Extent of lease obligations for remediation of contamination (published on 20 January 2016)
The Court of Appeal has held Mobil Oil NZ Ltd liable for the cost of remedying hydrocarbon contamination of land that it has occupied since 1925.(1) The issue before the court was whether an obligation in a 1985 lease that required Mobil to deliver up the land "clean and tidy" extended to the remediation of subsurface contamination, including contamination that had occurred long before the lease period.
From 1925 to 2011 Mobil (and companies that later became part of Mobil) occupied two sites on reclaimed land in Auckland's Freeman's Bay. The land was used as a tank farm for the bulk storage of petroleum products and chemicals delivered by ship. The original fill used to create the land was likely contaminated to some degree prior to Mobil's occupation, but its operations from 1925 onwards contributed heavily to subsurface contamination to the extent that, by 1970, complete remediation was required (although the full extent of the contamination and required remediation was not known until after 1985).
The lessor of the land was the Auckland Harbour Board. The original tenancies from 1925 ran for 50 years and required Mobil to yield up the buildings and structures in good order and condition at the end of the lease, an obligation that did not expressly extend to the land itself. The lease permitted the business of "oil merchant", including the bulk storage of petroleum products on the land. On expiry of the original lease, a further lease was entered into in 1975 for 5 years. It obliged Mobil to keep and yield up in good order not only the fixtures, but also the demised premises, which included the land. Following that, Mobil held over the site until new tenancies were agreed in 1985. At that time, the harbour board was aware of the risk of petroleum leaks and spills but did not appreciate the full extent of the contamination and the adverse effects on the subsurface of its land.
At the end of the original 1925 tenancies, the fixtures had reverted to the harbour board. The 1985 tenancies required Mobil to repurchase those assets and to remove them on termination or on them becoming obsolete (which was anticipated). The tenancies permitted the storage, handling and blending of petroleum products on the land and excluded covenants under the Property Law Act 1956 which would have required the demised premises to be yielded up in good and tenantable repair, having regard to its condition at the commencement of the tenancies.
Importantly, the 1985 tenancies contained an obligation on Mobil to keep the demised premises (including the land) "in good order and clean and tidy" during the term and to deliver it in that condition on termination.
The parties agreed that the cost of remediating the contamination caused by Mobil since 1925 was NZ$10 million.
The plaintiff claimed that the repair clauses in the 1985 leases required Mobil to remediate the subsurface of the land. In the alternative, it claimed an implied term that the premises would be returned uncontaminated (that the tenant would not commit "waste"). The claims were brought in contract rather than in the tort of the waste, as actions in tort would have been time barred.
The issue split the Court of Appeal. The majority held that Mobil was liable for remediation of the subsurface contamination caused by it since 1925. It held that Mobil's particular use of the land was expressly authorised by the leases, but contamination, which was an incident of that use, would be authorised only if the only reasonable way in which the permitted use could be conducted necessarily resulted in the contamination. The bulk of the contamination was attributable to leaking pipes and tanks, which would have resulted from breaches of the repair obligation, and the practice of dewatering (flushing product from pipes and tanks with water); the court held that neither cause resulted from the only reasonable way of operating the tank farm. The contamination was therefore not authorised by any of the leases.
Mobil argued that, as the repair clause required Mobil to keep the land "clean and tidy" during the lease, if it had been meant to extend to the subsurface then Mobil would have been required to remediate the land (and remove the fixtures in order to do so) as soon as the tenancies commenced. On this basis, it argued that the pre-existing subsurface contamination was not included. The majority of the Court of Appeal rejected this argument on the basis that it rested on hindsight, as the extent of the contamination was unknown until after 1985. It concluded that the repair clause extended to the subsurface (as the owner's interest included that part of the land) and Mobil had used the subsurface during its lease to lay pipes and build foundations.
The majority held that Mobil came into the 1985 leases with a pre-existing potential liability for its own contamination on the basis that the practices that had caused the contamination were not authorised by the pre-1985 leases and did not exclude liability for the contamination. It also held that a new lease does not excuse a tenant from its own liability for past breaches. It noted that clean-up obligations had been an issue in the negotiations and the parties had excluded the implied obligation to have regard to the condition of the premises at the commencement of the tenancies.
On the alternative claim of an implied covenant by Mobil not to commit waste (ie, to change the nature of demised premises either voluntarily through a positive act or passively by allowing fixtures to fall into disrepair), the majority declined to make a decision, as it relied on the express obligation. Justice Harrison dissented. He held that, although the repair clause obliged Mobil to rectify contamination of the subsurface, it did not require Mobil to return the land on termination in a better condition than at the commencement of the 1985 lease. In his view, the appropriate yardstick for compliance with the repair clause was the condition of the land at commencement – if the tenant were to be responsible for fixing pre-existing damage, that would need to be explicitly specified.
The issue raised in this proceeding was contractual interpretation. The parties were aware of past contamination and foresaw an actual or potential liability for clean-up costs. The lease negotiations did not produce complete clarity concerning responsibility, leaving the court to balance competing indications in the language. The language of the express obligation "to keep... [the land] in good order and clean and tidy", implies that the land was clean and tidy at the commencement of the lease and so the condition of the land at the time is the appropriate yardstick. However, the parties also specifically excluded implied obligations which would have had regard to the condition at the commencement. Further, other clauses expressly provided for Mobil to remove, at its cost, fixtures that it had been obliged to repurchase and other fixtures as required by the harbour board and make good any damage caused by removal, indicating that the parties envisaged Mobil returning the premises in a condition different from that at the commencement of the lease. However, although an express obligation was included in relation to fixtures, there was room for doubt that a similar obligation for the land should be implied.
The Supreme Court, New Zealand's highest court, has granted leave for Mobil to appeal against the Court of Appeal's decision.(2) In the appeal, the Supreme Court will consider:
- whether the repair clause in the 1985 leases requires Mobil to remediate hydrocarbon contamination on termination;
- whether Mobil is liable for costs of remediation on the basis of an implied term not to commit waste; and
- whether the remediation obligation relates only to hydrocarbon contamination caused since 1985 or extends back to 1925.
A version of this article appeared on the International Law Office website in March 2016