Jemma Deeney: Environmental contamination liability under commercial leases

Jemma Deeney: Environmental contamination liability under commercial leases

Jemma Deeney

It can be tempting to skip over environmental clauses in leases as just being “boilerplate”. However, in the context of environmental contamination, to do so could have unexpected and costly implications for landlords and tenants.

In the current market, environmental and sustainability provisions are increasingly scrutinised as ESG credentials become ever more important. Despite that focus, less attention is given to provisions regulating contamination within those clauses, and where liability tends to fall. Add into the mix the statutory environmental protection regime is particularly complex.

While there will be circumstances where robust environmental protections will be more relevant than others, given their evolution in the market it is crucial to understand what the legal position is and where responsibility lies under commercial leases.

Single let vs multi-let assets

Environmental clauses in leases are most relevant to single let properties, where the tenant’s lease demise is the entire building plus perhaps external areas such as car parking and/or servicing areas. That can be distinguished from leases of multi-let buildings, where the tenant leases an internal area or part of the overall area.

With multi-let buildings, contamination would likely fall to the landlord. Recovery of remediation costs from tenants would then depend on (a) the nature of the contamination and (b) the service charge expenditure and exclusions.

Tenant causing contamination

One needs to differentiate contamination caused by the tenant during the lease from contamination on site which may only come to light during the tenant’s occupation. Contamination caused by a tenant would most likely be their liability and fall to them to remedy. They are most likely to be caught by their repair obligation; obligation not to contaminate and not store dangerous / hazardous materials on site; and obligation to comply with statute, including all environmental statues and regimes. That’s the easier one.

Pre-existing contamination

The more complex situation is where there is contamination identified on site, irrespective of when it occurred.

Landlords are often (wrongly) under the impression that once a commercial property has been let, responsibility and indeed liability for environmental contamination is neatly transferred to the tenant. This is rarely the case, and there is therefore often confusion as to where responsibility for any pre-existing contamination lies. Much of that confusion leads from the fact that leases can often be ambiguous or indeed silent on such responsibility.

While the market is moving to clauses which seek to transfer environmental responsibility to the tenant, this generally only applies to environmental liability captured by the statutory regime and results from local authorities investigating and raising enforcement for environmental breaches. That being the case, without bespoke drafting liability for environmental claims brought by third parties, or indeed any liability under other environmental legislation, are not captured and could result in these claims landing at the landlord’s door.

Many leases may simply prohibit the tenant from causing contamination (defined by statute), and include an obligation on the tenant to rectify any contamination captured by the statutory regime, as may be required by the landlord. Accordingly, on the basis of those clauses alone, it is not clear where liability for pre-existing contamination lies. In such circumstances, should a breach be identified and remedial action enforced, a landlord may have to rely on more general provisions within the lease (for example, compliance with statute) to push responsibility for pre-existing contamination on to the tenant – with an uncertain degree of success.

As a result of this uncertainty, tenants are becoming increasingly alive to the potential for liability creep and are negotiating such clauses. A landlord may have to agree to pre-existing liability resting with them. Whether the landlord is comfortable doing so depends on the nature of the asset and where is it located. Landlords will also be careful about accepting liability themselves – they may agree to the tenant not being bound to remediate, but may not want to be under an obligation to do so themselves under the lease. Whilst the landlord may still be obliged to do so under statue is a separate consideration from being obliged to do so facing the tenant.

Responsibility for contamination in the context of a commercial lease is a complex area of the law, and one not to be overlooked. What is clear is that as the market continues to go ‘green’, where appropriate given the nature of the asset, careful consideration should be given to environmental contamination liability.

Jemma Deeney is a solicitor at Brodies LLP

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