[The following is an excerpted from “Environmental Liability: Managing Environmental Risks in Corporate, Real Estate and Brownfield Transactions” written by Larry Schnapf and published by Lexis Law Publishing]

Recommendations for Real Estate Leases

	The UST regulations apply both to owners and operators of USTs. Thus, liability for cleanups or for failing to comply with the UST design or performance standards could not only be imposed on the lessees who have actually used the USTs but also on lessors, property managers, absentee owners and lenders with title to the property even where these latter parties did not exercise any control over the USTs. If the USTs have leaked in the past, former owners or tenants who have not had any contact with the property for many years could also find themselves subject to a 7002 private action seeking an order compelling them to remediate the present effects of the old spill or reimbursement of cleanup costs. 
	
Older leases do not generally allocate liability for USTs. Instead, tenants are usually prohibited from committing waste, to keep the premises in good repair, to comply with law and, upon termination of the lease, to return the premises in the same state less normal where and tear. These covenants may be limited in their application to contamination caused by USTs. For example, while it is arguable that the anti-waste provisions apply to UST contamination, these convenants usually only apply to the demised premises and may not extend to subsurface contamination which is technically not a part of the demised premises or to USTs that are not specifically included within the definition of demised premises. 
	
Moreover, the duty to comply with law are unlikely to apply to pre-existing contamination or that migrates onto the property from adjoining properties. Absent a specific provision, it is also uncertain if the compliance with law requirement applies to cleanup obligations that arise after the tenacy is terminated. It is also unclear if a leaking UST would be considered a structural defect which is customarily outside the scope of a tenant's duty to repair. 	

In the event of non-compliance with UST standards or a UST release which requires remediation, government regulators will generally pursue the occupiers of the land. However, if the tenants are not responsive or insolvent, or the USTs are registered in the name of the owner, the government will likely issue cleanup orders against the owner even if it did not exercise control over the UST. If the cleanup order is under CERCLA or a state version with a comparable third party affirmative, the landlord will likely be precluded from asserting the third party defense because it is in contractual privity with the tenant. Readers should refer to Sections 5.18, 5.21, 10.7-10.9 for a more detailed discussion of the defenses available to landowners.  

Leases often allow tenants to construct or install equipment that is necessary for the operation of the tenant’s business, including USTs. Many of the older leases simply provide that such equipment and fixtures are the personal property of the tenants and provide the tenants with the right to remove such personal property at the termination of the lease. However, these leases often do not address what happens if a tenant leaves fixtures such as USTs in the ground. Further complicating the situation is that the leases are often assigned or subletted to successive operators who use the USTs but ownership of the USTs are rarely addressed in the consents issued by the landlord. Then, after the last tenant vacates the premises, a dispute arises over who is responsible for removing the USTs and remediating the contamination associated with the USTs. 

Former tenants have argued that they abandoned the USTs which then became fixtures for which the owners were responsible. Cutting against this argument is the typical statutory definition of a UST owner in RCRA and many state UST laws. The federal definition provides that tanks the owner of tank that was no longer in use as of November 8, 1984 is the person who owned the tank immediately before the discontinuation of its use. 

	Moreover, the weight of authority seems to be that there is a rebuttable presumption that USTs which have been installed by a tenant for the purpose of carrying on a business are trade fixtures. Unlike fixtures, trade fixtures do not become part of the realty but instead remain the personal property of the tenant. Courts will often look to the intent of the parties in determining ownership of the USTs.

	It is important to remember that the definition of a UST owner under the federal and most state UST programs excludes a person who holds indicia of ownership primarily to protect a security interest. Under a conditional land sale contract, the seller  will usually retain legal title as security for the performance of the contract. There is some authority to suggest that under such an arrangement, the seller’s reservation of title is akin to a lien or mortgage and therefore the seller should qualify for the secured creditor’s exemption.

