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special to the national law journal Andrew J. Perel is a partner in the litigation department of New York’s Cadwalader, Wickersham & Taft. He counsels clients on environmental compliance and due diligence, and litigates complex environmental claims and insurance disputes. With all of the recent media hype surrounding the hazards of toxic mold, a key issue is how to provide assurance to a commercial mortgage lender that toxic mold will not harm its investment. In order to provide the necessary comfort level, borrowers (and lenders alike) need to understand how and where molds form, the methods to prevent mold formation-including ways to eliminate already existing mold-and the necessary representations, warranties and covenants that borrowers will need to provide the lender that mold risks have been, and will continue to be, properly handled. Molds are a class of fungi that have been found to cause a variety of health problems in humans, including allergic, toxicological and infectious responses. Molds survive by obtaining nutrients from organic matter, either by parasitizing living organisms or by absorbing decomposing plant or animal matter. They thrive in humid environments, and produce spores to reproduce. When mold spores land on a damp spot indoors, they may begin to grow by digesting whatever substance they happen to land on. When excessive moisture or water accumulates indoors, mold growth will often occur, particularly if the moisture problem remains undiscovered or unresolved. Therefore, interior areas of buildings characterized by poor ventilation and high humidity are the most common locations of mold growth. Building materials including drywall, wallpaper, baseboards, wood framing, insulation and carpeting often play host to such growth. Molds need both food and water to survive. Since molds can digest most things, moisture control is the key to keeping mold growth in check. The best way to prevent water damage and the mold growth that accompanies it is to protect the building envelope. To ensure that the building envelope is not breached, it is imperative that the builder use construction methods that keep moisture from gaining a foothold within the building. Some construction practices that may serve this goal include: Vapor and/or moisture house wraps that help seal the joints of structural wall sheathing and the intersection points of the roof and walls. Adhesive-backed moisture barrier tape that seals the edges of window frames and doors and aids in stopping one of the most common entryways for rain and wind-driven moisture. The use of weep holes that dramatically aid in dissipating moisture collection between the exterior and interior walls. The use of wind-resistant roofing materials. The use of heavier felt underlayment, corrosion-resistant fasteners and specific nailing patterns. While there currently is no federal legislation on toxic mold, Congressman John Conyers Jr., D-Mich., is leading the charge to enact the U.S. Toxic Mold Safety and Protection Act of 2002. Known as the Melina Bill, this bill was introduced to Congress on June 27, 2002. If passed, this legislation would require the U.S. Environmental Protection Agency (EPA) to publish mandatory national standards for mold inspection and remediation by 2004. It would also require the EPA to establish building and construction model standards for commercial and residential real estate this year. If the Melina Bill does not become law, a borrower can still provide added assurance by complying with the current mold guidelines published by the EPA. Eliminate and prevent mold The EPA recommends the following course of action to eliminate the moist places where molds thrive: Fix leaky plumbing and leaks in the building envelope as soon as possible; watch for condensation and wet spots; fix sources of moisture problems as soon as possible; prevent moisture due to condensation by increasing surface temperature or reducing the moisture level in the air (humidity); and insulate or increase air circulation in order to increase surface temperature. In addition, one can repair leaks, increase ventilation (if outside air is cold and dry) in order to reduce the moisture level in air or dehumidify (if outdoor air is warm and humid). For example, one can use air conditioning to reduce indoor humidity levels if there are high temperatures and humidity levels outside. Otherwise, a desiccant dehumidifier should be used. One can also keep heating, ventilation and air conditioning (HVAC) drip pans clean, flowing properly and unobstructed; vent moisture-generating appliances, such as dryers, to the outside when possible; maintain low indoor humidity-below 60% relative humidity, ideally 30% to 50%, if possible; perform regular building/HVAC inspections and maintenance as scheduled; clean and dry wet or damp spots within 48 hours; prevent foundations from staying wet; and provide drainage and slope the ground away from the foundation. While following these rules may not lead to the complete eradication of molds and fungi, compliance may substantially inhibit mold formation and dispersal. While California is currently the only state that has passed toxic mold legislation, several states, including New York and Texas, have mold legislation pending in their legislatures. Like its California statutory counterpart, the New York-proposed Toxic Mold Protection Act would establish a task force responsible for determining assessment standards for molds. The bills currently pending in Texas would allocate this responsibility to the State Board of Health, and the standards created would only apply to government-owned buildings and public schools. The New York bill would also empower the task force to determine permissible exposure limits to mold in indoor environments. The California act, unlike the New York bill, has established that certain mandatory disclosure requirements must be met in conjunction with property transfers. Testing for mold The toxic effects of indoor molds have only recently become known to the general public. Due to the novelty of the problem, the guidelines for Phase I testing, published by the American Society for Testing and Materials, do not yet mandate procedures for investigating mold-related issues. However, this does not mean that such investigation is not beneficial. If an inspection and remediation scheme is undertaken, it should at least require periodic visual inspections by an industrial hygienist or an environmental consultant and prompt remediation of existing mold problems. Remediation of a mold problem should include at least two steps. First, the moisture problem that caused the mold growth should be corrected. Second, the mold-contaminated building materials should be either replaced or cleaned. As a general rule, corrective steps must be taken to rectify any conspicuous mold growth, regardless of genus. Collecting samples of such growth for screening purposes is of questionable value, as the moisture problems associated with mold growth must be reported and remedied when they are observed, regardless of the screening results; however, they are necessary for mold delineation purposes, as a baseline to establish remedial goals and to evaluate the remedial efforts. Every commercial real estate transaction is unique, and different lenders will require their own specific parameters relative to mold, in order to make the loan. The following exemplar representations and warranties may be included on commercial real estate loan documents: The borrower represents and warranties that: The subject premises currently display no evidence of water infiltration or water damage. There are no prior or current complaints (leaks, odors, etc.) by tenants at the premises. The subject premises currently display no evidence of conspicuous mold growth. There is no need to represent and warrant that the loan complies with applicable mold laws, since the loan documents contain an omnibus “compliance with all applicable law” provision. The subject premises are in compliance with any applicable building code currently in effect in the state where the property is located (either the Uniform Building Code, the Southern Standard Building Code or the International Building Code). While this representation and warranty may be beneficial, it may also be covered by the omnibus “compliance with all applicable law” provision in the loan documents. Similarly, the following exemplar covenants may be used: The borrower makes the following affirmative covenants: It will engage an engineering consultant to conduct yearly inspections for water damage and an environmental consultant to conduct yearly inspections for conspicuous mold growth. It will immediately adopt a remediation plan with respect to any water damage or mold growth identified as a result of the yearly engineering and environmental inspections. It will undertake any course of action recommended by the EPA to prevent mold growth. It will comply with any local, state or federal mold law, legislation, guidelines or statutes hereafter in force or effect. Prudent business people implementing prudent lending practices coupled with prudent risk management will create the necessary comfort zone for both lenders and borrowers to address the issue of toxic mold. With formulated comprehensive plans on both sides, this issue is clearly manageable.

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