ANALYSTS ARE CLAIMING mold is the new asbestos for real estate owners. Litigation is on the rise, with an estimated 10,000 mold-related lawsuits pending nationwide. Insurance claims have spiraled so high that some insurers are refusing to write policies in states where homeowners' policies are required to cover mold, such as Texas. And even though the medical science linking mold exposure to certain illnesses besides allergies is unsettled, juries are nonetheless awarding enormous sums to plaintiffs who claim damaged health from exposure.

The Buyer's Perspective

How can a savvy real estate player protect his assets? First, start thinking about mold right from the start. When buying a property, don't depend on a seller's disclosure. Conduct a thorough review of the property and its maintenance records. If there are doubts about a property, interview the occupants. Buyers of an office building in California did and learned that the extent of the property's mold problems were much greater than they originally thought. The seller was required to make substantial repairs before the sale closed.

Be especially cautious about properties with synthetic stucco facades, which have been blamed for creating water accumulations that permit the growth of wood-destroying fungus. One manufacturer of faux stucco was recently ordered to pay $2.5 million for construction defects and mold at a condominium building in Norfolk, Va.

Also, be wary of certain types of plastic piping. Polybutylene pipes have a high failure rate and develop pinpoint leaks, which may go undetected for a long time and create significant property damage.

Managing Mold As An Owner

How can you protect your asset once the transaction is completed? Remember that inspection report that you commissioned as part of your due diligence process to purchase the property? It may be discovered in subsequent legal action. If you are aware of structural or HVAC system inadequacies that have been identified and which could result in water intrusion and subsequent mold growth, rectify these conditions and have a reputable professional document the remediation actions.

Next, maintain high standards for property management. Prompt attention to water intrusion is your best defense against mold development. Even though there are no standards for how much mold can cause health problems, courts have still been willing to render judgments against property owners who have tolerated conditions that permit the growth of possibly injurious mold.

Prudent property owners and managers are implementing operations and maintenance (O&M) plans that clearly spell out how on-site staff are to deal with service calls about water leaks and mold. They also are including language in the lease contract clarifying the resident's duty to report all instances of excessive moisture in their unit. The National Multi Housing Council (NMHC) has prepared a prototype O&M plan for apartment properties that includes model lease language and other resident communication templates.

NMHC's “virtual” mold kit (www.nmhc.org) contains numerous third-party resources for dealing with mold.

Owners also should know that more insurance carriers are asserting that mold falls into the pollution exclusion. While this interpretation will be decided by state courts, it is important to know how much coverage your property has for first-party and third-party claims. Given the rapidly escalating costs of property and liability insurance, most apartment owners are negotiating bigger deductibles with higher premiums. Like other environmental specialty lines, mold insurance is available but may be unaffordable in light of the large tab confronting owners at renewal time.

Selling: How Much Disclosure?

State laws vary about whether a seller has to disclose latent defects associated with a property. Some sellers may think that if the mold was abated, it does not need to be disclosed. Whether remediated water intrusion and mold events need to be disclosed is a matter of debate. On the other hand, prior remediation actions may be viewed by the buyer as evidence of the seller's knowledge of a material defect.

In states in which sellers are required to disclose facts that materially affect the value of a property, it is wise for owners to disclose all mold remediation. If the mold does return, the purchaser may seek to connect the new situation to prior events, and courts are likely to regard prior mold remediation as a material fact. Even if disclosure is not required, disclosing remediation may insulate the seller from claims of misrepresentation.

Also know that an Arizona court recently held that sellers can be held liable for nondisclosure of latent defects if their purchase contract limits the buyer's ability to conduct a full environmental investigation of the premises.

Eileen Lee is vice president of environment for the Joint Legislative Program of the National Multi Housing Council and the National Apartment Association.