Protect Your Wallet When Leasing Contaminated Space

March 12, 2015
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If you're considering leasing space at a property that has been contaminated by a past tenant, don't assume that only that tenant and/or the property's owner will be responsible for cleanup costs later. The U.S. Comprehensive Environmental Response, Compensation & Liability Act (CERCLA), a.k.a. the “Superfund Law,” allows the Environmental Protection Agency (EPA) to clean up contaminated land and sue the parties responsible for the contamination to recover its costs. “Potentially responsible parties” (PRPs) the EPA may pursue include the land’s “owners and operators.” The rules apply to leased land. So even though the land was already contaminated when your lease began, and you didn’t do anything to make the problem worse, you may also be on the hook for cleanup costs as an “operator.”

You can use these strategies to minimize your potential risks of CERCLA liability for contamination caused by your owner or tenants who leased the property before you:

1. Conduct a Phase I Environmental Assessment before leasing property. To make out a BFPP defense, you must show that you carried out what the EPA calls an “all appropriate inquiry” (AAI) into the previous ownership and uses of property before you lease it. The EPA guidelines detail on what an AAI must include, such as a site visit, records review, etc. The good news is that you can meet all the AAI criteria by hiring a consultant to carry out a Phase I Environmental Site Assessment of the property to determine if it is or may potentially be contaminated before leasing it.

2. Include protections in your lease. Negotiate for including an environmental warranty in the lease clause that: 

  • Defines the baseline environmental condition of the property before you lease it;
  • Requires the owner to acknowledge that there is no contamination;
  • Requires the owner to comply with and ensure that neighboring tenants also comply with CERCLA and all other applicable environmental laws; and
  • Limits your liability for contamination to your property caused by discharges of hazardous substances committed by the owner, other tenants, subtenants, and neighboring properties.

3. Require your subtenants to meet environmental obligations. You can also be liable as an “owner” or “operator” for environmental contamination caused by your subtenants and assignees. Transfer all of the environmental obligations contained in your lease to all subtenants and assignees.

To test your knowledge about leasing space at a contaminated property and for a Model Lease Clause with four key protections to use in that situation, see “Are You Responsible for Costs of Cleaning Up Contamination You Don't Cause?” available to subscribers here.