Key Contact:

Carrie Ritchie

Key Contact:

Carrie Ritchie

Environmental Liability in a Commercial Lease

By: Carrie Ritchie

Liability for environmental damages and clean-up costs can be a hefty burden for both landlords and tenants. That is why the environmental clauses incorporated into a commercial lease should be examined closely.  There are significant risks for both landlord and tenant if potential, or historical, environmental contamination are not properly addressed.

Intended use of the Premises

One of the simplest ways for a landlord to minimize the risk of future environmental contamination of the property is to clarify the potential activities of the tenant in the space and determine whether any potential uses could result in environmental contamination. Dry cleaning operations have historically been known to contaminate the lands on which they operate, compared to other “lighter” uses, such as retail or office space. This typically gets addressed in the fine print under the ‘Permitted Uses’ section of the lease. It is essential to discuss the proposed use of the property up front in lease negotiations, so surprises are limited.

Environmental Indemnity

Indemnities are useful tools that are highly negotiable in the commercial lease context. Environmental clean-up is costly. An indemnity is not worth much if the party providing it doesn’t have the ability to pay. It is prudent for the landlord to have security, by way of a cash deposit for example, to ensure that the tenant will be able to pay for such costs, if the property becomes contaminated by the tenant. The tenant, in most situations, should try and resist providing an indemnity, as it can mean a substantial financial burden.

Environmental Due Diligence

It may be worthwhile for both the tenant and the landlord to conduct environmental due diligence on the property during lease negotiations, especially if it is being used for industrial purposes. While this may be costly, it can provide a baseline for any environmental contaminants located at the property. Depending on how recently the landlord purchased the property, the landlord may already have a recent Phase I or Phase II environmental assessment on hand. Conducting the environmental assessments at the beginning and the end of the lease can be helpful for both parties. It may provide protection for the tenant should any future claim for environmental contamination that took place before the tenant’s occupancy. Similarly, the landlord will then have a baseline to determine if any contamination has taken place during the tenancy.

Environmental Insurance

In some cases, it makes sense to have insurance in place for potential environmental contamination. As a condition of the lease the landlord may insist that the tenant obtain insurance in this regard. Environmental insurance can be expensive and vary significantly depending on the types of activities the tenant plans to undertake. In many cases, the cost and due diligence required to obtain environmental insurance can be prohibitive to leasing the land.

There are many ways for the parties to negotiate the division of environmental liability in a commercial lease. Due diligence is key in providing the baseline and both insurance and indemnities are useful tools to address the issue in the commercial context. If you need assistance in navigating environmental issues in a commercial lease, as either a landlord or tenant, please contact Carrie Ritchie at [email protected]

This article is not intended to serve as a comprehensive treatment of the topic and is not legal advice. All legal matters are dealt with pursuant to their specific facts and circumstance. Nothing replaces retaining a qualified, competent lawyer.