Pay What!?: Minimizing Environmental Liability

Since both landlords and tenants can attract statutory environmental liability arising from mere ownership or having carried out any (even non-polluting) operation on contaminated land, measures to minimize and, where appropriate, allocate, the liability risk should be considered by both prior to the commencement of the lease.  That being said, the nature of the protections and who will seek them will invariably depend on the type of property being leased, former operations that had been carried out on the property, the environmental condition of the property prior to the lease and the nature of the operations to be carried out by the prospective tenant.

(a)        Due Diligence

The first protective measure is to carry out sufficient due diligence prior to execution of the lease.  For landlords, the due diligence process will be aimed at understanding the nature of the operations proposed to be carried out by the tenant on the property to be leased.  Furthermore, if a sub-lease is being contemplated, the nature of the sub-tenants’ operations, and the environmental risk they carry (if any), will also have to be fully understood.  In addition to ensuring that they fully understand the nature of the tenant’s proposed operations and the environmental risk, landlords should also make inquiries into the financial means of the prospective tenant to address environmental concerns if contamination does occur.  It may also be necessary to gather information about the history of the prospective tenant’s compliance with environmental laws.

In contrast to a landlord, a tenant’s due diligence process will be aimed at obtaining information about the environmental condition of the land prior to commencement of the lease.  The process may include a search of the Ministry of Environment Contaminated Sites Registry, a review of existing environmental reports respecting the lands to be leased (obtained from the Registry or provided by the landlord), inquiry into, and verification of, the financial means of the prospective landlord, and an inquiry into the prospective landlord’s historical compliance with environmental laws.

Tenant due diligence is perhaps even more important for tenants who plan to carry on operations that may result in environmental contamination.  Such tenants will want to know whether similar operations were carried out on the property by previous tenants, whether such tenants have introduced contamination at the property and, if so, whether it has been remediated.  The primary concern for such tenants will be to ensure that at the end of their tenancy, they are not required to pay for the remediation of pre-existing contamination caused by a historic tenant who carried on a similar operation.

(b)       Environmental Insurance

Landlords and tenants exposed to potential environmental liability should consider obtaining an appropriate insurance policy.  A commercial general liability policy typically will not cover environmental risk.  Although environmental liability policies used to be prohibitively expensive, in recent years the insurance premiums for such policies have become more reasonable, which has made them a much more attractive option for landlords and tenants looking to bolster their liability protection.

(c)        Contractual Protections

Environmental risk can be allocated as between a landlord and a tenant in a lease agreement and as a result, both parties need to carefully consider the environmental obligations they are assuming in a lease.  Contractual protections are, of course, only operative vis-à-vis the other contracting party, as one cannot contract out of responsible person status and, therefore, liability to non-parties to the contract.

For example, a polluting tenant may provide to a landlord a covenant that the tenant will remediate the contamination on termination of the lease and, further, a release in favour of the landlord which will ensure that the tenant will have no claim against the landlord for any costs incurred in remediating the leased premises or any neighbouring lands impacted by migration from the leased premises.  If the tenant does not remediate neighbouring lands impacted by migration from the leased premises, the release given by the tenant to the landlord will not prevent the impacted neighbouring property owner from commencing a statutory cost recovery claim against the landlord.  While the landlord would have a claim against the polluting tenant, if the polluting tenant is no longer available to pay for the remediation costs of the impacted neighbour, the “innocent” landlord will likely have to shoulder that liability notwithstanding the contractual protections provided by the polluting tenant.

In the result, both landlords and tenants should consult with environmental lawyers early in the negotiations process to ensure that they are properly advised of the environmental risk they are assuming and that sufficient and properly drafted protections are negotiated into their lease.’

Questions? Comments? Please contact Una Radoja at uradoja@harpergrey.com or anyone else from our team listed on the Authors page.

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