Addressing Toxic Mold Risks in Retail and Commercial Property Transactions

High profile lawsuits involving claims for property damage and personal injury arising from toxic mold have received significant publicity in recent months. A Texas jury awarded Melinda Ballard and Ron Allison a total of $32 million in damages arising out of toxic mold contamination in their 22-room mansion. Erin Brockovich purchased a home with a bad mold problem and litigation followed. Although many of the highest profile cases have involved residences, commercial buildings have also been the subject of toxic mold contamination and resulting litigation.

Legal Issues of Mold Contamination

The legal issues associated with toxic mold are complicated primarily by the natural presence of molds in indoor environments and scientific uncertainty concerning toxic molds and their causal connection to adverse health impacts. Molds occur naturally and there are hundreds of thousands of varieties of molds and fungi. Molds produce tiny spores to reproduce and mold spores waft through indoor and outdoor air continually. When mold spores land on a damp spot indoors, they may begin to grow and to digest whatever they are growing on in order to survive.

When excessive moisture or water accumulates indoors, mold growth will often occur, particularly if the moisture problem is undiscovered or discovered but not addressed. There is no practical way to eliminate all molds and mold spores in indoor environments. Fortunately, most molds are harmless aside from their tendency to produce mild allergic reactions in allergy suffers, but certain molds produce mycotoxins that can adversely affect human health.

Statutory Regulation

From a regulatory perspective toxic mold has received mixed attention from federal and state regulators. In 1994, OSHA proposed rulemaking for standards addressing general indoor air quality in work environments. The proposed rulemaking considered exposures to toxigenic fungi and mycotoxins, but at least partially in recognition of the difficulty of developing a comprehensive regulatory regime for indoor air quality in all work environments, OSHA withdrew its proposed rulemaking on December 17, 2001.

California has adopted the Toxic Mold Protection Act of 2001. This law requires a task force to be convened to develop permissible exposure limits to mold, to assess the health threats posed by the presence of molds, and to set standards for the assessment, identification and remediation of molds. The law became effective on January 1, 2002 and the task force must report its progress on developing permissible exposure limits by July 1, 2003. The Act will eventually impose disclosure requirements to potential buyers and tenants, but owners will not be required to conduct air or surface tests to determine whether molds exceed permissible exposure limits.

Addressing Mold in Leases and Purchase Agreements

Given the increased attention to toxic mold, owners and tenants of commercial buildings and their attorneys are starting to address mold prevention and remediation directly in leases and purchase agreements. And, due to the current lack of scientific knowledge and regulatory uncertainty, the focus should be on risk assessment and prevention of mold problems.

Tenants and purchasers considering a transaction should have an assessment for toxic mold performed by a competent consultant with experience in industrial hygiene, mold sampling and mold remediation. This protocol should become part of their due diligence process. An assessment of indoor air quality for the presence of toxic molds will establish baseline conditions and, if necessary, allow the parties to correct a pre-existing mold problem.

Practices and customs for assessing toxic mold risk and indoor air quality are still developing. Some building owners may develop protocols for regular testing and may provide results to prospective tenants or purchasers. However, most retailers contemplating a lease or purchase transaction will likely have to request permission to perform a toxic mold assessment.

Mold Assessment

Although a matter for negotiation, it is likely that the retailer will pay the initial expense of an assessment. If a problem is identified, contractual provisions addressing the next steps should be considered:

  • Will the building owner be required to perform remediation and to what extent?
  • Who will control the consultant performing the assessment work and who will own the consultant's work product?
  • Will the work product be confidential?

Because toxic mold problems can require expensive and intrusive remediation work, and negative publicity associated with a mold problem could result in serious financial and legal consequences, savvy owners will seek to control the information flow and to avoid making any open-ended commitments to resolve mold problems identified during the due diligence process. Such provisions are reasonable as long as the prospective tenant or purchaser can evaluate baseline conditions and the prospective tenant or purchaser is protected from disclosure obligations and non-disclosure liability should the assessment reveal a problem that could cause adverse health effects.

On-Going Issue

Once a decision to proceed with a transaction is reached, addressing ongoing responsibility for mold is important in leases (in purchase transactions where toxic mold issues are not resolved prior to closing, transaction specific provisions would be required), and this presents some challenges for drafters. As previously noted, molds thrive in moist environments where excess water is present and mold spores move through indoor air constantly. Thus, a small roof leak in a tenant space could lead to a moisture problem with resulting mold. In a multiple tenant building, the mold could spread from one tenant space to other tenant spaces. Disputes and possible litigation could result.

For single structure retailers, building owners are, over time, likely to require tenants to hire qualified consultants at tenant expense to perform periodic assessments for the presence of mold, to provide the assessment results to the building owner, and to perform remediation if necessary. Owners may also seek access to the premises to verify test results or to perform independent analysis. Although a regular assessment regime adds costs, it is sensible prevention and it may provide liability protection to retail tenants.

Some retail tenants may find it advantageous to adopt a testing regime even in the absence of a lease requirement. The main issues for lease negotiation are responsibility for remediation and reasonable limits to owner access. If the cause of the mold problem is a latent construction defect as opposed to a tenant failure to perform required maintenance or repair, it may be appropriate to allocate remediation responsibility to the owner. As with other owner access to perform or verify a mold assessment should, if possible, be conditioned upon reasonable prior notice and limited to times when the space is dark.

Focus on Prevention

Addressing mold issues in leases of space in multi-tenant buildings should also focus on prevention of conditions that can lead to mold and prompt remediation in the event of a mold problem. If the owner assumes the general repair and maintenance obligations for the building exterior and all building systems, tenants should require the owner to perform periodic mold assessments - whether or not the owner recovers its costs as a common expense. Indeed, because a mold problem could originate in one space but manifest itself in another or other spaces, there is tenant incentive for comprehensive landlord oversight of mold prevention.

Where tenants are responsible for maintenance and repair of their interior space only, owners will want some right of inspection to the extent that the maintenance and repair involves building systems that could lead to moist conditions or mold growth. Additionally, tenants may want the owner to promise to oversee all tenant-performed maintenance to make sure that compliance is reasonably uniform. As with single tenant buildings, leases should also address responsibility for remediation costs and acceptable times of access.

In Conclusion

While owners and prospective purchasers and tenants always have competing interests, there is considerable common interest in devising appropriate contractual provisions to avoid complex and costly litigation resulting from a toxic mold problem. Retailers with concerns about toxic mold should consult with their counsel to minimize these risks.

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