Intrusive site investigations will not be allowed unless expressly permitted by the lease. If a property has underground storage tanks or if the tenant operates polluting activities, what are the options for landlords?
Leaking underground storage tanks
Soil and groundwater contamination can significantly reduce property value and lead to clean up liabilities for the landlord as owner.
Underground storage tanks at former garages and petrol filling stations are particularly high risk. The EA reported that almost 1 in 3 of the older filling station sites pre-1980 have had pollution issues.
Many of these sites will now be redeveloped and impacted by groundwater contamination.
If a landlord wants access to check for pollution, either during or at the end of the term, it will need agreement from the tenant or an express clause for environmental investigations in the lease.
Two cases involving Kwik-Fit highlight the pitfalls for landlords
Possfund Custodial Trustee Ltd v Kwik-Fit Properties Ltd
Kwik-Fit had a 25 year lease to fit car parts and carry out MOTs. The property had previously been a garage with USTs.
The landlord served notice on the tenant to enter the premises to carry out phase 2 investigations.
The proposed investigations would involve four days of drilling works, 6 boreholes and part of the property would be cordoned off.
The lease required the tenant:
To permit the Landlord and its agents at all reasonable times with or without workmen on giving forty eight hours’ written notice (except in emergency) to the Tenant to enter upon the Premises
(a) generally to inspect and examine the same to view the state of repair and condition thereof and
(b) to take a schedule of the Landlord’s fixtures and of any wants of compliance by the Tenant with its obligations
The Scottish Court of Session Inner House decided that the clause only permitted site investigations of a non-intrusive nature.
Looking at the lease as a whole, the court held that there was no evidence of intention for phase 2 testing – i.e. obligations for the landlord to minimise disruption or to make good any damage.
The landlord was therefore powerless to check for contamination at its own property.
Heronslea (Mill Hill) Ltd v Kwik-Fit Properties Ltd
The property was a former petrol filling station with USTs. Kwik Fit had a 30 year lease.
The landlord was concerned that there may have been leaks over the years from the USTs and served notice on the tenant to carry out a phase 2 testing involving 15 boreholes.
The lease terms appeared more favourable for the landlord than the Possfund case.
The landlord was allowed:
(a) at all times to enter (and remain unobstructed on) the Premises for the purpose of inspecting the Premises for any purpose, or making surveys or drawings of the Premises or
(b) complying with the Landlord’s obligations under this Lease or with any other Legal Obligations of the Landlord, provided that the Landlord shall cause as little interference and disturbance as is practicable and shall make good any damage caused forthwith and to the reasonable satisfaction of the Tenant.
The lease also contained an environmental indemnity from the tenant against any environmental liability incurred by the landlord.
Let sleeping dogs lie
The Court of Appeal held that the landlord was not entitled to carry out phase 2 investigations.
• There was no express provision for the investigation of contamination
• The environmental indemnity related to tenant incidents during the term and not the historic use as a petrol station. There appeared to be an intention in the lease “to let sleeping dogs lie”.
Key messages for landlords
1. Carry out an initial desktop search and make enquiries with the local petroleum officer.
2. Review the lease terms. Are intrusive phase 2 investigations permitted?
3. For new leases, if a landlord has concerns about existing contamination or USTs, you should agree the principles of site investigations and environmental liability before granting the lease.
4. Make sure that the new lease contains express clauses permitting phase 2 environmental investigations and that the landlord has the appropriate indemnities.
5. Assess the need for environmental insurance