Potential liability for landlords 6 min read
The New South Wales Environment Protection Authority (EPA) has issued a prevention notice requiring a landlord to clean up hundreds of tonnes of hazardous e-waste abandoned by its tenant.
This case highlights the potential for landlords to become responsible for the actions of their tenants and the cost of addressing environmental risks created by their tenants.
Key takeaways
Landlords of properties which are used for potentially hazardous or environmentally impactful activities, such as operations which involve the creation of significant waste streams, should proactively manage risks and protect themselves by:
- regularly inspecting and monitoring the use of premises — to enable early detection and ideally prevention of environmentally unsatisfactory practices or unlawful waste disposal; and
- ensuring that environmental liability insurance policies are put in place where appropriate — to respond in the event of environmental liability arising.
Background
Soar Development Group Pty Ltd (Landlord) leased premises in Sydney's west to MRI (Aust) Pty Ltd (Tenant). The premises were operated by the Tenant as an electronic waste management facility.
The Tenant was subsequently placed into administration and vacated the site. In doing so, the Tenant abandoned a variety of hazardous e-waste on the premises, including more than 180 tonnes of alkaline batteries and 20 tonnes of lithium-ion batteries.
The EPA issued a prevention notice under the Protection of the Environment Operations Act 1997 (NSW) (POEO Act) to the Tenant ordering it to address the fire risks presented by the abandoned waste and remove the waste from the site. The Tenant, being in administration, failed to comply. The EPA subsequently issued another prevention notice, this time ordering the Landlord to remove the waste.
Powers to issue orders to landlords
As landlords will generally be aware, the EPA has the power to issue management orders to landowners under the Contaminated Land Management Act 1997 (NSW), requiring them to investigate and remediate contaminated land. A management order may be issued even where the contamination was caused by a tenant or other third party, in circumstances where the person who caused the contamination cannot be identified or located, or is not in a financial position to comply with a management order.
There is therefore a risk to landlords when leasing premises for any potentially hazardous or environmentally impactful activities that, if those activities result in contamination, the landlord may be liable for the cost of remediation.
In contrast, a landowner is not a category of person to whom the EPA can issue a prevention notice under the POEO Act. The EPA may only issue a prevention notice to an occupier or person who is carrying on an activity in an environmentally unsatisfactory manner. In this case, the EPA reasoned that, following abandonment of the premises by the Tenant, the Landlord was now the 'occupier' (defined as the person who has control and management of the premises) for the purposes of section 96(2)(a) of the POEO Act.
As the activity for which the Tenant had been using the premises (ie waste storage) was continuing at the date possession of the premises reverted to the Landlord, the Landlord was taken to be unlawfully undertaking the activity of waste storage without an environment protection licence and carrying out that activity in an environmentally unsatisfactory manner.
What can landlords do to prevent this from happening to them?
Prevention is better than cure
Regular inspection and monitoring of the use of premises is certainly the most cost-effective and practical way to ensure early detection of any breaches of a lease and environmentally unsatisfactory practices by a tenant. Having detected a breach, the landlord will then be in a position to require the cessation of any activities that may give rise to environmental liability and avoid the far more significant costs and damages that may ensue if these activities are allowed to continue unchecked.
To effectively monitor the proper use of premises leased for specialised facilities, such as waste processing and recycling, industrial manufacturing and other businesses which present a high environmental risk, it may be necessary for landlords to engage independent experts to carry out routine inspections of premises.
The allocation of costs for such measures will ultimately be a commercial matter for negotiation. However, it is worth recognising that both landlords and tenants benefit from the greater clarity, assurance and record-keeping gained through regular monitoring — providing both parties with commercial certainty as to their roles, responsibilities and liabilities.
Coverage landlords can rely on
While prevention of environmental breaches and avoidance of resulting damage is ideal, accidents and unforeseen events can (and will) arise. For those circumstances, landlords should ensure that appropriate protection is in place to minimise direct financial exposure.
While landlords may demand greater security amounts to be provided, or require corporate guarantees to be given to account for the added risk associated with tenants who are undertaking high risk environmental activities, such protections are likely to:
- be inadequate in the event of a serious environmental incident or non-compliance (where damages and remediation costs can run into millions of dollars);
- be of limited practical value where a tenant is insolvent (and where there may be a queue of claimants against a guarantor); and
- be commercially unacceptable to tenants (particularly in a competitive market where other premises are available without such conditions being imposed).
Realistically, after taking reasonable preventative steps, the most effective protection available to mitigate the residual risk associated with an environmental incident or non-compliance by a tenant, may be putting in place appropriate environmental liability insurance coverage.
Prudent tenants that operate businesses that involve high environmental risks should already be mindful of maintaining adequate environmental liability insurance, and are likely to view this as a necessary operating cost. However, it is crucial for landlords that such policies:
- are issued for an appropriate level of coverage (having regard to the environmental risks associated with the business);
- entitle the landlord to claim under such policies (eg where the tenant fails to do so, or where an order is made directly against the landlord); and
- are maintained for a reasonable period after the expiry of the lease (to ensure that coverage continues to be available if environmental damage is discovered only after the tenant has vacated the property).
Although procuring insurance coverage which is satisfactory to landlords can have cost impacts to tenants, the increase to insurance premiums may be preferable and/or more cost efficient, compared to providing greater security (through bonds or bank guarantees) or giving parent company guarantees.
Actions landlords should take now
Existing leases
Leases will ordinarily provide landlords with rights to enter and inspect premises. Where landlords have not been regularly inspecting their premises, or where there is a high risk associated with a particular use of a property, landlords should take the opportunity to implement routine inspections in accordance with the terms of the lease.
Landlords should also review the insurance provisions in their leases, and the currency of policies which are required to be maintained under leases, to confirm that appropriate coverage is in place for premises which are used for operations which present a high environmental risk.
Where a lease does not specifically reference a requirement to maintain environmental liability insurance, it may still be appropriate for a landlord to require such coverage — as many leases will include some degree of flexibility for landlords to require additional insurance coverage to be procured during the term of the lease.
New leases
When negotiating new leases for premises which are to be used for operations presenting a high environmental risk, landlords should consider including routine inspection rights and clearly set out the apportionment of costs for any independent inspectors.
Landlords should also evaluate whether a tenant's use of a premises warrants the need for the tenant to procure environmental liability insurance. If so, landlords should specifically identify the requirements for such coverage to ensure the policy responds, and the landlord is entitled to rely on the insurance policy, in the event of an environmental incident or liability arising.
Contact us for advice on your specific environmental liabilities as a landowner or as a tenant, for a review of your existing lease rights or for assistance in negotiating new leases for premises which are to be used for operations involving a high environmental risk (including industrial manufacturing and waste facilities).