February 23rd, 2012
Many commercial properties are subject to old leases that were originally negotiated prior to the advent of environmental laws. These leases not only do not address environmental issues but also may contain clauses that can create liability for landlords when the property contains USTs.
One of the more problematic clauses in old leases are those that provide that property left behind when a tenant surrenders the premises becomes the property of the landlord. When a tenant fails to remove a UST, these clauses can result in the landlord becoming responsible for taking corrective action as the owner of the UST.
A case that illustrates this issue is The Carroll Independent Fuel Company v Washington Real Estate Investment Trust, 2011 Md. App. LEXIS 161 (Ct. Special App. 12/1/11), the plaintiff (CIF), a wholesale distributor of motor fuels, entered into a ten-year commercial lease agreement with defendant (WRIT) in July 1988 to lease a gasoline service station in Westminster, Maryland. Approximately one year later, CIF and WRIT entered into another ten-year commercial lease agreement for an adjacent gasoline service station. An addendum to the lease required CIF to install new gasoline tanks at each of the leased properties.
Both leases required CIF to remove all of its personal property and unattached movable trade fixtures prior to surrendering the premises. If CIF failed to remove its personal property and trade fixtures, the leases provided that such property would be considered abandoned and become the exclusive property of WRIT. The leases also required CIF to provide an environmental inspection certificate declaring that the “Demised Premises” were “free of dangerous and/or toxic substances or materials in quantities or concentration which would require clean up under applicable governmental regulations”.
In July 2005, CIF provided notice to WRIT that it would be terminating the leases effective August 15, 2005. CIF had sought to renegotiate the leases and modernize the properties but WRIT declined, explaining that it had decided to demolish the buildings to facilitate leasing of the properties to a bank. After CIF vacated the premises, WRIT advised CIF it had failed to remove the USTs or provide the environmental inspection certification required upon termination of possession.” As a result, WRIT told CIF that that until these conditions were satisfied, WRIT would consider CIF not to have surrendered possession of the premises and would reserved its right under the leases to collect daily holdover fees.
Between January 30 and February 1, 2006, CIF removed the gasoline storage tanks and removed tons of contaminated soil. CIF continued to corrective action until March 2007 when it ceased work. At this point, WRIT took over remediation of the property. In May 2007, WRIT combined the two sites and leased it to Susquehanna Bank. Demolition of the service station buildings was completed in October 2007.
WRIT filed breach of contract claims for each lease. WRIT alleged, inter alia, that CIF had failed to keep the properties in the condition required by law due to the petroleum contamination and it failed to surrender possession of the properties as required by the leases. WRIT requested a judgment of $3,000,000, consisting of rent at the holdover rate and additional damages, including attorneys’ fees and costs and expenses associated with remediation.
CIF responded that there was no evidence that any spills or contamination had occurred during its occupancy and that it did not provide the environmental inspection certificate because it was limited to the condition of the buildings and felt the certification was unnecessary since WRIT was going to demolish the buildings. On the claim for holdover rent, CIF said it did not initially remove the USTs because it believed that ownership of the tanks vested in WRIT upon termination of the lease. CIF also said when it subsequently discovered that WRIT never registered the tanks in its name, CIF decided to remove the tanks between in January 2006. CIF continued to pay base rent for both properties during that time.
In January 2010, the circuit court ruled that CIF was not liable for environmental contamination that predated its tenancy and that WRIT had not shown that CIF caused the contamination of the sites. The court also refused to award damages for lost rent since there was evidence that construction could have occurred while remediation efforts were occurring.
Turning to the holdover rent issue, the court rejected CIF’s argument that the tanks were to become WRIT’s property under the lease because CIF was aware that WRIT was not interested in leasing the property for a gasoline station but wanted to convert it to a bank. Accordingly, the court found that CIF was holding over from September 2005 through January 2006, and WRIT was entitled to holdover rent for that period of time in the amount of $123,460.81
However, the court agreed with CIF that its duty under environmental certification clause was only to have an inspector certify that the buildings themselves were free from hazardous waste and did not extend to the soil or groundwater contamination. Thus, the court concluded that WRIT was entitled to charge holdover rent until CIF could certify that they had not left the demised premises in a dangerous state. The court found CIF liable to WRIT for holdover rent from September 2005 through October 2007, when the buildings were demolished, in the amount of $624,621.09
The appeals court reversed the judgment for holdover rent. The appeals court said the record reflected that WRIT was the owner of the tanks and therefore the failure of CIF to remove property owned by the landlord did not constitute holding over. On the environmental certification, the appeals court CIF’s failure to deliver the certificate may have constituted a breach of the lease but there was no evidence that CIF’s failure interfered with WRIT’s possession and control of the premises. However, the court awarded WRIT reasonable attorneys fees for the breach of the lease.