Chapter 6 - § 6.7 • LANDLORD-TENANT ISSUES
| Jurisdiction | Colorado |
Leasing property presents many issues similar to those raised by buying and selling property. For example, a prospective tenant should confirm the current condition of the property and should investigate prior operations at the property to ensure that possessing the property will not create unanticipated health or liability risks. However, leases also present unique problems. In particular, the lease separates ownership from possession, leaving two separate, and often unfamiliar, parties subject to one another's whims for the term of the lease. Landlords have little control over the day-to-day operations of their tenants and often reside thousands of miles away from the property. Similarly, tenants have little control over the operations of landlords and neighboring tenants. In addition, prior to entering a lease, tenants rarely conduct the kind of due diligence that typically accompanies a transfer of title. Because of the resulting mutual dependence on the integrity of one another, it has been said that the landlord-tenant "relationship provides an ongoing opportunity as well as a convenient medium for mutual ruination."39
Environmental concerns can arise out of the property's condition, both upon the tenant's possession at lease commencement and upon the landlord's possession at lease termination. The tenant's operations on the property during the lease also raise concerns relating to permitting and regulatory compliance. Liability under environmental statutes and laws applies broadly and can ensnare the unsuspecting, and otherwise innocent, landlord or tenant. Therefore, careful attention to lease terms is important to protect the parties' relative interests.
Legal liabilities obviously are important considerations in drafting the lease. But the landlord's most important concern is protecting the value of its investment — the property. Therefore, the lease should forbid damage to the property beyond normal wear and tear. Another important goal of the landlord is avoiding unexpected costs. Consequently, if damage does occur, the lease should place the burden to cure the damage on the tenant.
Tenants have similar concerns about the portion of the property they possess that could be damaged by the actions of the landlord or other tenants on other portions of a multiunit property. They also need protection against existing conditions that could interfere with business operations or have an impact on their health or that of their employees and patrons.
These concepts apply broadly to issues beyond environmental contamination. Nonetheless, they are important concerns that drive lease terms relating to environmental matters.
§ 6.7.1—Legal Liabilities
The split of ownership and possession established by a lease, combined with the expansive nature of environmental liability, results in unique and potentially unexpected theories of environmental liability.
CERCLA
As discussed in Chapter 5, CERCLA's strict, joint and several liability applies to current "owners and operators" of a facility at which hazardous substances have been released and to past "owners and operators" who owned or operated a facility at the time of a release. CERCLA contains no exception for absentee landlords, even if they had no control over, or knowledge of, the tenant's hazardous substance operations.40 This presents a difficult and potentially disastrous situation for landlords, who must rely on their tenants to maintain the leased space appropriately.
While landlords may incur CERCLA liability for releases caused by their tenants, under the right circumstances, they can avoid liability for releases caused by sublessees. As more fully discussed in § 5.3.6, "CERCLA Enforcement Provisions," a defense to CERCLA arises when a third party, with no contractual relationship to the defendant, caused the release.41 When no contractual relationship exists between the landlord and a sublessee who caused the release, the landlord can assert the third-party defense.42 The existence of a contractual relationship with a sublessee depends on the actual circumstances of the parties' relationship.
In United States v. A & N Cleaners & Launderers, Inc., the property owners conveyed all responsibility for the property to their tenant. The tenant had the unconditional right to sublease the property and the owners received no rent from the sublessees.43 Thus, even though they could affect the sublease by enforcing their lease with the lessee/sublessor, the owners had no contractual relationship with the subtenant, and could invoke the third-party defense.44 In contrast, in United States v. Monsanto Co., the property owners accepted rent payments from the sublessee directly, presumably in lieu of the lessee's payments.45 That was sufficient to establish a contractual relationship with the sublessee and destroy the third-party defense.46
These holdings are consistent with Colorado laws regarding subleases. Generally, a sublease agreement that establishes rights and obligations solely between a lessee/sublessor and a sublessee lacks the privity between the lessor and the sublessee to support a novation or a direct contractual relationship.47 Consequently, barring circumstances like those in Monsanto, where the lessor effectively took the place of the lessee/sublessor vis-à-vis the sublessee, courts applying Colorado law likely would find no contractual relationship between a lessor and a sublessee, and would recognize a third-party defense for lessor CERCLA liability.
Tenant liability under CERCLA typically arises out of the tenant's own operation of the facility.48 The tenant's operations, though, must relate to the hazardous substances. In Nurad, Inc. v. William E. Hooper & Sons Co.,49 the plaintiff asserted CERCLA claims seeking reimbursement of cleanup costs from several former tenants of the subject property. Because those tenants neither actively participated in the disposal of hazardous substances at the facility, nor had the "authority to control" the underground storage tanks from which the hazardous substances leaked, they were not operators of the facility.50 Notably, while the tenants' leases contained no express exclusion of the underground storage tanks from the leased premises, the leases did expressly identify the specific improvements to which the leases applied.51
Tenants also have been deemed "owners" for CERCLA liability purposes. In those circumstances, courts have found that the tenant exercised control over the facility similar to that of a fee owner.52
In A & N Cleaners & Launderers, Inc.,53 the defendant leased a multi-tenant property from the owner and had the right to sublet all or part of the property, to evict tenants without notice to the property owner, to determine uses of the property, to collect rents from the subtenants, and to enforce lease obligations under the subleases, and was obligated to maintain the entire premises.54 According to the court, these rights, responsibilities, and actions "placed [the defendant] in the shoes of the 'owners'" and therefore rendered the lessee/sublessor liable as an "owner" under CERCLA § 107(a)(2).55
In contrast, in Commander Oil Corp., the sublease agreement at issue was entered, in significant part, to simplify the landlord's accounting.56 Although the court recognized that circumstances could arise in which a lessee/sublessor may be liable as an owner under CERCLA,57 the court found that the lessee/sublessor in this case lacked sufficient attributes of ownership to justify such a conclusion.58 The court identified five factors that it felt were important in evaluating whether a lessee/sublessor qualifies as an owner:
(1) whether the lease is for an extensive term and admits of no rights in the owner/lessor to determine how the property is used;
(2) whether the lease cannot be terminated by the owner before it expires by its terms;
(3) whether the lessee has the right to sublet all or some of the property without notifying the owner;
(4) whether the lessee is responsible for payment of all taxes, assessments, insurance, and operation and maintenance costs; and
(5) whether the lessee is responsible for making all structural and other repairs.59
In Commander Oil, the lessee/sublessor's lease limited its possession of the property to the specific unit in which it conducted its business and limited use of the space to that business; required written consent from the landlord before altering the leased space and reserved to the landlord ownership of any such improvements or alterations; reserved to the landlord the authority to approve any sublet of the leased space; required written permission from the landlord to display signs on the leased space; required maintenance of the property to the satisfaction of the landlord; prohibited the lessee/sublessor from keeping flammable or explosive substances on the property; and limited the term to five years.60 In addition, the landlord retained the right to enter the leased space, reserved a right to use certain improvements on the property and to place fixtures on the property, and retained an option for use of a portion of the property. Under these...
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