LEASE AGREEMENT REFERENCE GUIDE 1380: PROTECTING THE LANDLORD FROM ENVIRONMENTAL LIABILITY $24.95
Protecting the Landlord from Environmental Liability
This LARG looks at how the landlord can protect itself from environmental liabilities related to the manufacturing activities of its tenants. Such liabilities can be enormous, and require the landlord to keep a watchful eye on precisely how the tenant uses the premises. They also oblige the landlord to fortify the lease with lots of environmental boilerplate. The first article talks a bit about CERCLA and RCRA, and what they mean to the landlord. The article contains nine separate contractual devices the industrial landlord can use in its leases to dodge environmental bullets—all with sample clauses and comment.
Fighting CERCLA Et Al With Environmental Boilerplate
The manufacturing activities spawned by the Industrial Revolution made it clear that people can get sick because they are exposed to certain chemicals at work. Miners contracted silicosis, a lung disease, because they inhaled silica dust. Potters and paint makers suffered neurological damage because they were exposed to high levels of lead. Workers manufacturing matches developed bone disease because they handled lots of phosphorous.
Once physicians established the nexus between certain chemical agents and the diseases they caused, the government began to regulate environmental hazards, in the work place and elsewhere. But comprehensive environmental legislation—the really big stuff—came in the form of CERCLA (Compensation and Liability Act of 1980), and RCRA (Resource, Conservation and Recovery Act of 1986).
CERCLA exposes both industrial landlords and tenants to massive expense and liability for their industrial activities if they contaminate the environment. CERCLA makes both landlords and tenants potentially responsible parties (PRPs) if they have control over a particular property. PRPs are strictly liable for their activities that release or threaten to release hazardous substances into the environment. CERCLA makes PRPs responsible for "response costs" incurred by the federal or state government in cleaning up contaminated sites. The cost of such cleanups can be astronomical, especially for those involving large scale cleanups, or removal and disposal of hazardous or toxic materials in heavy concentrations.
Avoiding PRP Status
This means is that the industrial landlord needs to exercise considerably more due diligence in leasing space to tenants, particularly when the space is to be used for industrial or manufacturing purposes. Landlords need to monitor the activities of their tenants to ensure they are operating with all necessary permits, and are not employing practices which could release hazardous substances into the environment.
In many cases, contamination is far from obvious. If such contamination is discovered in the future, the landlord may be left holding the bag, even though the tenant was the sole cause of the contamination. This can happen when the tenant who contaminated the premises is no longer in business (or is barely in business). Many manufacturing and chemical concerns that were once substantial operations have gone out of business due to changing technology and increasingly restrictive environmental laws and regulations. Others have relocated their businesses to locales with a lesser degree of environmental regulation (e.g., Mexico).
CERCLA provides that the present owner (or landlord) is a PRP liable for response costs regardless of fault, even if the environmental contamination was caused by a prior owner, prior tenant or the present tenant. As a result, most landlords leasing space for industrial, chemical, or manufacturing uses require comprehensive environmental protections in their leases and ground leases. They range from traditional devices such as tenant indemnities and representations and warranties regarding hazardous materials to specialty environmental clauses permitting the landlord to install test wells on the property to monitor ground water, special landlord environmental inspection rights, and provisions requiring the tenant to perform remedial cleanup of any contamination it causes.
This LARG looks at nine separate devices a landlord can use to insulate it from environmental liabilities caused by its industrial tenants. They include: