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Environmental Considerations for a Prospective Port Tenant

Industrial tenants looking to operate on port property should perform thorough environmental diligence before occupancy, carefully analyze lease obligations, and understand the relevant permitting and regulatory obligations.

Q2 2017
Does your business lease, or wish to lease, prime commercial or industrial space at or near a marine terminal? If so, be sure you have considered the environmental risks and protected your company’s interests. Port districts, which own most major marine and riverside facilities, are public business entities — they lease, and sometimes operate, marine facilities and make money from it. But they are also stewards of the environment because their property sits on or adjoins valuable marine ecosystems and natural resources. As such, port districts are particularly attuned to assigning environmental risks and obligations to their tenants, particularly when historical industrial activities may have contaminated their sites. Here, we discuss at a high level key factors a tenant should consider when leasing or operating on port property, and methods to potentially limit environmental liabilities.

Environmental Investigation and Due Diligence
Prospective tenants sometimes think leasing property, rather than purchasing it, reduces their environmental cleanup liability because they do not own the land. While sometimes true elsewhere, at port facilities this is not so. Running a business on port property, even as a lessee imposes “operator” liability under the Comprehensive Response, Compensation, and Liability Act (“CERCLA,” the federal Superfund law) and similar state laws. This liability is “strict” (fault doesn’t matter) and “joint and several” (every historical owner and operator is liable for the whole mess, regardless of what they contributed). And when the port is the landowner, the tenant’s risk is even greater. When the cleanup agencies come knocking, ports often cast themselves as government entities, servants of the taxpayer, and trustees for the public good, sometimes seeking protection as a so-called “innocent landowner.”

Prospective tenants sometimes think leasing property, rather than purchasing it, reduces their environmental cleanup liability because they do not own the land. So doing your homework — conducting appropriate environmental due diligence —before signing a lease of port property is essential. A Phase I Environmental Site Assessment (ESA) is the place to start. Environmental professionals conduct ESAs, doing site visits, reviewing historical and public records, environmental databases, and additional information to determine if there are “recognized environmental concerns.” Since industrial port facilities are almost always contaminated to some degree, and are usually owned by port “trustees,” there is often significant sampling data from soil, groundwater, sediment, and the water column. Sometimes, a Phase II subsurface investigation is called for to generate more data. This investigation increases a potential tenant’s understanding of the property’s environmental condition, whether a danger of contamination exists, and whether any land use restrictions or ongoing cleanups could impact future business operations. Most importantly, a well done environmental investigation can establish the “baseline” condition of the property, which, as we’ll learn later, is critical to limiting the cleanup a tenant may have to do when they vacate the property.

The due diligence process may serve another important purpose. In some jurisdictions, it can provide Bona Fide Prospective Purchaser (“BFPP”) protection — yes, even for a non-purchasing lessee. Under the Bona Fide Prospective Purchaser provisions in the 2002 Brownfields Amendments to CERCLA, tenants with a lease executed after January 11, 2002 can obtain BFPP protection that exempts them from CERCLA owner or operator liability if certain conditions are met. To get BFPP status, a tenant must conduct “all appropriate inquiries,” starting with a proper ESA. Additional requirements include cooperating with regulatory agencies and information requests, taking reasonable steps to prevent migration of hazardous substances, and proving that the disposal of hazardous substances occurred prior to execution of the lease. BFPP status is not immunity from all environmental liability — especially in states where more hoops must be jumped through to get that status under state law. But it can significantly help a tenant’s position in a later dispute.

The Lease
Along with thorough due diligence, a tenant operating at or near port property must understand all its obligations being assumed under the lease. Ports typically seek to impose broad indemnifications, warranties, maintenance requirements, and requirements to remediate environmental contamination, to control the release of hazardous materials, to hold lots of insurance that protect the port, and — importantly — to completely restore the property after the tenant’s use is completed (thus, the importance of a “baseline” condition report, so you know what you are restoring). In light of these standard provisions, a prospective and current port tenant must know what is in the lease. This is doubly true because port operations often trigger several environmental laws applicable to navigable water (e.g., the Clean Water Act) and heavy industrial or manufacturing operations occurring on-site (e.g., the Clean Air Act and Resource Conservation and Recovery Act). A lease cannot contract away the parties’ statutory liability to third parties and the government. But it can still fashion indemnities to allocate responsibility among parties, often resulting in the tenant bearing most, if not all, of the risk.

Along with thorough due diligence, a tenant operating at or near port property must understand all its obligations being assumed under the lease. Thus, when negotiating a lease for port property, one must consider several important factors, including:
  1. Whether the tenant will indemnify the port for CERCLA cleanup liabilities;
  2. Whether the tenant will be subject to expensive maintenance provisions (remember that sediment is dynamic, unlike most soil, and piles up or erodes relatively quickly, requiring regular maintenance dredging to maintain draft depths);
  3. Whether the tenant will remediate contamination or “restore” the site after the lease is up and, if so, to what condition (serviceable condition? pre-lease baseline? development-ready condition? pre-industrial, pristine condition?) (You laugh, but it is a frequent port argument); and
  4. The scope of any defense obligation the tenant owes the port if there is a dispute (do not assume the defense is limited to third-party claims — ports sometimes argue tenants must defend the port from the tenant’s own claim against them!)
The magnitude of the tenant’s risk depends on whether the property is contaminated (which should be discovered during the Phase I due diligence process) and whether the responsible party (i.e., prior operator) can pay for the cleanup. Becoming liable for any of these pre-lease conditions can prove extremely costly. One must carefully investigate the site and analyze the lease provisions before entering into the contract.

Permitting and Other Environmental Laws
Finally, because of the proximity to navigable waters and the limitation on activities that can be performed on port property, obtaining necessary business and environmental permits is essential for a prospective tenant, which can be an expensive and lengthy process. If a tenant’s operations cause waste to discharge into waters of the United States (for instance, through industrial process water, noncontact cooling water, or plain old storm water runoff), then an NPDES (National Pollutant Discharge Elimination Systems) permit may be required. The NPDES permit program implements the Clean Water Act’s prohibition on unauthorized discharges into the waters of the United States by requiring a permit authorizing any such discharge. In states like California, developing coastal property, even as a tenant, requires a host of authorizations — coastal development permits, Army Corps of Engineers permits, and compliance with state environmental quality acts, requiring environmental impact reports and statements. In contrast to other industrial facilities, environmental impact reviews at port facilities must consider a broader set of potential impacts, including recreational water uses, sport or sustenance fishing, sensitive wetland habitats, and unique underwater flora like eelgrass. Additional local regulations and permits may also be required.

In Sum
Industrial tenants looking to operate on port property encounter some unique considerations and challenges. To avoid assuming unknown and unexpected liabilities, tenants should perform thorough environmental diligence before occupancy (with the goal of establishing baseline conditions and obtaining BFPP status), carefully analyze lease obligations, and understand the relevant permitting and regulatory obligations. It boils down to this — before you go near the water, get your ducks in a row.

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