Allocating Environmental Liability – Landlord v. Tenant

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In a lease, parties can allocate risk as they choose – and often do. Risk need not follow fault, though it often does. So, the question is: how should allocating the risk of environmental liability work as between a landlord and its tenant?

For simplicity, we’ll assume that the landlord we’re talking about owns the property in question. We’ll also assume that we’re not speaking of a ground lease or similar arrangement, though many of our thoughts are equally applicable to such arrangements.

When it comes to allocating the risk of environmental liability between a landlord and its tenant, Ruminations thinks risk (call that: responsibility) should follow fault. We’ve said “between a landlord and its tenant” a couple of times because our thoughts certainly won’t change the way the law allocates such responsibility.

The landlord owns the property. If its tenant never came along in the first place, and contamination was discovered, the landlord would be responsible. We don’t think that the fortuitous circumstance of the landlord finding a tenant should allow a landlord to shift such liability to the tenant. Plain and simple – a landlord should be entirely responsible for environmental liability resulting from hazardous materials at the property before its tenant takes occupancy. If it can find someone else to take or share that liability, more power to it. But, the new and innocent tenant should be unaffected. Implicit in that is the thought that a landlord should indemnify its tenant for whatever arises out of pre-occupancy hazardous materials at the property. We wouldn’t cry foul if that didn’t include consequential damages (explained in an earlier blog posting – click HERE).

Now, there is going to be a shift once the tenant moves in. At that point, the tenant can begin to do harm with hazardous materials, meaning that once it enters its premises it can introduce its own hazardous materials to the property. In truth, it can introduce them at any time, but with our suggested formulation, that distinction disappears. Basically, Ruminations believes that a tenant should be responsible for whatever hazardous materials it, or someone acting for it, introduces to the property. Our usual formulation would say: “related to hazardous materials introduced to the property by tenant or any person or entity acting on behalf of or under the direction of tenant.” That would include its employees and contractors, but not independent truckers simply making deliveries. You can twist yourself in knots thinking about those truckers, but start by deciding (for yourself) whether a tenant should be responsible for the leakage from the UPS truck’s gas tank, and which of UPS’s tenant-customers at the shopping center should be responsible? Perhaps, the one whose premises the driver just left or the one to whom it was headed next? We’ll return to truckers and others similarly situated before this diatribe is over. Hold your horses – we’ll get to customers as well.

Similarly, we think that beyond a landlord being liable for whatever previously existed at the property, it should have liability for things: “related to hazardous materials introduced to the property by landlord or any person or entity acting on behalf of or under the direction of landlord.” What about its other tenants (not the one in the hypothetical lease we’re talking about)? We’ll get to that – those other tenants are somewhat analogous to a tenant’s customers.

At this point, we’ve opined that a landlord should be responsible for what was already at its property as well as for hazardous materials it or its people later introduce to the property, and that tenants should be responsible for hazardous materials they and their people introduce to the property at any time. So, what about hazardous materials introduced by “third parties” after a tenant moves in? Ruminations thinks that, as between a landlord and its tenant, neither should be responsible to the other for such situations. Clearly, the government will place the remediation burden on someone, and if you bet on that being the landlord, you’ll probably be a winner. Regardless of the effect, whether it be damages to one’s business or the economic burden of a clean-up, let the chips fall where they may and each party can chase the actual polluter. Again, in such circumstances, we think neither the landlord nor the tenant should be liable one to the other.

Ruminations is pretty inflexible in its thinking so far as what we’ve already written. Beginning here, we’re not comfortable in being so rigid. A landlord’s other tenants are, in effect, the landlord’s customers, no less than a shopper inside a store is that tenant’s customer. We’re sure that few of our readers previously have made that connection, but that doesn’t make it any less true. We’ll skip over the exercise of laying out what we think would be the kinds of retorts readers would post and then matching our responsive arguments to each of those retorts. We’ll just ask a few question of our own, hoping that our questions will point out that there isn’t an easy answer.

