Verify Tenant Compliance with Environmental Laws

Federal and state laws make property owners liable for environmental damage done by a tenant. That makes it imperative to verify that tenants comply with those laws. But a tenant may refuse to grant you access to inspect or perform environmental testing for that purpose. And without clear lease language ensuring such access, you could be literally and figuratively locked out in your quest for verification of environmental compliance, leaving you exposed to millions of dollars in potential liability.   

Gas Station Tenant Bars Environmental Testing

A California landlord learned this lesson the hard way. Worried that a gas station tenant might be polluting the underlying land, the landlord wanted an environmental consultant to take soil samples to perform “precision tests” of the two underground storage tanks at the site. But the tenant wanted no part of it and refused to allow the testing.    

So, the landlord hired an attorney. But even after costly litigation, its right to perform the tests remained in doubt. The problem was that nothing in the lease clearly gave the landlord access to the property for such testing. The lease just required that the tenant obey all applicable laws. As a result, the state appeals court ruled that the landlord could perform only tests found to be “reasonably needed” to determine whether the gas station was compliant with environmental laws and ordered that a trial be held to determine exactly what tests were “reasonably needed” [Sachs v. Exxon Co. U.S.A., 12 Cal. Rptr. 2d 237, 1992 Cal. App. LEXIS 1168 (1^st Dist. 1992), modified, reh’g denied, 1992 Cal. App. LEXIS 1273 (4^th Dist. 1992)].

Negotiate Clear Right of Access for Testing

Needless to say, this was a highly unsatisfactory outcome that the landlord could have avoided with better lease language. Specifically, clearly reserving the broad right to perform environmental tests of property occupied by tenants would have headed off the kind of delay, obstruction, and litigation that the landlord in the Sachs case had to endure. Example:

Model Lease Language

Tenant shall fully cooperate in allowing, from time to time, such examinations, tests, inspections, and reviews of the Premises as Landlord, in its sole and absolute discretion, shall determine to be necessary to evaluate any potential environmental problems with the property. Landlord expressly reserves the right to conduct examinations, tests (including but not limited to a geohydrologic survey of soil and subsurface conditions), inspections, and reviews of the Premises as Landlord in its sole and absolute discretion may determine to be necessary and appropriate.  

What to Do If Tenants Object to Clause

Of course, environmental inspections, testing, and the like can be highly disruptive to tenants. So, don’t be surprised if tenants push back at what they may perceive as giving you such broad discretion to interfere with their business. If compromise is necessary:

• Agree to use your discretion “reasonably”;
• If that’s not enough, promise not to do any inspections or tests during business hours; and
• If that’s still not enough, agree to restore the premises to their original condition within a reasonable time after the inspection is performed.   

Model Lease Language

The right reserved to Landlord in this provision to conduct such examinations, tests, inspections, and reviews of the Premises as Landlord, in its sole and absolute discretion, shall determine to be necessary to evaluate any potential environmental problems with the property, shall be exercised by Landlord in a reasonable manner. Specifically, no such test shall be conducted during the Tenant’s normal hours of business, which are [insert specific hours], unless Tenant specifically agrees otherwise. Landlord shall take all reasonable steps to restore the Premises to the condition in which they existed prior to the taking of such steps.  

Takeaway

Recognize that from an environmental liability perspective, having inspection rights that you don’t use is worse than not having those rights to begin with. That’s because you’re more likely to be held responsible for any contamination or environmental offenses the tenant does commit that you could have detected and prevented via use of your inspection rights. In other words, having the right to inspect raises the standard and expectations you must meet to establish compliance and avoid liability. Bottom Line: Once you get the right of access to perform environmental inspection and testing, you better be diligent in using it.