Commercial and industrial leasing

What you need to know about potential environmental liability for a tenant

We’ve all heard the old adage “what you don’t know can’t hurt you.” With regard to environmental liability, however, what you don’t know most definitely can hurt you.

Under applicable federal law (Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)) and Washington state law (Model Toxics Control Act (MTCA)), owners and operators of a facility can be strictly liable for all of the costs to investigate and clean up contamination at the property. An operator is the party who conducts, directs or manages operations at a facility and includes a tenant. In turn, a facility includes a building, structure or any real property.

The law has a broad reach and can be draconian in its requirements to pay, regardless of intent or even involvement in the operations that resulted in contamination. For that reason, tenants need to be cautious about stepping onto property and into a lease without understanding the potential that the property is or may be contaminated. Tenants should protect themselves from becoming involved in MTCA’s or CERCLA’s chain of liability.

So, how does a tenant of commercial or industrial property avoid or reduce the likelihood of liability under the state and federal environmental laws? In Washington, there are several defenses that a party may raise so as to avoid liability under MTCA. One such defense is that of an innocent purchaser. To be an innocent purchaser or tenant under applicable state law, the party in question must exercise the “utmost care” with respect to hazardous substances, whereas the federal environmental laws look for the innocent party to exercise “due care.”

While there is precious little case law describing what may constitute “utmost care” or “due care” for a tenant, there is some direction in the statutes and case law that applies to owners. For instance, an owner, past owner or purchaser of a facility may avoid strict liability where she can establish by a preponderance of the evidence that at the time she acquired the facility, she had no knowledge or “reason to know” that any hazardous substance had been or was about to be released requiring the need for remedial action.

For that purchaser/owner to establish that she had “no reason to know,” she must have undertaken, at the time of acquisition, all appropriate inquiry into the previous ownership and uses of the property, consistent with good commercial or customary practice so as to minimize liability. If the issue of whether or not the purchaser had reason to know of the presence of hazardous substances is presented to a court for determination, the applicable statute directs the court to take into account (i) any specialized knowledge or experience on the part of the person, (ii) the relationship between the probable value of the property if uncontaminated versus the actual purchase price, (iii) commonly known or reasonably ascertainable information about the property, (iv) the obviousness of the presence or likely presence of contamination at the property, and (v) the ability to detect such contamination by appropriate inspection. 

So, should a tenant similarly undertake “all appropriate inquiry” prior to leasing industrial or commercial property? I believe that a tenant should be able to show that it had no reason to know of contamination at the leased property. And to meet this burden of “no reason to know,” the obligation for a tenant may well be the same as that of a purchaser.

My advice: before leasing industrial property and many kinds of commercial property, contact an environmental engineering firm to undertake a Phase I environmental site assessment (ESA). This is a standard screening level assessment where a consultant conducts an investigation of the current and prior uses of the property using readily available resources to determine whether there are any recognized environmental conditions. It also typically includes an inspection of the property, a review of governmental records, aerial photos, title reports, environmental databases, and historical records, along with interviews of the current owner, and ideally former owners and neighbors.

Paying for a Phase I ESA will go a long way in attempting to meet the “all appropriate inquiry” standard. Further, the lease could provide that undisclosed or unknown environmental conditions discovered after the commencement of the lease would constitute a default allowing the tenant to terminate the lease. Also, the tenant, depending upon its size and economic strength, may insist on indemnification and release provisions in the lease should contamination be discovered after lease commencement. 

While there are several other available defenses for tenants with regard to environmental liability, by exercising a standard of all appropriate inquiry into the previous ownership and uses of the property, a potential tenant may best protect itself.

Don Russo is a real estate attorney with Schwabe, Williamson & Wyatt. He works with private parties and public entities on the purchase and sale of both ‎commercial and industrial real estate property. Don can be reached at drusso@schwabe.com.

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