How would you characterize a shopper who parks at a shopping center with the intention of entering the pizzeria? Is that the pizzeria’s customer? If so, at what point did she become the pizzeria’s customer? When she pulled into the lot or when she entered the pizzeria? What is she after she leaves the pizzeria? Suppose she intended to go to the video store after leaving the pizzeria? Whose customer is that now? When does she shift from being the pizzeria’s customer to being the video store’s customer? What was she when she parked – a customer of both stores? How about after she leaves the video store? Whose customer is she on her way back to her car and then out of the shopping center? What if she parked at the shopping center intending to go to the pizzeria, but it was too crowded and she turned around and left? Whose customer was she? What if she had then gone to the salad place instead? If you answered that she was a tenant’s customer only when she was inside that particular customer’s store, then was she “everybody’s customer” while in the common areas? If so, doesn’t that make her the landlord’s customer at those times because it is the landlord’s job to attract customers to a particular shopping center by the center’s design, location, and tenant mix?

For purposes of this blog posting, none of those questions matter if this “customer” didn’t dispose of hazardous material on this particular shopping trip. Thankfully, it is a rarity that such a customer ever does that. When negotiating this issue, it would be helpful to remember that. Nonetheless, we still have to deal with the theoretical because theoreticals turn into real situations, and our task is to provide answers to the “if-then” situations – if someone’s customer does damage by introducing hazardous material to the property, then, as between the landlord and its tenant, who pays? That doesn’t mean we need the “perfect” solution; we just need one that is practical.

Here’s what we think. While a customer (or a delivery person) is inside a tenant’s premises, the tenant should have control over that customer or delivery person and bear responsibility for what that person does. We’ll just say that the tenant has the last best chance to stop a problem that takes place inside its premises. However, there is a flip side to such logic. We think that the parallel situation is that when a shopper (or delivery person) is on the common areas, the landlord should take responsibility. After all, shopping centers are created for the purposes of attracting shoppers as a common benefit and, by necessity, draw delivery vehicles. Shopping centers have “common” areas to serve those shoppers and delivery persons. Landlords control the common areas (or at least they pretend that they do, making that the basis for charging rents based on the property being a shopping center).

What about contamination caused by “other tenants” inside their own premises or in common areas? Ruminations believes that this should be a landlord’s problem. Leave the innocent tenants alone. “Other tenants” are the landlord’s customers and the landlord should indemnify its other, innocent tenants. Let the landlord get its recourse against the wrongdoing tenant.

Now, to an even more practical approach. We know that tenant-oriented readers are screaming that they should not be liable for what their customers do because they have no control over them. Landlords are saying the same thing about the “other tenants” and “undesignated” shoppers, after all “they are just like your customers and we, your landlord, don’t really have control over our other tenants.” Even though the landlord’s and tenant’s situations aren’t perfect mirror images (to be frank and honest), you still get the general idea about how this kind of discussion goes.

So, where does Ruminations really come out on the issues of customers and other tenants? We think they should be treated just like strangers or what we call “midnight dumpers.” Landlord and tenant each should deal with the problem themselves and neither should have responsibility to the other (just to the government). Each should chase the wrongdoer for its own damages. Granted, that’s a practical approach, but doing leases isn’t an academic exam, and leases needed to get done within “our lifetime.”

Here’s a final thought, one that invites “slings and arrows of outrageous fortune.” (Not really a very appropriate use of that set of words, but we’ve always wanted to quote from Marlowe’s Hamlet.) We don’t think that the cost of environmental remediation (other than for normal clean-up of ice treatment material or drippings from parked vehicles or the like) should be passed through to tenants as part of common area expenses. To do so would serve to relieve the landlord of some of the very liability we’ve already allocated to landlords, such as for hazardous material that were already at the property before a given tenant got there. Like it or not, operating a shopping center is not the same as investing in U.S. Treasuries – the return can be much, much higher; but, with a higher return, comes a higher risk, and that risk is not limited to vacancies.

We know a lot of readers will want to know the address to which their polite, reasoned objections should be directed. The best place is to post a comment at the top of this piece by going to www.retailrealestatelaw.com.

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Comments

  1. Juliet Locke says:

    Couldn’t a landlord recapture the costs invovled in “third party” releases to the common area via CAM? That way it would be allocated prorata between and among all the tenants.

  2. Having been the environmental person in an owner/landlord company I strongly suggest that the owner/landlord have a previous Phase I Environmental Site Assessment report from either the time of acquisition or later. This is the benchmark to define tenant liability. It is especially advisable for multi-tenant industrial properties and less so, shopping centers which may have gas stations on the property.

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