Byline: Jeffrey Kirschenbaum, Esq.

The newly issued guidance by the U.S. Environmental Protection Agency suggests that prudent long-term tenants of commercial and industrial properties should conduct environmental due diligence before entering into a lease. So says law firm Buchalter Nemer.

Firm shareholder Jeffrey Kirshenbaum, who is based in the San Francisco office, explains that “lenders who are looking to a tenant’s interest in a lease as security for a loan should ensure that the loan documents require the borrower-tenant to provide all legally required notices, cooperate with environmental authorities, and take reasonable steps with respect to hazardous substance releases.”

The liability of “innocent” tenants under environmental laws is limited, but real, says Kirshenbaum. “A tenant may become liable for historical environmental problems either by controlling the property to such an extent that it is deemed a “de facto owner,” or by exercising a level of control over the remediation of the hazardous substances at issue to such a great extent that the tenant becomes an “operator” under CERCLA, and, by extension, California law.”

The risk is particularly acute for ground lease tenants and for tenants in sale-leaseback transactions, he says. “When deciding whether a tenant is a ‘de facto owner’ courts look for indicia of ownership, and long-term leases which effectively turn over control of the property to the tenant have been held to satisfy this test.”

He adds that an “innocent” tenant also may become liable as an “operator” if it exacerbates the contamination.

The newly issued guidance is applied by the USEPA on a site-specific basis, but it nevertheless provides useful information to ground lease and saleleaseback tenants on how to protect themselves from liability for historical contamination, explains Kirshenbaum.