“Clean and tidy” lease clause requires tenant to remediate subsoil contamination

Monday 31 August 2015

Author: Belinda Green

​The Court of Appeal has overturned the decision in the High Court, and ordered Mobil to pay NZ$10 million in damages to its landlord, Auckland Waterfront Development Agency Limited, to remediate subsurface contamination in the Wynyard Quarter “tank farm” area1. As a result of this judgement, tenants may be liable to remediate contamination pursuant to repair covenants under their leases – even with wording as seemingly innocuous as an obligation to keep the land in “clean and tidy order”.

The facts

Various Mobil companies had leased the premises since 1925, under a number of different leases. The most recent leases were entered into in 1985. The reclaimed land on which the premises were situated contained some contaminated materials, and pollution from neighbouring sites had also affected the premises. However, Mobil itself caused spills onto the land, and dewatered the tanks which released contaminants into the land. As a result, by the 1970s the land required complete remediation. The agreed cost of remediating the land for the part of the contamination caused by Mobil was NZ$10 million.

None of the leases expressly mentioned contamination – they were all entered in to before the Resource Management Act 1991, and in an era of less heightened sensitivity around contamination issues. Instead, what the leases had were tenant’s repair and permitted use clauses.

The Court looked at the wording of the repair clause which required the tenant to keep the land in good order and clean and tidy and to yield it up in that same condition to the reasonable satisfaction of the landlord (the “clean and tidy” clause), and found that this wording included an obligation on the tenant to remediate the contamination it and its predecessors had caused to the subsoil of the land.

The findings

In holding that Mobil was liable to Auckland Waterfront Development Agency for the NZ$10 million remediation costs, the Court made the following findings:

  1. The repair obligations reached the land (not just improvements on the land), and extended to the subsurface of the land. This overruled the High Court’s finding that words good order and clean and tidy applied to the surface of the land only.

  2. If Mobil wanted to show that contamination from spillage and dewatering practices was authorised as part of the permitted use of the lease, it had to show that there was no other reasonable way of carrying on the permitted use. Mobil wasn’t able to meet this requirement. In considering the issue, the Court specifically said that earlier cases had applied the wrong test when they had simply asked whether the practices were reasonable uses within the permitted use of the lease.

  3. Mobil was responsible for the costs of remediating contamination caused not only during the current lease term, but for the entire period of occupation – even though different leases applied, with different Mobil entities. This had a material impact given that the premises needed complete remediation by the 1970s. In making this decision the Court favoured the commercial reality of the leasing relationship between these parties over the legal fiction that when an old lease ends and a new one is granted there is a moment in time where the land reverts to the ownership of the landlord. One of the three judges disagreed with this finding.

Three other aspects of the case are also worth mentioning:

  1. The Court said that, even if the leases had not contained an explicit obligation to remediate the contamination, they would have implied the ancient tort of waste into the leases. This signals a possible change in New Zealand law when it comes to assessing contamination liability under leases which are silent on the subject.

  2. The Court confirmed that a new lease does not excuse a tenant from its own liability for past breaches. This means that even if the finding at (3) above is overturned or not appropriate on another set of facts, a landlord could potentially still enforce liability to remediate contamination under a prior lease if the prior lease was recent enough to fall within the limitation period. (Here, the pre-1985 leases were too old to support a stand-alone claim).

  3. The Court examined the history of the leasing relationship over the whole 80 year period, and in particular considered the business context within which the 1985 leases were negotiated. This included things like the parties’ knowledge of contamination at the time the leases were being negotiated; their awareness of Mobil’s possible liability to remediate under the old leases; and their knowledge of possible future uses of that land.

Leasing issues

As for what this means for other leases, this will depend on the exact wording of each lease and the context in which it was entered in to.

The ADLS Deed of Lease, for example, has had a specific clause dealing with contamination since the Fourth Edition was issued in 2002 (clause 22.1(b)). Under that wording, the tenant is expressly required to remove contamination of the property unless the contamination was not caused by the tenant or took place prior to the commencement date of the lease term. If this wording had been included in the Mobil leases, Mobil would have been liable to remediate the contamination but only as from 1985 when the new leases were granted.

If a lease does not expressly refer to contamination, the repair covenants may still be interpreted as including an obligation to remediate contamination – even wording as seemingly innocuous and ‘boiler plate’ as an obligation to keep the land in clean and tidy order. The permitted use of a particular lease may be of assistance in showing that the contamination was authorised by the landlord, but only in a situation where the contaminating practises are the only reasonable way of carrying on the permitted use.

Mobil may appeal the decision, says Radio New Zealand News.


1 Auckland Waterfront Development Agency Limited v Mobil Oil New Zealand Limited [2015] NZCA 390.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • David Chisnall

    Partner Wellington
  • Jane Holland

    Partner Auckland
Related areas of expertise
  • Property and real estate