Tenant Insolvencies and Contaminated Land Liability Risks for Landlords

The continuing effects of the Coronavirus pandemic, the Russian invasion of Ukraine and high energy prices have placed significant financial pressure on many businesses. 

As a result, the risk of insolvencies has unfortunately increased: The Guardian recently reported that business insolvencies jumped 30% to a 13-year high last year.

In broad terms, a company becomes insolvent if it has insufficient assets to discharge its debts and liabilities.  An important class of liabilities, particularly in the context of businesses involved in industrial activities on leased premises, are environmental liabilities.  These can result from the presence or escape of contaminants.  In some cases, it can be an environmental liability that leads to insolvency.

Environmental liabilities under leases 

Liability for contamination can be sought to be allocated contractually between a landlord and a tenant in a lease.  A lease will typically allocate liability for pre-existing contamination to the landlord with liability for contamination arising or exacerbated after the commencement of the lease to the tenant.  Some leases may contain no express environmental wording.  In those cases, a landlord may need to seek, should an environmental issue arise, recourse under more general provisions (such as those relating to a tenant's repair obligations) although this can prove difficult. 

A tenant’s insolvency can affect a landlord’s ability to recover in respect of losses caused by a tenant's contamination, particularly as environmental liabilities can take time to manifest.  In some cases, a tenant may simply no longer exist as a legal entity capable of being claimed against. 

While a company's dissolution can, under certain circumstances, be declared void – such that the company is 'brought back to life' by being restored to the register of companies – this assumes that there would be sufficient assets to satisfy an environmental liability claim. 

In reality, it is unlikely that, following the conclusion of an insolvency process, there would be any material assets left.  Therefore, while a contractual claim might technically be capable of being brought against such a restored tenant, doing so may be of limited practical utility.    

Environmental liabilities under the Contaminated Land Regime

Liability for contamination can also arise under England's Contaminated Land Regime (CLR).  Local authorities have a legal duty to inspect sites within their jurisdiction to determine whether they may be contaminated and, if one is found to be, whether a remediation notice should be issued.

Under the CLR, liability first attaches to the person who causes or knowingly permits contamination to occur (so-called 'Class A' persons).  Liability can also attach to non-polluters (so-called 'Class B' persons) where the actual polluter cannot be found.  If a company is dissolved and is no longer in existence, it will not be capable of being ‘found’ for the purposes of the CLR.  Where the dissolved company was a Class A person, its dissolution could result in liability falling on a Class B person.  As the current owners or occupiers of a contaminated site will be Class B persons under the CLR, a landlord can find itself fixed with liability for a dissolved tenant's contaminating activities.     

Liability can also, as noted above, arise under the CLR for a person who has knowingly permitted contamination to occur even if they did not cause it.  This can also result in a landlord being fixed with liability under the CLR where, for example, they do nothing to stop a tenant's contaminating activities.  While a landlord may have a contractual right to recover any losses arising from their tenant's contaminating activities under a lease, where a tenant has been dissolved - or where it otherwise does not have any assets - this is unlikely to provide a basis for effective recovery.

A person’s liability for contamination under the CLR can be sought to be transferred to another person.  Where the person to which liability has purportedly been assigned cannot be found, it will be impossible for a regulator to obtain the costs of remediation from them.  As a result, a landlord can also find itself responsible under the CLR for contamination that it had regarded as having been transferred away. 

Practical recommendations

Landlords can take a number of practical steps to reduce the risk of incurring liability for contamination caused by their tenants.  They can:

1. evaluate a prospective tenant’s solvency and financial strength before entering into a lease;
2. obtain a financial guarantee (such as a parent company guarantee) for a tenant’s obligations under the lease including its obligation to make a landlord whole in respect of any contamination liabilities;
3. insure against the realisation of environmental risks, including those arising from a current tenant’s activities; and
4. undertake regular inspections of a tenant’s operations so that potential contaminating activities are identified and addressed before they become significant.

Landlords should, however, be aware that they may not be able to obtain effective insurance cover for known issues. Further, they may be required to obtain an assessment of their property before an underwriter will be willing to offer coverage.  This can itself create a risk if an issue is identified (and about which a landlord could be found to be knowingly permitting contamination to occur), but which insurance will not cover.

How can Fieldfisher lawyers assist?

We have experience in advising businesses on their environmental liabilities, including in relation to environmental contamination. 

If you are concerned that your business may be exposed to environmental risks and need sensible and pragmatic advice on what steps you should consider taking in response, please contact Aonghus Heatley in our Regulatory, Trade and Competition group or John Bowman in our Real Estate group.