Coldwell Banker Commercial Benchmark

Landlords and Tenants: Protect your property interests from environmental cleanup liability

By Jim Reed

Here’s a common situation landlord and tenant reps give some thought to, but not enough to protect themselves.  A commercial or industrial lease commonly provides for the tenant to indemnify the landlord against all liabilities associated with any environmental contamination to the leased premises caused by tenant during the tenancy.  Often the tenant will attempt to protect its interests by insisting on a contrasting provision to the effect that tenant will not be responsible for any contamination that already exists at the inception of the lease.  Fair enough, right?  Everyone is protected and happy, correct?  No. 

At the end of the lease term and after tenant has vacated (often after five, ten years or more), landlord discovers some substances contaminating the property, checks his lease and contacts tenant to demand that tenant undertake and/or pay for the cleanup.  Tenant  may deny all responsibility, claiming that the contamination must have existed before it took possession.  Neither party, unfortunately, has any documentation or evidence of the property’s condition at any of the relevant time frames.  Because the parties did not provide a mechanism to actually measure or examine the extent of environmental contamination at the inception of the lease or at the end of the lease, these provisions are difficult to enforce and can lead to intense disagreements over cleanup responsibility.   

Many landlords and tenants try to protect themselves by ordering a Phase I environmental assessment of the property at the inception of the lease.  However, this is the wrong tool to address these issues.  A Phase I assessment will provide some useful information, but will also provide a lot of irrelevant data.  A Phase I includes historical information about the property, historical aerial photographs, a radius search of registered contaminated sites in the area, a listing of underground storage tanks on neighboring properties, none of which addresses the issue at hand. (However, someone will still pay for all this research).  A cursory inspection of the property is also included, which may or may not reveal any visible contamination.  The report usually concludes with a list of any areas of concern, but may not include and examination of what the contaminants are, what the extent of contamination is or whether the conditions require attention under state environmental regulations.  In summary, the report will not provide a baseline of the conditions on the property at the inception of the lease.

So, what is to be done?  An experienced environmental consultant should be able to provide a “pre-lease assessment” of the property.  This assessment will include a visual inspection of the property, soil sampling and testing to accurately discover and quantify any contaminants on the property.  Similarly, an “end of lease assessment” will examine the same conditions at the termination of the lease.  What is not included is all the irrelevant material; such are radius searches, historical aerial photos, etc.  Often, these assessments will actually cost less than a Phase I report.

In future posts, we’ll look at the particulars of the pre and post lease assessments and a related base line agreement that can be entered into at the inception of the lease.