Chinese Drywall Trouble Could Extend to CRE

Office buildings, restaurants, warehouses, retail establishments and other commercial projects nationwide have been built or renovated with Chinese drywall since 2001, though the number of reported cases is very low. We know that homeowners are still reluctant to report that they have Chinese drywall—to date, only 2,833 cases have been reported to the Consumer Product Safety Commission. However, based on shipping records, enough drywall was imported between 2004 and 2006 to build as many as 100,000 homes. For this reason, a significant number of commercial projects are likely affected.

Why are the reported incidents of Chinese drywall in commercial properties so low? Presumably, many commercial property owners do not believe that Chinese drywall was installed in their structures because imported 5/8-inch drywall (which is used in many commercial applications) has not been problematic like the half-inch drywall typically installed in homes. As we now know, contractors did not always use 5/8-inch drywall, even when specified.

Another reason is that indoor environments in commercial properties tend to be cooler and less humid. As a result, off-gassing and corrosive effects may be delayed or lessened, making it take longer to discover the tainted Chinese drywall. In addition, some commercial property owners may be reluctant to confirm the presence of Chinese drywall or pursue the matter because of the economic and legal implications, particularly in a landlord/tenant situation.

Tainted drywall in one space could emit gasses that may impact the entire building, especially if there are shared mechanical systems. Failing to warn tenants of the presence of Chinese drywall anywhere in the building (even if one tenant performed an interior build-out on his/her own) and neglecting to protect the tenants' property could have devastating consequences.

Commercial tenants are also in a precarious situation if leasing a property with Chinese drywall. Putting aside whether a tenant is obligated to continue paying rent, a tenant may be faced with significant repairs (such as the HVAC and electrical system), damage to equipment caused by the Chinese drywall, and adverse health effects. Relocating may not be economically feasible for some tenants, particularly if the tenant invested in an interior build-out.

Some owners and tenants of commercial properties have responded by attempting quick fixes and/or simply removing the affected drywall. This could be a huge mistake. There is currently no approved remediation protocol, but experts generally agree that removal of affected drywall, or even complete removal, without additional remedial steps is not sufficient.

Of course, a protocol may also differ based on the type of construction, building materials and the building envelope. Anyone who attempts to remediate prematurely must understand that the property may not be marketable or insurable if a later adopted/approved protocol requires more than was actually performed, and owners and tenants may face significantly increased costs if further remediation is necessary.

Finally, owners and tenants may be foregoing opportunities to receive benefits under their own insurance policies, including a claim for business interruption. They may also forego opportunities to recover losses against responsible parties by neglecting to put certain parties on notice in accordance with Florida law and may jeopardize their legal rights if they do not preserve evidence as required by the courts. Before taking action, commercial owners and tenants are urged to consult with an attorney.

The views expressed here are those of the author and not of ALM's Real Estate Media Group or its publications.

Allison Grant is a partner in the law firm of Shapiro Blasi Wasserman & Gora PA in Boca Raton. She can be reached at agrant@sbwlawfirm.com.