Supreme Court rules that leases don't require tenant to remediate subsoil contamination

Friday 22 July 2016

Authors: Belinda Green and David Friar

​​​​​​Mobil will no longer have to pay NZ$10 million in damages to its landlord for subsurface contamination remediation in the Wynyard Quarter “tank farm” area.1 The Supreme Court has overturned the Court of Appeal’s earlier decision, which found that lease wording requiring the tenant to keep the land “in good order” and “clean and tidy” extended to the subsurface of the land.2

Background

From the 1920s, the Mobil Oil group and others leased properties in the Wynyard Quarter in Auckland for the bulk storage of oil. The most recent leases were granted in 1985, and required Mobil to keep the land “in good order” and in a “clean and tidy” condition.

The properties became contaminated with oil products during the time that they were occupied by Mobil and other lessees, and were heavily contaminated by the time the 1985 lease agreements came into effect. When the leases ended in 2011, the properties were handed back to the landlord, Development Auckland, in that same condition.

Development Auckland now wants to use the properties for general commercial and residential purposes. That requires remediation of the properties, including removal of the soil to a depth of about three and a half metres and replacement with clean fill. This was expected to cost $50 million, but after taking into account the works already required by Development Auckland’s development plans, the additional cost of remediation was $10 million. Development Auckland argued that it was entitled to recover this $10 million additional cost from Mobil. It made two arguments:

  • that the “clean and tidy” clause required Mobil to remediate the contamination, and

  • the lease contained an implied term requiring Mobil to remediate the contamination.

Justice Katz in the High Court found in favour of Mobil. The Court of Appeal overturned this decision, and ordered Mobil to pay $10 million in damages. Mobil appealed to the Supreme Court.

The “clean and tidy” clause

The Supreme Court rejected Development Auckland’s broa​d interpretation of the “clean and tidy” clause, ruling:

  1. It is long-established law that a tenant’s obligation to “keep” a property can impose an obligation to put the premises into a particular state of repair even if the premises were not in that condition at the commencement of the lease. But those obligations cannot be construed as requiring a “transformative change” to be effected.

  2. The words “good order” and “clean and tidy” in this context more naturally refer to the state of the surface of the land and in particular its appearance. This is reinforced by the linkage to the words “free from rubbish weeds and growth” which appeared in the same clause.

  3. The “clean and tidy” clause applied throughout the term of the lease. If Development Auckland’s interpretation was right, the Court would have to find either that Mobil had an obligation to remediate the property at the time the lease was granted (at that time a cost of around $50 million), or that the words “keep in good order and clean and tidy” meant something different at the start of the lease than at the end. Neither of these options made sense.

  4. At the time the 1985 leases were being negotiated, neither of the parties had turned their minds to the contamination or the ramifications of that contamination; they intended for the foreseeable future for the land to be used for heavy industrial uses, and the liability of Mobil for the pre-existing contamination was unclear at best.

No implied term

Development Auckland’s second argument was that a clause should be implied into the leases requiring Mobil to remediate the contamination. The Supreme Court ruled that the context on which the leases were entered into did not support an implied term.

In addition, the Supreme Court ruled that the proposed term could not be implied, on the basis that the leases were effective without the term, the term was not so obvious as to go without saying, and the term was not consistent with the “clean and tidy” condition as interpreted by the Court.

Comment

Tenants will be happy to know that a “clean and tidy” obligation will be given a limited meaning, and will not require them to spend millions of dollars on works – unless the parties clearly intended that in the context of the granting of the lease.

The effect of the decision is also interesting in a wider liability context. Where there is historical contamination by a tenant that has occurred before the introduction of the Resource Management Act 1991:

  1. Current owners of the land can be ordered to remediate the historical contamination if the Council issues a “clean up” order under section 314(da). This order requires the current owner of the land to remedy the adverse effects a contaminating discharge has caused to that land, regardless of whether they themselves caused those effects. This is wide enough that it can encompass both RMA-era and historical contamination. It also means, for example, that a landlord could be issued with a “clean up” order for contamination that was caused by a tenant or by a former tenant.

  2. Current tenants could also be given a “clean up” order under section 314(da) – although in practice this would be unlikely unless the current tenant had caused the historical contamination. Historical tenants who no longer occupy the property (such as it the case with Mobil and its leases that expired in 2005) cannot be subject to a “clean up” order.

  3. Any owner or tenant, current or historical, who had caused the contamination, could be subject to common law action such as nuisance or negligence. However, depending on when the contamination was discovered, this action may be time-barred.

As a result, and despite the principle of “polluter pays”, in practice it may be the current landlord who ends up with the obligation to remediate contamination. That landlord will find it difficult to pass this obligation on to a tenant unless there is an obligation to remediate under the lease.

Some leases do expressly require a tenant to remediate contamination. For example, since 2002, the ADLS Lease has required tenants to remove contamination. However, that clause does not apply if the contamination was not caused by the tenant or took place prior to the commencement date of the lease term. If a lease does not expressly refer to contamination, the repair covenants may still be interpreted as including an obligation to remediate contamination. However, the Supreme Court’s decision means that such an obligation to remediate will not be easily found in standard clauses such as the “clean and tidy” obligation, or in circumstances where the parties had not specifically turned their mind to the issue.


1 Mobil Oil New Zealand Limited v Development Auckland Limited (formerly Auckland Waterfront Development Agency Limited) [2016] NZSC 89.

2 https://www.bellgully.com/publications/clean-and-tidy-lease-clause-requires-tenant-to-remediate-subsoil-contamination


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.

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  • Andrew Beatson

    Partner Wellington
  • Jane Holland

    Partner Auckland
  • David Friar

    Partner Auckland
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  • Environment and resource management
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