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Five guidelines for negotiating mold issues in commercial leases

December 24, 2004

NJPA Real Estate Journal

as printed in NJPA Real Estate Journal, December 24, 2004

Very few commercial leases address mold. This topic has been in the news lately and has been the subject of many seminars, but finding an approach which allow both landlords and tenants to address the mold issue productively during lease negotiations continues to be problematic.

Many articles and seminars are one-sided, and each party negotiates based on the principles learned from those sources. Landlord oriented materials encourage an approach which holds the tenant is responsible for mold and resulting damage, and absolves the landlord from any responsibility. The tenant-oriented approach provides that the landlord is responsible not only for the repair of the cause of the mold (i.e., a leaking pipe), but is. also obligated to remediate the mold and restore the damaged im provements. Neither of these approaches is practical in lease negotiations in most markets.

Traditionally, landlords limit their liability for damage to the interior of the premises, including water damage caused by roof and pipe leaks. This is really a matter of risk allocation. The landlord is looking for the tenant to be responsible for the interior of the premises, and wants the tenant to carry appropriate insurance. In negotiations with larger and more creditworthy tenants, however, the tenant often wants the landlord to bear responsibility for this damage if it was caused by the landlord's negligence or willful misconduct. Certainly some landlords are willing to do this, if and to the extent that these events can be insured. The larger tenant does not want to take the traditional tenant responsibility because the tenant may self-insure or have a large insurance retention or deductible. If the landlord is not responsible, the tenant must pay for these losses from its own pocket. Therefore, the tenant wishes to place some obligation on the landlord.

The landlord's problem is that unlike the results of other negligent conduct, mold damage is not necessarily an insurable condition and the remediation and restoration cost can be unpredictable and substantial. Mold damage is often excluded from property damage and general public liability policies. Some environmental policies may currently cover mold damage, but this coverage may not continue to be available. Thus, the landlord is asked to take on a responsibility that it cannot control and may not be able to insure.

As landlords and tenants continue to debate the mold issue in lease negotiations, here are some suggested guidelines for these discussions:

- The landlord should repair the leak if it is otherwise the landlord's obligation to do so.

- The tenant should be obligated to notify the landlord of leaks and damp conditions.

- The tenant should be responsible for mold which results from a wet condition under its control, including remediation of the mold and restoration of the premises.

- The landlord may take on responsibility for repairing the core and shell areas in addition to repairing the condition that caused the mold.

- The parties should address whether the remediation obligation goes for all mold or just mold that is hazardous to humans.

Will there ever be a mold clause in common usage? It is too early to tell, as discussions about mold clauses are ongoing and have not resulted in any generally accepted practices between landlords and tenants.

Jeffrey M. Gussoff
is a member of the West Orange, NJ-based firm of Wolff & Samson PC. Gussoff, whose practice consists of a broad spectrum of real estate matters, can be reached via e-mail at