Lease agreements are pretty standard these days, including essential items like the length of the lease, payment amount and schedule, and, vitally, environmental-related clauses that outline what activities can – and cannot – be done on the property, as well as who is responsible when something goes wrong, like a spill.
All standard business practices, designed to protect the property owner and tenant and make sure everybody is on the same page to avoid complications and potential issues.
But there is an aspect of this issue you may not have considered: sublease agreements.
Here’s how this might work:
A company has a lease with a property owner. That agreement might be for a 20, 30, 50-year time period. In fact, I actually came across one that was for 100 years that was generated in the 1960s!
But the tenant company decides at some point, for whatever reason, to shut down their operations at that site. Yet, they are contractually obligated to pay the lease for the length of the contract. That can be a significant hit financially. (That is unless they can get out of their lease, which is possible in some cases.)
But the tenant does have options if they keep their long-term lease.
They sublease. And this can be extremely lucrative. In fact, they can sometimes charge a significantly greater amount than what they’re paying the property owner for their lease. And all they’re doing is sitting back and collecting the money.
Here’s the thing though… you, as the leasee are still legally responsible for what goes on at the property. You are responsible for what the company who subleases the site does. At the end of the “chain of responsibility,” you are on the hook to the property owner.
This is especially concerning when it comes to environmental issues, which can be time-consuming and expensive, and even have legal and regulatory ramifications.
At Envision Environmental, Inc., we’ve had several clients involved in situations like this.
An owner identified environmental issues on their property and held our client responsible, even though they had subleased the site to another business. The property owner doesn’t really care who actually caused the problem, to be honest. They want the issue taken care of, and our client had a direct lease with the property owner, making them responsible.
You don’t want to be in this situation.
How to Protect Yourself When You Sublease
There is a relatively simple solution to this issue:
First, make sure your sublease agreement includes environmental conditions relative to the tenant’s operations and who is responsible for all issues that could arise.
This next step is also key and ensures the tenant cannot claim that they did not cause the environmental issue, but the issue was a pre-existing condition that was present when they moved in. It was like that when they got there, so to speak.
After you cease operations and before signing the sublease agreement and the tenant moving in, conduct a Phase I Environmental Site Assessment following strict ASTM criteria.
Then, if you do find something concerning in that initial assessment, conduct a Phase II Environmental Site Assessment and do some sampling or whatever you need to do.
The goal here is get a “picture in time” of the property conditions prior to the tenant moving in and starting their own operations.
This might seem like an unnecessary expense. But it will be well worth it down the road if you could end up responsible for remediating something your tenant caused. Plus, the tenant should be willing to share the costs of those assessments.
Why? It’s in their best interest.
Because of the recent developments in the Superfund law, tenants like these can now, for the first time, qualify as a bonafide prospective purchaser. And that would protect them from clean-up costs in the presence of hazardous substances on a property. Prior to this recent change, they were not in that category.
This comes from changes, specifically, in the Brownfields Utilization, Investment, and Local Development Act of 2018 and in the Comprehensive Environmental Response, Compensation and Liability Act. Now, a prospective tenant may now obtain what’s called “bonafide prospective purchasers’ treatment” in the event of future clean-up action at a leased property if certain criteria are met by the tenant/lessee.
This basically means that the tenant would not be on the hook for past issues on the property.
We recommend that a prospective tenant also conduct thorough environmental due diligence, which includes a Phase I Environmental Site Assessment, and possibly a Phase II Environmental Site Assessment, if necessary.
So in turns out, thorough environmental due diligence protects all sides.
You’re Not Done Yet
Of course, you shouldn’t be ready to hand over the keys to a sublease tenant just yet.
The next step is to require that the tenant disclose all the details of their operations, processes, and any hazardous materials that they plan to use or store at the site... as well as the waste generated and how it will be stored and/or disposed of.
The tenant should also make you aware of any changes to their operations prior to implementing them so you stay aware of what the tenant is conducting onsite.
It’s also important that the sublease requires that the tenant maintain full compliance with all environmental, health and safety regulations on a local, state, and federal level while occupying the property. Because, again, you could be on the hook if they don’t. Speaking of which, there should be a clause requiring them to tell you about any regulatory action and provide you with any documentation that resulted. You should also attend any meetings with regulators so you understand what the tenant is required to do – so you can hold them to it.
You should also lay down the exit procedure to make sure that the property is returned to you in the condition it was in prior to them operating there. This is where those environmental assessments really come into play.
That’s your “picture in time” of the condition of the property before they were there. And now you just compare that to the current status.
Finally, don’t be afraid to conduct periodic inspections of your tenants to make sure they are following all these rules. Check out their processing and storage areas… and document everything you find with a written report and photographs.
I don’t recommend doing all of this on your own. Be sure to utilize legal counsel experienced in EH&S issues and property leases to draw up these agreements in the proper legal language.
This may seem like a lot of work. But in the long run, it provides you with vital protection.
I’m happy to speak with you further about this issue and also help you to conduct thorough environmental due diligence.
Just reach out to me, Mark Roman, at 609-208-1885 or get in touch via email at markroman@envisionenvironmental.com.
