Here’s an interesting issue that landlords throughout Michigan may be seeing more of when they seek refinancing. Remember the Court of Appeals decision last year in 1031 Lapeer LLC v. R.L Price Properties? Banks remember it all too well. It was that pesky little case that reminded all of us that Part 201 of NREPA (Natural Resources and Environmental Protection Act) imposes an obligation on parties involved in real estate transactions to disclose that the property is contaminated.

In 1031 Lapeer, the tenant sought to void a lease with its landlord because the landlord failed to disclose that the premises were contaminated. The trial court ruled in favor of the tenant and the Court of Appeals upheld it because Part 201 Section 16 specifically states that if a party knows or is on notice that its property is contaminated, then it shall not transfer an interest in the property unless it has provided notice of that fact and the general nature of the contamination to the transferee. Based on the ruling in 1031 Lapeer, the notice requirement applies to sellers and landlords and failure to adhere to it can create a pretty harsh result – voiding the transaction.

Lenders have keyed in on this issue for obvious reasons; if their landlord or borrowers have redeveloped a contaminated property but have not disclosed the existence of the contamination to the tenants, the landlords are at risk of losing tenants (and thus the rent). With the current glut of retail and office space, this could mean a loss of income and the lender being saddled with a contaminated parcel – not a desirable picture from the bank’s point of view.

If you are a landlord that did not notify your tenants that the property they are renting is a Part 201 facility before they signed the lease, the bank may request that you provide the notice after the fact before the bank commits to refinance.

How do you handle that? Very carefully and with good legal counsel!