Even when the landlord cannot be considered an “owner” of a UST, there may be a dispute over whether the landlord, sublessor or property owner could be considered an “operator” who is responsible for compliance with the UST regulations. The definition of “operator” under the federal and most state UST programs refers to any person  “in control of, or having responsibility for, the daily operation” of a UST. The dictionary definition of “control” (“to exercise restraining or directing influence over”). Thus, to be considered a UST operator, it must be shown that a person was restraining or influencing the daily operation of a UST. In holding a franchisor liable as an operator in Shell Oil Co. v. Meyer, the Supreme Court of Indiana analyzed the requirements for operator liability. The court held that an operator does not have to have interaction with a tank on a daily basis but have some continuous level of activity which is routinely associated with the tank such as having the authority to fill a UST, dispensing fuel from the tank as well as routinely monitoring or measuring the fuel levels of the tank. The court also said that an operator does not have to have responsibility for every aspect of the daily operation of a tank but engage in at least two of the principal tasks routinely associated with the tanks. Following this reasoning, another Indiana court ruled that operators can include those who “control” on-site personal who have regular or daily contact with a tank as well as those who are responsible for carrying out the daily activities. Thus, there could be more than one operator for a tank.
	
There are several strategies that absentee landlords may employ in new leases that can lessen the possibility that they will be held responsible for UST non-compliance or cleanup of UST releases.
 
	1. The lease should expressly allocate responsibilities for UST compliance and maintenance. This understanding should be set forth in specific covenants describing who will pay for the costs of installing required leak detection, spill, overfill protection and corrosion protection, replacement of the USTs, remediation of UST releases and UST closure as well as who is responsible for UST repairs. The lease should also contain a specific environmental indemnity for any contamination caused by the USTs.
	
2. If the existing USTs must be replaced or USTs are to be installed at the site for the first time, the lease should designate who will be deemed the owner of the USTs. If the lessee is designated as the owner of the UST, the lessor might be able to avoid statutory liability for any problems associated with the USTs.  

	3. Another way to possibly document who is the owner of the USTs is to identify who is responsible for paying for the installation or removal of the USTs. Where the USTs are necessary for the particular operations of the tenant, the lease can require the lessee to install its own USTs or to pay the fair market price for an existing UST system, and to remove the UST upon termination of the tenacy. However, lessees are unlikely to agree to this unless the term of the lease is long enough to amortize the UST expenses.

	4. If the lessee is unwilling to be designated as the UST owner but will have exclusive use of the USTs, then the definition of the demised premises in the lease should expressly include the USTs and the lease should also indicate that the tenant has the right to control the USTs. However, if the lessee does not intend to use a UST or there is an inactive UST located on the premises, the tenant should seek to have the UST carved out of the lease. Where a UST will not be used by a new tenant, it is in the interest of both parties to have the UST removed or closed in accordance with the UST regulations prior to the commencement date of the lease.

 	5. The UST registration should reflect the understanding of the parties. If the tenant is designated as the UST owner, the registration should not indicate that the property owner is the UST owner.

	6. The lease should also expressly state if the tenant will be responsible for contamination pre-existing the commencement date of the lease. If the tenant will not be responsible for pre-lease contamination, a site assessment should be conducted to determine the environmental conditions of the property prior to occupancy.

 	7. In addition to an indemnity, the lessor might also want to require that the tenant maintain the requisite UST financial assurance coverage. Where the financial assurance is provided by a state UST trust fund, the landlord will want to monitor the tenant's compliance with the UST requirements since eligbility for reimbursements is often linked to compliance with state UST requirements.

	Finally, as explained earlier in section 4.19, lenders holding indicia of ownership primarily to protect a security interest will not deemed to be owners or operators of USTs. However, once a lender forecloses on property containing USTs or the personal property of a borrower which includes USTs, the lender could expose itself to full range of UST compliance obligations and liability. EPA is in the processing of drafting a lender liablity rule for USTs which will be modeled on the CERCLA lender liability rule that was vacated in 1994 by a federal appellate court. [Readers should refer to Chapter 11 for a detailed discussion of lender liability and the CERCLA lender liability rule]. The UST lender liability rule will require lenders to take some actions regarding the USTs to maintain their immunity from liability. Until the rule is promulgated, lenders should proceed with extreme caution before foreclosing on any property containing USTs or any business which uses USTs. At the very least, a lender should conduct a site assessment to fully understand the environmental conditons associated with the USTs and should carefully review any leases to understand the contractual liabilities that may have been assumed by their borrowers.

(c) copyright 1999 Lawrence P. Schnapf