It is now well known that, once a building has been altered, Title III of the Americans with Disabilities Act prohibits discrimination against disabled people by a landlord or tenant of a place of public accommodation.

What is not so evident is that the law extends beyond owners and commercial tenants to include lenders in the foreclosure process, title-holding "lenders" in sale-leaseback financings, and title-holding trustees.

While it is clear that the act permits an allocation of compliance responsibility among the parties to a lease or other contract, the U.S. Department of Justice, through its Technical Assistance Manual, has taken the position that all parties in a real estate project share full responsibility for complying with Title III.

All Parties Responsible

According to the Justice Department, any allocation of responsibility made in a lease or other contract is effective between the parties but does not relieve either party from complying with the new law.

Since compliance issues under the law are to be resolved on a case-by-case basis, there is little guidance in the statute itself, and several concerns of banks need to be addressed.

The disabilities act is replete with technical rules that will have an impact on transactions. In addition to leases, the act will play a role in contract and mortgage negotiations.

In contract negotiations, buyers and their lenders should be concerned about present compliance based upon the existing use of the facility. But they must also consider that future tenancies, uses, or alterations may require additional compliance.

Deep Pockets Vulnerable

Since requirements under the disabilities act are continuing obligations, the mere fact that the new owner has greater financial resources may make additional work "readily achievable" at the time of closing.

Mortgage lenders in possession should likewise take into account this possibility, given their deep pockets. Lenders should be concerned both from a credit perspective and in considering the lender's potential exposure upon foreclosure.

Lenders must seek continuing covenants from their borrowers to maintain the premises in compliance with the disabilities law.

As with environmental matters, lenders will want inspection reports before closing and a right to reinspect during the term of the loan.

Indemnities Likely

As a credit issue, third-party indemnities or guarantees from financially sound parties will no doubt be negotiated. In some circumstances, a pre-foreclosure evaluation would be recommended.

Although it would seem simple enough to demand representations from sellers and borrowers as to compliance with the disabilities act, one would not be surprised during these early days of the law to find sellers and borrowers reluctant to make unqualified representations.

However, it is not unreasonable for a lender to demand a representation that, to the best of the borrower's knowledge, it is in compliance with the Americans with Disabilities Act and that there are no pending or threatened claims by the Department of Justice or third parties related to the act.

Buyers and lenders should mitigate their risks by engaging qualified architects or engineers to conduct an inspection prior to closing. Contracts and loan commitments should be contingent upon delivery of a satisfactory inspection report.

Such an inspection report, in addition to serving a checklist for necessary compliance work, may serve as a basis for drafting specific representations and covenants concerning future work or may provide a lender or buyer with a right to refuse to close.

Both buyers and lenders would need comfort as to compliance by the tenants as well as the contractual obligations arising under the leases.

Due diligence relating to leases and tenancies and other contracts must now focus on the obligations under the act. Given the subjective nature of much of Title III, this will be no easy task.

The new law presents a new set of factors to be considered in all real estate transactions and in property management. In time, through the enforcement actions of private litigants and the Department of Justice, the thrust of the law will become clear. In the meanwhile, lenders must learn to think in terms of the disabilities act at all times.

Mr. Diamond is a partner in the New York office of Stroock & Stroock & Lavan, where he specializes in real estate law.

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