Third Quarter 2006

Landlord Beware: New York Court Holds Landlord Strictly Liable for Tenant's Contamination

Holland & Knight Newsletter
Bonni F. Kaufman

Bonni F. Kaufman In a recently decided case, State of New York v. B & P Auto Service Center, Inc., 814 N.Y.S.2d 367 (N.Y. App. Div. 3d Dep’t 2006) the Supreme Court of New York, Appellate Division, affirmed the grant of summary judgment to the New York Department of Environmental Conservation (NYSDEC) in a claim by NYSDEC for cleanup costs against the owner – as opposed to the operator – of a gas station site. The owner of the property was “faultless,” but the mere fact that it had a contractual relationship with the tenant who was directly responsible for the spill was sufficient to impose liability under New York’s Navigation Law Article 12. This holding has important implications for landlords who lease commercial properties, particularly industrial and light manufacturing facilities as well as gas stations.

In this case, NYSDEC investigated property owned by defendant Smook & Sons Realty Company (Smook), that was leased as a gas station to O.S. Free Corporation (Free), pursuant to a triple net lease. Although Free had notified Smook in 1987 that a spill had occurred as a result of an overfill of one of the tanks on the property, the NYSDEC did not notify Smook that it was liable for cleanup and removal costs until 1996. In 1997, the Agency filed an environmental lien on the property and brought an action under the New York Navigation Law for recovery of the costs of remediation associated with the spill. Smook moved for summary judgment to dismiss the complaint and vacate the lien, asserting that it had relinquished all control of the property to Free when it entered into a triple net lease for the property. The Court found that under prior interpretations of the Navigation Law and the specific provisions of the lease in question, Smook was responsible for the cleanup costs because it had sufficient control over the property.

The New York Navigation Law provides that “any person who has discharged petroleum shall be strictly liable, without regard to fault” for the costs of remediation. The Court, following an earlier decision in State of New York v. Speonk Fuel, 3 N.Y.3d 720, 819 N.E.2d 991(2004), found that the requisite level of control over the property by Smook was present, and that liability could be imposed on Smook. The Court emphasized that Smook knew that petroleum was stored on the premises, and the lease expressly recognized that Free could continue to operate the premises as a gasoline station throughout the 15-year lease term. The Court noted that as the landowner: “Smook had the ability to control activity on the site through its lease agreement with Free.” Id. at 814 N.Y.S.2d 369. The ability to regulate the terms of the lease distinguished Smook’s position from that of a landowner who falls victim to a “midnight dumper.” Id. In addition, the lease provided that Free would reconvey title to the tanks to Smook when the lease expired and that the tenant had to provide Smook with a large insurance policy for the tanks during the lease term. If Free failed to fulfill any obligation under the lease, Smook was permitted to perform the obligation, terminate the lease, or reenter the premises.

The Court concluded that the statutory language in the Navigation Law was sufficiently broad to include defendants who, by virtue of their status as landowners alone, are in a position to control the site and the source of discharge. The Court stated, “in our view a rule permitting a landowner to evade liability by contractually limiting his or her day-to-day control of the premises ‘creates opportunities for avoidance that would lead to an evisceration of the statute,’” citing State of New York v. Mantayne, 604 N.Y.S.2d 978, 980 (N.Y. App. Div. 3d Dep’t 1993).

The holding in this case has important implications for landlords. Under the federal cost recovery statute, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the owner or operator of a facility from which a release occurs is strictly liable for cleanup costs, regardless of fault or responsibility for the release. Thus, landlords are strictly liable under CERCLA for all releases of hazardous substances on property that they own. However, most petroleum contamination is exempt from regulation under CERCLA and it is much more likely that cost recovery actions for remediation of petroleum contamination will be brought pursuant to state law. Several state environmental cost recovery statutes do not hold owners of contaminated property strictly liable, instead the statutes contain language similar to New York’s Navigation Law, which focuses on “responsibility for discharge.” See, e.g. Minnesota Statutes Chapter 115B.05 (any person “who is responsible for the release of hazardous substance from a facility is strictly liable for the certain economic loss damages”); New Jersey Statues Annotated 58:10-23.11g(c)(1)(“any person who has discharged a hazardous substance shall be strictly liable, jointly and several, without regard to fault for all cleanup and removal costs ...”) Therefore, to avoid liability, landlords must be very careful to include indemnities for cleanup costs in their leases, inspect their premises frequently to ensure that the tenant is complying with environmental law and require tenants in environmentally sensitive businesses, particularly petroleum and chemical storage as well as distribution and manufacturing facilities, to obtain environmental insurance policies protecting the landlord in the event there are spills or releases of hazardous materials.

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