Importance of environmental due diligence and good negotiation when entering into a lease

01 October 2020

Author: Hannah Grimley
Practice Area: Real Estate

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Tenant’s covenants can effect a significant transfer of risk from the landlord to the tenant and always require close attention when negotiating a commercial lease. By carrying out due diligence before entering into a lease a tenant can minimise and sometimes eliminate those risks. A recent High Court judgment in Pullman Foods Ltd v The Welsh Ministers & Others determined how a yield up covenant in a lease applied where asbestos was left buried across the site at the end of the lease.

Background

Pullman Foods Ltd (“Pullman”) was the lessee of a parcel of land at Swansea Dock (“the Site”). The reversion of the lease was held by the defendant, the Welsh Ministers (“the Welsh Government”). In 2013, a notice was served on Pullman under s25 Landlord and Tenant Act 1954 to terminate the lease. After an agreed extension of time, Pullman did not seek a new tenancy and in February 2015 Pullman vacated the Site.

In 2019, Pullman commenced proceedings in the County Court at Swansea, claiming £42,500 as compensation for the termination of the tenancy, pursuant to s37 of 1954 Act. The Welsh Government did not dispute this claim, but brought a counterclaim against Pullman and its parent company, BFS Group Limited (“BFS”).

In brief summary, the Welsh Government’s case was as follows: Pullman’s covenants under its lease obliged it to remove the building that had been erected on the Site and to reinstate it at the end of the lease. Pullman failed to comply with that obligation because it left on the Site remains of the buildings, which contained asbestos-containing materials (“ACMs”). The Welsh Government then granted two successive licences to BFS to enable it to go onto the Site and remove the remains of the buildings and ACMs. However, some ACMs were not removed and spread widely over the Site, with the result being that the Site was contaminated with asbestos and required extensive remediation works. The Welsh Government claimed against Pullman and BFS for breach of covenant.

Issue before the Court

The lessee’s covenant was as follows: “at the expiration or sooner determination of the said term quietly and peaceably to deliver up the demised premises leaving same in good and substantial repair and condition to the satisfaction of the lessor having first, if required to do so, removed any buildings or work and having made good to the satisfaction of the lessor all damage occasioned to the demised premises by or in such removal.”

The Judge made the following key points:

  • The covenant went beyond one of repair. The Judge stated that the use of the word “condition” showed that the obligation was capable of extending to undertaking works that went beyond repair strictly so called. The mere fact that the demised premises could not be said to be in a state of disrepair would not mean that they were in a good condition.
  • The Judge stated that the lessor did not have carte blanche in deciding the appropriate standard of “good condition” or remediation works, but it would be entitled to form its own judgment as to what was required to satisfy the appropriate standard, provided its judgment was within the range of views that could reasonably be held.
  • The presence of the asbestos meant that the Site was in a damaged or deteriorated condition and was not in a good condition or in proper repair.

The Court’s Decision and Conclusion

The High Court concluded that removal of the asbestos was reasonably required for compliance with the covenant. The Court made the point that even if the asbestos had been present before the grant of the lease, Pullman would still be obliged to remove it in order to deliver up the Site in “good and substantial repair and condition”. The Court held that the Pullman was liable for damages for breach of the covenant.

This case reiterates the importance of undertaking environmental due diligence to ascertain the presence of any historic hazardous substances or contamination before entering into a lease and / or negotiating repair and yielding up covenants carefully. Simple due diligence before entering into a lease can help protect tenants from costly remediation works when exiting their lease.

For further information please contact the Real Estate team at Carson McDowell.

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