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Don't Let Toxic Mold Lead To Toxic Litigation

Toxic mold in buildings often makes the news these days, but generally in regard to individual homes. Erin Brockovich, played by Julia Roberts in the movie bearing the same name, purchased a home with mold problems, and litigation followed. 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. However, toxic mold issues are just as important, if not more important, in commercial property transactions.

First, a bit of background regarding mold. There are thousands of varieties of mold, which is naturally present in all indoor environments. Molds reproduce by means of small spores that are carried indoors with the normal air flow. When those spores find a wet environment, mold growth will occur. It's simply impossible to eliminate mold and mold spores in an indoor environment. Fortunately, most molds are harmless. However, some molds produce mycotoxins that reportedly can cause medical problems. (Although, a recent New York Times article summarizes recent findings challenging links between more serious health problems and mold - http://www.buildingunderstanding.com/mold_NYTimes.html.)

The federal government has come close to implementing standards for toxic mold, but the effort has gone nowhere. In Illinois, legislation regarding abatement standards and reporting requirements is held up in the House Rules Committee. In short, it's an open field at the moment.

As the owner, seller, or buyer of commercial property, this regulatory vacuum should concern you. How can you help assuage that concern?

Owners and tenants of commercial property should address mold prevention and remediation in their lease and purchase agreements. Because current scientific knowledge is not all in agreement, and because of the regulatory uncertainty, the focus of those efforts should be on risk assessment and prevention.

Before committing to buy or lease, tenants and buyers may want to have a competent consultant with experience in this field perform a toxic mold assessment. Establishing a baseline indoor air quality condition will allow the parties to measure future problems and, if necessary, to remedy an existing problem.

The standards for assessing toxic mold and other indoor air quality are ever changing. As a result, some property owners have established their own protocols for testing. Accordingly, even if you elect to do no independent testing, ask if the owner has done any of his or her own testing and demand to see the results. If no testing has been done, some owners might (for good reason) not consent to having any testing done. Testing then becomes a business decision for the prospective tenant or buyer.

Who pays for the expense of an initial assessment? It's a matter of negotiation. However, as with most other "due diligence" matters, it's the prospective buyer or tenant who usually foots the bill.

Assuming that testing is done and a problem identified, the contract needs to address how problems are handled. Typical issues include (1) who will perform the remediation and to what standards, and (2) whether the problem will remain confidential.

Mold problems can require expensive remediation work, and usually carry a stigma that may attach to the property. Savvy owners, therefore, want to control the flow of information and seek to avoid open-ended promises to resolve any identified problems. From the perspective of the acquiring party, such provisions should cause no concern so long as there is no liability for non-disclosure and if a baseline condition has been established.

Assuming the transaction goes forward, the contract will have to address who remedies the problem. Both parties may have their own "mold consultants," and a standard will have to be negotiated and agreed to. Also, the parties must consider who controls the consultant in charge of certifying that the problem has been remedied.

Bigger issues loom in the landlord/tenant setting. 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, rather than a tenant's failure to perform required maintenance or repair, it may be appropriate to allocate remediation responsibility to the owner. To protect the property, an owner may also want to have access to perform independent testing. Timing, notice, and the extent of permitted disruption are all issues that will need to be negotiated.

Multi-tenant buildings involve even more issues. For example, what if the mold migrates from a neighboring tenant? Will your lease include a provision that the landlord periodically inspect other tenants' space? Who pays such costs? Who pays for the remediation when it's the fault of a third party? All these issues, and many more, should be covered in the lease.

Owners and prospective purchasers and tenants always have competing interests. However, all such parties have a strong common interest in drafting a contract that addresses such problems up front, rather than leaving them to be determined through costly and complex litigation.

by Thomas C. Pavlik, Jr.
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