Tenant Insolvencies in the UK and Contaminated Land Liability Risks Due to COVID-19

The negative economic effects resulting from efforts to mitigate the spread of Coronavirus Disease 2019 (COVID-19) have put financial pressure on many businesses.  In the worst such cases, businesses may face the risk of insolvency.  In an environmental law context, this raises the question of what the potential implications may be for those businesses’ environmental liabilities – in particular, for businesses which lease premises and who may be responsible for any potential liabilities for contamination caused during the term of their lease.

As between a tenant and a landlord, liability for contamination may arise contractually through provisions in a lease.  While such provisions are often heavily negotiated, a typical approach is to allocate liability for pre-existing contamination expressly to the landlord and liability for contamination first arising or exacerbated during the term of the lease to the tenant.  For tenants whose use of a property has the potential to be materially contaminative (for example, where the tenant is undertaking an industrial activity), the lease may also provide for the landlord to recover on a full indemnity basis should the landlord suffer losses from contamination caused by that tenant.  Where the lease makes no express contractual provision governing contamination the landlord may have to try to obtain recourse using the standard non-environmental provisions (such as repair covenants) in the lease.

Landlords may take practical steps in efforts to mitigate the risk of liability for contamination caused by tenants who may be financially distressed. For example, landlords may consider:

1. assessing their tenant’s creditworthiness and financial health before deciding whether to enter into tenancy agreement with them;
2. obtaining a guarantee from another person, such as a parent company, for the tenant’s obligations under the lease;
3. putting in place an insurance policy covering environmental risks including those arising from a tenant’s activities; and
4. undertaking periodic inspections of the tenant’s operations so that potential issues may be identified and, where necessary, recourse can be sought.

Read the full GT Alert here.

For more information and updates on the developing COVID-19 situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019.