UK: Environmental Liabilities - Some General Reminders for Practitioners

This article is not intended to prescribe the advice that a surveyor should provide – clearly this will depend upon the nature of the retainer and advice provided by other professionals. We trust it is a useful aide memoir, however, in this area.

The following standard lease clauses have potential environmental implications.

• A covenant requiring a tenant to keep the leased site in good condition may oblige the tenant to remediate contamination on the leased site.
• A broad provision permitting a tenant to assign a lease may allow the tenant to assign it to the operator of a highly contaminative use.
• A covenant requiring a tenant to conduct all works on a leased site that are required under or by virtue of any Act of Parliament may include an obligation to comply with a remediation notice under Part IIA of the Environmental Protection Act 1990 or a works notice requiring the recipient to clean up surface or ground water pollution under sections 161 to 161D of the Water Resources Act 1991. A tenant’s covenant to indemnify the landlord for costs associated with a statutory obligation may have the same effect.

Under Part IIA, a person who caused or knowingly permitted land to be contaminated is primarily liable for the cost of remediating the contamination. The owner or occupier of a contaminated site may be secondarily liable even though he did not cause the contamination or, in some cases, even knew that it existed.

• A covenant obliging a tenant to pay existing and future outgoings in respect of the leased site may include an obligation to pay remediation costs associated with a remediation or works notice. A
• tenant’s covenant not to commit, permit or suffer any act or thing that may be or become a nuisance to the landlord or occupiers of adjoining sites may include a ban on permitting the continuation of a nuisance such as the migration of pollutants in groundwater under the leased site to neighbouring property.
• A tenant may be contractually bound to pay remediation costs due to a covenant concerning a service charge. For example, a landlord who is required to remediate the leased site by a local authority may be able to pass the costs onto the tenant.
• In a similar way, a tenant who remediates the leasehold and thus increases its value may be obliged to pay more rent following a rent review.

Surveyors should consider advising their landlord or tenant clients to consider including provisions in a lease to allocate environmental liabilities. Whilst doing so would not prevent a governmental authority from requiring either party to remediate the leasehold or prevent third parties from bringing claims against either of them, they would reduce the likelihood of disputes between the parties as to future responsibility for the costs associated with such actions.

If a prospective tenant intends to conduct industrial operations on a leased site, a surveyor advising the landlord should consider checking whether the tenant previously complied with environmental laws and whether any actions or claims have been brought against him. Whilst pollution incidents may occur despite the most rigorous measures to avoid them, the tenant’s environmental history will provide an indication as to whether he is likely to take measures to avoid the occurrence or recurrence of such incidents on the new site.

Somewhat similarly, a surveyor should consider advising a landlord client to include a covenant obliging the tenant to adopt measures and procedures to avoid pollution incidents at the site. If an incident causes water pollution, the landlord may be subject to criminal and/or remediation liabilities in addition to, or instead of, the client. At a minimum, the covenant should oblige the tenant to comply with environmental law and all applicable permits, consents and other approvals. (Managing agents have also been found liable of causing water pollution when one of the causes of an incident was the lack of maintenance of the premises or services in respect of the premises.)

Further protection would be added by a covenant requiring the tenant to conduct environmental assessments of the leasehold say every five or ten years during the lease term and, in particular, during its final year. An accompanying covenant could oblige the tenant to remediate the site if contamination is discovered and to pay any costs incurred by the landlord in respect of the contamination.

A further covenant could oblige a tenant to notify the landlord if the tenant, for example, is notified by a governmental authority of a breach of environmental law or the terms and conditions of a permit, or if he receives a complaint or claim concerning an environmental matter. A surveyor may wish to advise a landlord to include a provision granting him the right to seek further information or to investigate the matter.

Surveyors should advise their landlord clients that the inclusion of the above covenants or the exercise of their rights under them could result in the landlord becoming a "knowing permitter" for purposes of Part IIA or otherwise becoming directly liable for any criminal, remediation or other civil environmental liabilities. Thus, such clauses should be carefully drafted.

Another provision to protect a landlord is one that states that the tenant’s liability for remediation and civil liabilities plus any remediation of contamination caused by the tenant will survive the lease term.

One method of transferring some environmental risks if a tenant objects to the above covenants is for the landlord or tenant to purchase an environmental insurance policy. Insurance is available, among other things, for liabilities arising from undetected contamination on a site at the inception of a policy, known contamination reported to the insurer (if, of course the insurer agrees to accept the risk of a claim concerning it), future pollution incidents and the cost of defending an Environment Agency prosecution.

Surveyors should consider advising both landlord and tenant clients of the benefits of conducting a baseline assessment of the leasehold to establish its environmental condition prior to entering into a lease. Such an assessment is essential if the covenant to yield up the site in its condition at the beginning of the lease term is to be effective. The results of an assessment would also aid a prospective tenant in deciding whether to enter into the lease.

If the leasehold is known to be, or suspected of being, contaminated, the surveyor may wish to advise his client about methods of handling any requirement to remediate it by:

• placing money in escrow for a specified period with the amount perhaps to decrease over time according to a sliding scale; or
• the landlord agreeing to indemnify the tenant if a governmental authority requires the remediation of existing contamination, again perhaps according to a sliding scale over time.

The surveyor should also advise his client about lease provisions specifying measures to take and/or the allocation of liabilities if a tenant’s development activities or operations on the leasehold aggravate existing contamination.

Whereas a landlord risks his land being contaminated or contamination on it being aggravated by a tenant’s activities, the tenant’s use and enjoyment of the land may be at risk if contamination that existed prior to the lease term causes harm or must be remediated during the lease term. In such a situation, the surveyor should advise a tenant client about the possibility of including a break clause or a provision permitting him to suspend the rent if, for example, the tenant’s operations on the site are disrupted due to remediation activities.

A further option for tenants in limited instances is a pie crust lease, that is, a lease of only the surface of the leasehold. This option is obviously not feasible if the tenant wishes to develop the leasehold or otherwise use the subsurface, for example, for underground storage tanks. A pie crust lease would not protect a tenant from liability for remediating pollution caused or knowingly permitted by the tenant. It is irrelevant in such cases whether a person owns or occupies the contaminated land or water.

The measures indicated above are not comprehensive. Their applicability will depend on the type, condition and location of the leasehold, the negotiating position of the parties and other factors specific to the site and the parties. The measures will, however, hopefully provide an indication of the type of environmental issues about which surveyors should be advising their landlord and tenant clients.