Tips for the Retail Leasing Lawyer to Minimize Environmental Liability Risk

Retail leasing attorneys face particular challenges when it comes to managing environmental liability, in large part because of the misconception that prospective commercial tenants cannot be held legally responsible for preexisting contamination that they did not cause. However, the federal "Superfund" law makes clear that owners and operators (aka tenants) of properties with prior contamination can be held legally responsible for all investigation and cleanup costs relating to the contamination, even when they did not contribute to the original contamination.¹ Furthermore, commercial lessees may have state-specific spill reporting and cleanup obligations for petroleum, storage tank and hazardous substance spills that occurred prior to their tenancy.

While it is easy to think of environmental due diligence as a concern just for prospective purchases, the law is well established that environmental liability risks are equally critical for prospective lessees. When working in tandem with environmental counsel, leasing attorneys should focus on reducing risks associated with contamination, compliance obligations and liability exposure. The following strategies are essential to protect retail leasing clients from environmental liability risks.

1. Engage an Environmental Law Colleague Early in the Process

Involving environmental counsel at the onset of the leasing engagement enables leasing attorneys to address environmental risks proactively and structure lease terms to protect the client's interests. Environmental counsel can provide specific insight into particular risks that may arise due to the property's history, location or planned use. This early engagement helps prevent costly or complex amendments later in the process.

Environmental attorneys can also help their leasing colleagues work with environmental consultants to scope necessary due diligence efforts and minimize investigating issues that are irrelevant. Many environmental investigations assess the property's current use, historical operations and prior cleanup activities that may have occurred at the site. Environmental diligence may also include a review of environmental regulatory or permitting activity concerning the property and environmental enforcement actions of prior tenants or cleanup activities at the land – all things that may impact lease terms. Information obtained during the environmental due diligence stage is invaluable when negotiating lease terms that affect tenant obligations, such as insurance requirements, reporting duties and indemnity provisions. Early involvement with environmental counsel allows leasing attorneys to craft lease terms that align with the client's operational needs, help to ensure regulatory compliance and limit future environmental liability risks.

2. Environmental Counsel to Thoroughly Review Environmental Lease Provisions

Environmental lease provisions can be complex and may have significant implications for a tenant's liability exposure, particularly when the property has a history of contamination or tenant activities may involve the use or storage of regulated substances (e.g., petroleum, hazardous substances). Close collaboration with environmental counsel on environmental lease provisions can help leasing attorneys spot issues early in the process and negotiate lease terms that protect the client's interests, including scoping environmental responsibilities, environmental compliance obligations, tenant's use restrictions, and notice and remediation protocols.

3. Collaborate During the Due Diligence Stage

A thorough environmental due diligence process enables leasing attorneys to understand existing environmental risks associated with the property and to structure lease terms accordingly. A Phase I Environmental Site Assessment (ESA), which provides an initial evaluation of potential contamination, is especially valuable in leasing, as it can help identify recognized environmental conditions (RECs) and business environmental risks (BERs) with the property, which may affect the tenant's future use and liability exposure.

When collaborating during due diligence, leasing and environmental counsel should jointly scope the Phase I ESA and any subsequent investigations, such as Phase II ESAs or compliance reviews. This partnership helps to ensure that investigations are thorough – but not overly intrusive – and that the results are useful during lease negotiations.

Environmental counsel should also review Phase I ESA reports while in "draft" form to help ensure the reports comply with the regulatory standards of CERCLA's All Appropriate Inquiries (AAI) Rule. Compliance with the AAI rule is foundational to establish statutory liability protection under CERCLA and can provide a shield to protect tenants for liability for preexisting environmental contamination.²

Several additional considerations for leasing attorneys during the environmental due diligence include scoping the Phase I ESA and further investigations, reviewing reports for tenant-specific concerns, interpreting potential long-term obligations and evaluating regulatory and stakeholder implications.

4. Protect Client Interests During Required Environmental Mitigation or Remediation

If contamination is discovered, it often triggers regulatory reporting, mitigation or remediation requirements that can disrupt property use and result in ongoing obligations. These activities can lead to significant operational and financial implications for tenants. It is essential for leasing counsel to work with environmental counsel to evaluate these impacts and craft lease terms that protect the client's interests. Environmental counsel can also help leasing counsel with clarifying access and use restrictions, setting standards for tenant notification and involvement, allocating costs and defining reimbursement protocols, and monitoring safety standards for employee and customer protection.

5. Maintain an Ongoing Relationship with Environmental Counsel Post-Lease Commencement

Environmental risks can surface throughout the lease term, especially in operations that involve the use or storage of hazardous materials or processes that generate, emit or discharge hazardous waste. It is essential for leasing counsel to maintain an ongoing relationship with environmental law colleagues to address any new environmental concerns, evolving environmental regulatory compliance issues and negotiate lease amendments or extensions. Continued collaboration helps to ensure that the client can promptly address potential liabilities. Leasing attorneys should routinely request support from environmental counsel on routine environmental audits and compliance monitoring, environmental management plans regulatory updates and training programs, and responding to environmental incidents and emergencies.

In sum, environmental issues in retail leasing require careful navigation, with close collaboration between leasing and environmental counsel. By following these strategies – engaging environmental counsel early, thoroughly reviewing lease provisions, conducting robust due diligence, managing mitigation requirements and maintaining ongoing environmental oversight – leasing attorneys can help retail leasing clients minimize environmental liability.

Notes

¹ The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. 9601 et seq., colloquially known as the Superfund law, imposes strict, joint and several liability on parties responsible for the contamination from hazardous substances at a site.

² To address CERCLA's oppressive strict, joint and several liability scheme for sites with preexisting contamination, Congress amended the law in 2002 to provide liability limitations for landowners that qualify as: 1) bona fide prospective purchasers, 2) contiguous property owners, or 3) innocent landowners. The law was further amended in 2018 to clarify that these liability protections extended to prospective tenants. To qualify for these liability protections, a prospective landowner or tenant must satisfy certain conditions; one of the threshold criteria is performing "all appropriate inquiries" into the previous ownership and uses of the property before acquisition or signing a lease. U.S. Environmental Protection Agency (EPA) regulations establish that a person can comply with the foregoing requirement by performing a Phase I ESA prior to closing on a purchase or establishing a leasehold interest. 40 C.F.R. § 312.