Although it is standard practice for landlords to build several provisions into their commercial lease agreements to guard against liability exposure stemming from their tenants’ operations on their land, few landlords appear to fully appreciate the potential environmental liability risks that they are exposed to as a result of their tenants’ activities, which exist both during and well after the tenancy has concluded. Fortunately, there are several steps that landlords can take in order to address their risk of exposure to environmental liability arising from the operations of their tenant(s). This includes:
(a) Due Diligence
It is important that a landlord understand the nature of the tenant’s operations and any protocols it may have in place to prevent contamination (if the operations creates a risk of pollution) before agreeing to the tenancy. This type of due diligence goes without saying but is especially applicable if there is a concern about possible environmental impacts. In addition, a landlord will not be exempt from responsible person status if it “should have known” that contamination may be caused by the conduct of the tenant. As such, it is important that landlords complete their due diligence at an early stage; while considering incorporating some of these facts into their lease agreement as representations and warranties.
(b) Environmental Monitoring
If it is known or suspected that a tenant’s activities have the risk of impacting the environment, it is important that landlords require regular environmental testing during the tenancy. This helps ensure compliance with best environmental practices and to identify when and if contamination may be occurring. It is also advisable that such testing provisions be built directly into the commercial lease agreement as well.
(c) Environmental Contingency Plan
Lease agreements should be clear as to what must happen if contamination is discovered during the tenancy. For instance, the landlord will want to specify what environmental standard (numeric or risk-based) the contaminants must be remediated to if a legal instrument from the Ministry of Environment is desired (i.e., a certificate of compliance on completion of remediation) and the tenant’s obligation to provide one must be clearly stated in the lease. There is significant room for interpretation under the legislation on this issue, so it preferable for the landlord to put some parameters around this in advance. Understanding this risk and taking the necessary steps to build appropriate protection clauses into the lease agreement are critical to successfully mitigating exposure.
(d) Indemnity Provisions
Landlords may wish to incorporate protective clauses, such as environmental indemnities, that will continue to apply after termination of the tenancy. An indemnity is particularly important for environmental contamination because such contamination is often discovered years after the polluting‑causing activities have ceased. Ideally, the indemnity would be worded such that it covers not only costs incurred by the landlord or claims arising from its own land, but also any costs or claims from third parties such as impacted neighbouring property owners.
In summary, landlords potentially face significant environmental liability risks from the activities of their tenants and unfortunately, this exposure does not end when the tenant vacates as risk can materialize years or even decades later when the contamination is discovered, often in the context of a redevelopment. Fortunately, however, there are several steps that landlords can take in advance in order to minimize their risk of environmental liability, which includes exercising due diligence, creating environmental monitoring or contingency plans, and incorporating indemnity provisions into their leases.
To stay current with new case law and emerging issues, consider subscribing to our Environmental Law Update and we’ll send helpful information straight to your inbox. Subscribe here.