Investing in real property for the purpose of leasing to commercial tenants can be a lucrative endeavor for the diligent real estate investor. However, much of the profit anticipated by the investor/landlord can easily be lost to the cost of investigating and remediating hazardous waste contamination – whether or not the owner/ landlord caused the contamination. It is essential that the commercial landlord understands that it is ultimately responsible for the environmental health of the property, and that it must protect such investment from undisclosed or future tenant-caused contamination. This Update broadly identifies some of the major issues an owner/landlord should consider when investing and leasing commercial property.
The Connecticut Transfer Act imposes upon the commercial property owner an obligation to determine the environmental health of its property. If the owner has reason to believe that one hundred kilograms of hazardous waste was produced in any one month period on the property (after November 19, 1980) or that the property had been used to treat or dispose of hazardous waste, or the property was occupied by a furniture stripping facility, dry cleaner, or auto body repair shop (after May 1, 1967), the owner then has a duty to certify the status of environmental contamination on the property at the time that title transfers.
The certification requires that the owner file a form with the Connecticut Department of Environmental Protection (DEP) declaring: (i) that the property has been investigated, and that no hazardous waste was discovered; (ii) that pollution has occurred and has been remediated; (iii) that the property has been contaminated and the owner agrees to investigate and remediate the pollution; or (iv) that the property has been investigated, remediated, and the owner agrees to perform post-remediation testing, and further remediation if necessary, to meet minimum regulatory standards.
The cost of filing the appropriate certification can be expensive, ranging from three hundred dollars to thirteen thousand dollars, depending on the severity of the contamination (if any) and the cost of remediation. However, failure to certify the environmental condition in connection with a title transfer can be even more expensive. The deficient transferor opens itself to a claim, among others, by the transferee that the transferor should be held strictly liable for all remediation costs incurred by the transferee. In other words, the owner can be held liable regardless of fault if it fails to file the required certificate.
Thus, the Transfer Act places the ultimate burden on the owner/landlord to take responsibility for contamination on its property. The diligent commercial landowner must take measures to protect its investment, namely, to research the history of the property prior to purchase, and to provide for the allocation of responsibility for contamination that may occur when the property is occupied by a tenant.
If the real estate investor is not presented a copy of a certification by the current owner of the property, the owner may obtain the filing history of a particular parcel from the DEP. The investor may also research the land records for evidence of prior owners and occupants (assuming that the latter had their leasehold recorded). Finally, the careful prospective purchaser must make the purchase contingent on a satisfactory report by a certified environmental consultant following a thorough inspection of the property.
Assuming that the prospective owner is satisfied that the investment is worthy, the investor should further protect its interest by allocating responsibility for future contamination with its lessee(s). Such an agreement with the tenant/lessee can take several forms, ranging from a complete prohibition of all activities that involve the creation, use, storage or disposal of hazardous waste on the property, to an assumption of responsibility by the tenant and agreement to remediate any contamination that occurs during the term of the lease, to a requirement that the tenant procure insurance sufficient to cover the tenant’s obligations under the terms of the lease. In short, the parties to a commercial lease are free to allocate their respective obligations relating to environmental contamination of the property.
While there are statutory remedies available to an owner absent a contract (many subject to a shorter statute of limitations than a contract action), an express agreement that addresses this contingency provides an owner with additional protection, customized to the specifics of the transaction, if contamination is discovered. However, an agreement buffered with statutory causes of action does not necessarily protect the owner in all cases. For instance, what happens when the tenant is insolvent and failed to purchase insurance to cover his environmental liabilities? How about if the former owner failed to certify the property, but is insolvent or judgment proof? The owner/landlord retains responsibility under the Transfer Act, and a claim for indemnification from the insolvent or bankrupt tenant or former owner may ultimately recover only a fraction of the amount the owner was required to spend to investigate and remediate the property.
The prudent commercial landlord can protect itself most effectively by evaluating real estate investment potential and the environmental risk of a lease on a case-by-case basis. Careful attention to the property’s historical use, proximity and grade relative to neighboring properties and their historic uses, and assessment of prospective tenants’ operations and financial health prior to execution of a lease are essential considerations for any commercial landlord. Depending on the risks associated with any particular parcel or tenant, it may be wise for the landlord to procure its own insurance for the property as well (a topic beyond the context of this article).
Because the Transfer Act places the final burden on the owner to ensure the environmental health of its property, even after title has transferred to another, it is essential that the possibility of environmental contamination and the prospective tenant’s intended use of the property be carefully scrutinized prior to investing and/or leasing any parcel. The efficacy of investing in commercial rental property will vary from one parcel to another, and risk assessments must be made on a situational basis. But because the ultimate liability rests with the owner/landlord, it is vital that it be proactive in assessing these risks.