A recent decision by the Sixth Circuit Court of Appeals, applying New York contract law, illustrates the impacts a tenant’s environmental activities can have on a landlord and the importance of addressing environmental compliance issues in a lease. Wilmington Trust Co. v ARP Generating Co., (June 8, 2017)was a breach of contract case brought by the owner of a facility, alleging that a consent order between the tenant and EPA was a breach of several lease provisions.
The Defendants financed the construction of a power plant, sold the power plant to a group of investor-financed trusts and then leased the facility back from the trusts. Plaintiff was acting as trustee for several of the owner trusts. Essentially, EPA commenced litigation against a number of power plant owners and operators to require additional pollution control equipment. The Defendants entered into a Consent Decree resolving the litigation and subsequently amended the Consent Decree to delay significant requirements until after its lease expired. Plaintiffs then challenged that action as a breach of the lease.
The court provided a lengthy analysis of the lease provisions that is beyond the scope of this post. For our purposes, it is sufficient to know that a tenant’s activities can impose environmental liabilities on the landlord and it is best to try to address these issues during lease negotiations. The typical office lease will not be allocating the same potential liabilities as a power plant (the scrubber initially agreed to by the defendants had an estimated cost of $1.4 billion). Nevertheless, the parties to a lease ought to address responsibility for a host of environmental issues that could occur.