Environmental Law Update

Environmental Law Update provides information on developments in environmental law as it applies to property, probate and trust matters. The editors of Probate & Property welcome information and suggestions from readers.

Environmental Liability in the Landlord-tenant Context

The Second Circuit recently published a decision that analyzes the factors under which a lessee/sublessor might be held to be an "owner" for Superfund liability purposes for contamination that a sublessee causes. Commander Oil Corp. v. Barlo Equipment Corp., 215 F.3d 321 (2d Cir. 2000).

This case narrows the scope of potential liability for a tenant that serves as lessee/sublessor if the tenant can demonstrate through its lease provisions that it does not have sufficient control over the subleased property to be deemed an "owner." Although the court's analysis was somewhat complex, it offers useful insight on drafting lease provisions for landlords and tenants alike.

Commander Oil owned adjacent lots 7A and 7B. It leased lot 7A to Barlo and lot 7B to Pasley, which used the site to revitalize and repackage solvents. Later, Commander consolidated its leases by making Barlo the lessee of the entire property, with Pasley subleasing from Barlo. Both Barlo and Pasley continued to occupy the same portions of the property as before consolidation, while Barlo made a small profit on the sublease arrangement.

Following an investigation by a county agency, an enforcement action was brought against Pasley for contamination related to its operations. Eventually, EPA sued Commander for costs incurred in cleaning up the site, in its status as the owner of the property. Commander sued Barlo and Pasley for contribution.

The trial court apportioned liability between Commander and Barlo, because Pasley was "financially irresponsible." The court accepted Commander's theory that Barlo became an "owner" by virtue of the sublease to Pasley and its "authority and control" over lot 7B.

The appeals court ruled that a lessee/sublessor will not be held liable for environmental damage as an "owner" under Superfund if the lessee/sublessor does not have sufficient control over the subleased property. Typical lessees are not liable as "owners" under Superfund, it noted, but said it was not foreclosing the possibility that such circumstances might exist. For example, the lessee with "the proverbial 99 year lease" would be a de facto owner and thus strictly liable.

The court listed the following factors that might transform a lessee into an "owner": (1) the term of the lease and rights of owner/lessor to determine how the property is used; (2) termination clauses; (3) the right to sublet without notifying the owner; (4) responsibility for payment of taxes, assessments, insurance and operation and maintenance costs; and (5) responsibility for repairs.

In this context, the court will closely examine the relationship between the owner/lessor and the lessee/sublessor to determine the extent of control that the lessee/sublessor exercises over the premises.

Indicia of Ownership

In this case, the court found that Barlo did not possess sufficient attributes of ownership because the lease: (1) limited Barlo's use of the entire property to Lot 7A; (2) required Barlo to obtain written consent for making additions, alterations or improvements on the land; (3) required written approval to sublet and contained a prohibition against subletting for any business that conflicted with the owner's business; (4) required written permission to display any signs or notices; (5) required Barlo to keep the property clean to the owner's standards and to repair any damage to the systems or equipment of the improvements; and (6) prohibited Barlo from engaging in any activity that would increase the rate of fire insurance or from bringing any inflammable, combustible or explosive fluid, chemical or substance onto the property.

Although the court's analysis may be too complex to provide immediate comfort to a lessee/sublessor, it does at least demonstrate that there are real differences between "owners" and "operators" of property. The central analys is turns on the relationship between the owner and the lessee/sublessor. It appears that the fee owner of the property would have to meet a heavy burden to prove that the lessee/sublessor had been given so much control as to have exercised "ownership" over the property. Nevertheless, although the Second Circuit characterized this as a case of "first impression," at least the Fourth Circuit has found a lessee/ sublessor liable as an "owner."

A looming question is how these factors would apply in the ground lease context, where the lessee is given relatively free rein over the property for an extended period of time. It is always important to allocate environmental liability between a lessee/sublessor and a sublessee and to ensure that the lessee/sublessor does not have so much control over the operations "of the sublessee as to be considered an "operator" at the facility. Looking closely at the relationship between the lessor and lessee, however, may be more important-especially in cases such as this, where the sublessee became "financially irresponsible."

Implications for Long-term Leases

Until recently, most lawyers assumed that the only way lessees could be held liable under Superfund would be if they had taken some action that led directly to the contamination. Yet, under this court's analysis, parties entering into long-term leases may want to take a close look at how they define the extent of the property and address rights of access under the lease. A ground lessee would generally want as many indicia of ownership as possible. Nevertheless, this could lead to problems under Superfund for contamination that either existed at the property before the tenant took control or was the result of a sublessee's actions. Considering that liability of "owners" under Superfund is strict, joint and several, this is certainly an issue worth pondering.

Environmental Law Update Editor: Rafe Petersen, Linowes and Blocher, 1010 Wayne Ave., Silver Spring, MD 20910, rp@linowes-law.com.

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