/>iA lender is considering a commercial mortgage loan secured by an apartment building. The apartment building was built in 1973. How should the lender evaluate the potential that lead-based paint was used in the property?
The Residential Lead-Based Paint Hazard Reduction Act of 1992, sometimes referred to as “Title X”, directed the U.S. Department of Housing and Urban Development and Environmental Protection Agency to require disclosure of known lead-based paint and lead-based paint hazards. Pursuant to this requirement, HUD and the EPA promulgated 40 CFR 745, effective late 1996. Section 745 applies to property owners and landlords of properties built prior to 1978, defined as “Target Housing”.
While no provisions of Section 745 require a seller or lessor to conduct any evaluation or reduction of lead-based paint, Section 745 does require a seller or lessor of Target Housing to (i) provide the purchaser/lessee with an EPA-approved lead hazard information pamphlet, (ii) disclose to the purchaser/lessee the presence of any known lead-based paint and or lead-based paint hazards in the housing being sold or leased, (iii) disclose to the purchaser/lessee, or any agent thereof, the presence of any known lead-based paint and or lead-based paint hazards in the housing being sold or leased and the existence of any available records or reports pertaining thereto, (iv) permit the purchaser/lessor a 10-day period to conduct a risk-assessment or inspection for the presence of lead-based paint or hazards, and (v) attach a Lead Warning Statement to the sales or lease contract containing EPA-approved language, among other requirements.
What do these requirements mean for a lender whose collateral is Target Housing? The good news is that, in the event a lender takes possession of Target Housing, that lender will not be required to clean up, test or otherwise remedy any lead-based paint or lead- based paint hazard on the premises. The bad news is that the lender will be subject to all the disclosure rules described above. This can be problematic if the lender was not involved in preparing tenant leases, negotiating lease terms or corresponding with tenants during the leasing process, as is usually the case.
While the lender will not be liable for its borrower’s failure to disclose, the lender must be sure all HUD-EPA requirements are met as soon as it steps into the role of landlord. This means that the lender should immediately send disclosure statements to all tenants containing the HUD-EPA required information. All existing leases should be reviewed for verification that the mandatory HUD-EPA language was included at the time of execution. If the language was omitted, the lender should consider having all leases re-executed on a HUD-EPA compliant form. This means that a lender which otherwise prefers to maintain a distance from tenant matters may need to spend much more time and money ensuring these disclosure requirements are satisfied.
If the landlord of Target Housing decides to perform renovations, information regarding lead-based paint hazards must be provided to all occupants. Contractors hired to perform the renovation must be properly trained, certified, and must follow specific work practices defined in Section 745. In the event of casualty or condemnation after which the Target Housing must be partially rebuilt, the same renovation rules will be triggered. These requirements can raise the cost of renovations and rebuilding efforts.
Should a lender’s form documents be revised to ensure compliance with the requirements of Title X? It depends. Most form documents already contain a litany of environmental regulations to which all representations and warranties relate. Because Section 745 was promulgated under the Residential Lead-Based Paint Exposure Reduction Act of 1992, which amended the Toxic Substances Control Act of 1976 (“TSCA”), most lender forms which reference the TSCA already automatically encompass the provisions of Title X. If a lender’s forms do not currently include reference to the TSCA, it is strongly advised that such reference be added. Even if the TSCA is included in a lender’s forms, in order to adequately track the evolution of the TSCA and leave no doubt that all lender documents refer to the TSCA as amended, it is prudent to add a reference to Title X.
While the requirements of Section 745 are not overly burdensome, they add a level of cost and potential liability that is easily overlooked. When making a loan to borrowers where the collateral is Target Housing, lenders should be aware that even the savviest borrowers may not have complied with the EPA requirements. Although lenders will not incur liability for borrowers’ failures, lenders must be prepared to step in as landlords. That means being prepared to comply with Section 745.
