Mitigating Environmental Risks

Feb 1, 2022 | Blog
Partner

Leases for life sciences uses can present a unique set of challenges and considerations. Besides the special demands life science uses can place on electrical capacity, HVAC, floor loads and waste removal, the activities conducted by the life science user can pose risks beyond those presented by tenants who are engaged in less technologically advanced or research-oriented activities.[1]

Inherent in many life science uses is the utilization, storage and/or distribution of materials that may be considered hazardous or toxic under applicable environmental laws.[2] Of course, the owner’s standard form of lease will contain a standard indemnification clause allocating responsibility to the tenant for losses resulting from its activities.

When it comes to environmental issues though, the owner of the life science property has a heightened concern. This well-founded concern is based on several factors, including (i) the environmental indemnity the principals of the owner provide to its lender (which typically comes from a well-funded source other than the property owner) and (ii) the strict liability imposed under federal law on anyone in the chain of title for clean-up and other costs regardless of whether or not such party caused the contamination.

Compounding this concern is that the owner will typically have recourse only to the tenant entity itself for a breach of the lease’s environmental covenants.[3] Where the tenant is one of the more established pharmaceutical companies or medical device makers, the owner may feel comfortable with the credit supporting these obligations. At the same time, many life science companies are startups, perhaps backed by private equity or venture capital funds, with more limited operating histories and capital reserves and more uncertain future earnings.

With the benefit of the limited liability created by its corporate structure, the tenant conducting its business operations in the premises has the most control over what is brought to the property and how it is handled there.  The owner, its personal and vicarious liability notwithstanding, is more removed from these day-to-day operations.

Given the disconnect between the parties’ relative degree of control and potential for personal liability should environmental contamination occur, the owner of the life science project would be well-advised to include additional guardrails and mechanisms in the lease document to monitor operations at its property and protect itself against environmental exposure. Examples of steps the owner may take to manage these risks include the following:

Upfront disclosure. Specifically identify and limit the hazardous materials that may be brought into the premises and in what quantities. This list of materials will need to be reviewed by      independent environmental professionals to confirm they are necessary and reasonable, relative both to their necessity for the operations being conducted and in quantity. Where the property or material being handled is subject to a “right to know” law, ownership may need to provide notice to other tenants or neighbors of the materials being brought into the premises.

Monitoring. Ownership will want and need the ability to enter and inspect the premises periodically to confirm compliance with applicable covenants and requirements.

Environmental insurance. Ownership should require the tenant to carry pollution legal liability insurance insuring ownership and the tenant against property damage, bodily injury, cleanup costs and claims with terms and limits satisfactory to ownership. The term of such pollution legal liability insurance will need to extend beyond the term of the lease.

Reporting. If not already in hand, ownership or the tenant may want to perform a baseline report establishing the environmental condition of the property at the beginning of the lease term. Periodically throughout the term, ownership may want the tenant to provide (or ownership may want the right to perform) an updated report, with the allocation of the cost of the update being a negotiable item. Ownership will certainly want the tenant to perform and deliver such a report to the landlord, at the tenant’s expense, if a release or contamination occurs and again, at the end of the lease term, whether or not a release has occurred.

Decommissioning. At the end of the lease term, the tenant should dismantle and remove any equipment utilized in the handling of any hazardous materials, remediate any contamination and restore the affected areas to a satisfactory condition.

The foregoing suggestions are in addition to the usual lease provisions requiring indemnification, compliance with laws, notice of claims and survival of liability.

Other lease provisions may also warrant special attention in this context. One example is the assignment and subletting provision. There, ownership may want to make sure that successors to the original named tenant, whether by merger or assignment, must maintain adequate liquidity and net worth to meet the tenant’s obligations under the lease. Elsewhere, ownership may want to require periodic financial reporting by the tenant to confirm that it maintains adequate liquidity and net worth to meet its lease obligations, whether or not a merger or assignment has occurred.

In light of the severity of the consequences that may be suffered by the principals of the owner should a violation of environmental covenants occur, it is imperative that the owner understand the nature of the activities being conducted by the life science tenant in advance and include provisions in its lease protecting it accordingly. Besides having these provisions crafted by qualified legal counsel, the substance and nature of the activities to be conducted by the prospective life science tenant will need to be reviewed by environmental professionals.

If you have any questions regarding mitigating environmental risks in life science leases, please contact Michael Pollack.

_____________________________

[1] Life Science industries span a range of uses –clinical research and trials; biologics; medical device, pharmaceutical, vaccine and vitamin research and development, manufacturing and distribution; plant and animal biotechnology; and veterinary products, to name just a few.

[2] The use, storage and transportation of hazardous and toxic materials are regulated under a myriad of laws, including at the federal level, the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. §9601 et. seq., the Federal Water Pollution Control Act, 33 U.S.C. §1321 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. §1802 et seq., the Toxic Substances Control Act, 15 U.S.C. §2601 et seq., the Oil Pollution Act of 1990, 33 U.S.C. §2701 et. seq., and associated regulations and under the state law in which the property is located.

[3] While there may be a security deposit under the lease, where a serious breach occurs, it is unlikely the security deposit will be sufficient to address the costs to be incurred.