BUILDING OWNERS NEED ENVORMONMENTAL AUDITS
Long term leases on industrial properties expire everyday. Many of these buildings were built as long as 40 years ago and more recently during the industrial boom of the 70s and 80s. The industrial buildings which are the focus of this article are those which were built by developers sold to investors and then leased back to the industrialist. Some of these industrial operations emit either air emissions or liquid wastes or solid wastes which have been recognized as hazardous to the environment. The Ontario Ministry of the Environment and Energy has made the identification of these industries fairly straight forward by publishing a list of the Standard Industrial Classification (SIC) codes, some 40 or so of them, which are particularly at risk.
A building owner or property manager should, as a matter of course when negotiating a lease with a prospective industrial tenant, ask for the SIC code of the operations which will be carried on in the leased premises. This requirement should extend to sub tenants as well.
If the SIC code is one of those at risk, then further inquiries are needed, perhaps by a specialist. Finding that a hazardous waste will be produced does not in any way need to preclude leasing the property to this prospective tenant. However, it is advisable for the negotiator to obtain certain undertakings from the tenant to protect the future value of the property.
Perhaps the first thing to come to mind would be the undertaking or not to dump or to spill hazardous waste on the property or to permit others to do so. Another undertaking might be that the tenant should also agree to obtain all required certificates of approval and to abide by their conditions. This would also apply to obtaining and keeping on file MSDS sheets and recording and filing in proper form all hazardous waste shipment manifests.
Of particular importance would be an ongoing requirement that the tenant provide at his own expense to the owner a regular environmental audit. Such an audit is often referred to as a compliance audit and it focuses particularly on the procedures and practices and emergency response planning which is appropriate to that particular type of process. These environmental audits are valuable, not only to the landlord but to the investors, as represented by the Board of Directors of the tenant, to the lenders such as the banks and to insurers. If the landlord obtains a mortgage, the mortgage terms may also require an environmental audit report as well.
The most careful planning, the most elaborate of reports, does not guarantee that a spill or emission will never take place. A further requirement might be that the landlord require the tenant to provide environmental insurance. Such insurance often comes in two forms, first party insurance to compensate for the clean up of the original spill and a third party liability portion to cover the clean up of a spill which reaches a neighbour's property. Although the insurance industry effectively withdrew any environmental coverage in 1985 with the passage of the "Spills Bill", since 1991. Some limited cover has become available and more is being offered each year.
Everything that has been said so far applies equally to older buildings coming up for lease renewal as id does to new buildings. The situation with an older building is that previous tenants may have left behind some environmental and physical damage or waste materials. This strongly suggests that as a termination of a long term lease approaches, that an environmental audit combined with a building assessment be carried out. For example, acid fumes may have corroded metal roof decking or structural members. Acidic discharges may have weakened the concrete sewer pipe. A new tenant should at least require a documentation that establishes conditions prior to tenancy. Another example might be an investor purchasing a former gasoline service station site for lease to a third party operator. In this case, a guarantee from a major oil company would be invaluable if at some time in the future a level of contamination was discovered which exceeded the acceptable levels.
Walters Consulting Corporation has had experience in both environmental audits and building assessments and has developed some creative solutions for the difficult problems.
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