The Supreme Court's decision last July in the case of Mobil Oil New Zealand v Development Auckland has implications for liability for contaminated land under leases in New Zealand. This article explores some potential implications of the case for those holding a lease over industrial or commercial land and the resulting lessons to be learnt from the decision.
From the 1920s until 2005, properties in Auckland's Wynyard Quarter were used for the bulk storage of oil. The land was first leased to Australian companies that went on to become part of the Mobil Australia group. Then, in the 1950s and 1960s, New Zealand registered companies took over the leases. These companies were later amalgamated to form Mobil Oil New Zealand (Mobil). In 1985, after the leases had expired, Mobil entered into new tenancy agreements for the land. These were the tenancy agreements primarily in issue in the case.
The land was part of a coastal reclamation that was completed between 1905 and 1917. The original fill was already contaminated with the likes of demolition debris, gas works waste, refuse from city tips, and material extracted from the harbour in the vicinity of sewage and gas works discharges. Through leakage and spillage of petroleum products, contamination of the land went on for years. It was largely caused by Mobil (including its New Zealand predecessors and Australian predecessors). By the 1970s, the contamination had reached a tipping point – the land was so polluted as to require complete remediation. Now, the land is being developed for mixed commercial and residential use.
The ordinary meaning of words
The Supreme Court case was about whether clean and tidy conditions in Mobil's 1985 tenancy agreements meant it had to pay to remediate the land. The High Court had found that Mobil was not required to pay, but the Court of Appeal disagreed. The Supreme Court restored the High Court's decision. In doing so, the Supreme Court considered the interpretation of the clean and tidy conditions, the overall scheme of the arrangements and the prospect of an implied term requiring Mobil to remediate the land. The 1985 tenancy agreements contained a 'clean and tidy' condition providing for Mobil to 'keep' the land and (at the end of the tenancies) 'return it' in 'good order and clean and tidy'. In finding Mobil was not required to carry out subsurface remediation, the Court focused on the ordinary meaning of these words.
The Court found that the word 'keep' can impose obligations beyond maintaining the status quo at the start of the lease, such as putting a demised premises into a state of good and tenantable repair. An obligation to keep a building in good and tenantable repair is recognised to extend to, for example, require a dilapidated roof to be replaced. This can result in an improvement to the building and a potential windfall to a landlord. (This unfairness is now addressed for leases after 1 January 2008 by section 223 of the Property Law Act (PLA). It provides that a covenant to keep leased premises in good condition does not require the lessee to put the premises into good condition if they are not in good condition at the start of the lease.)
The Court held the obligation can only go so far, and made it clear that 'keep' cannot signify transformative change.
A further lesson from the decision relates to the words 'clean and tidy' and 'good order' in leases. The Court found that the following suggested that these words do not extend to the subsurface:
- The words were linked to the phrase 'free
from rubbish weeds and growth';
- These terms are not customarily used in relation to land in commercial or industrial leases; and
- An interpretation of 'good order' and 'clean and tidy' that required complete remediation of the land from the beginning of the tenancy would be fundamentally inconsistent with the commercial purpose of the tenancies.
What's more, Development Auckland's interpretation of 'clean and tidy' involved different interpretations of the same words during the term of the lease and then at the end, referring to the appearance of the surface of the land throughout the term of the lease, but then extending to the subsurface on termination.
Where land has become contaminated and the lease includes an obligation to keep the land in 'good order and clean and tidy', the ordinary meaning of these words may mean that the obligation is confined to the surface and does not require a transformative change.
Of course, every situation is different and a court will consider all the circumstances of each case.
The overall scheme
The Court was careful to examine the overall scheme of the arrangements when interpreting the meaning of the clauses. The Mobil case shows us that features such as any actions or inaction taken by the parties which might cause a difference in interpretation (for example, acceptance of the contamination or a failure to complain about it, and the option to remove improvements on the land that may be the sources of the contamination) are all pivotal to interpretation.
If a landlord is on notice of an issue and does not act on it, this inaction could give rise to an estoppel argument that prevents a landlord from enforcing its rights. Another key feature of the overall scheme of a lease is its duration. Leases of a short-term nature do not lend themselves to the imposition of substantial remedial obligations (unless express wording is included), and certainly not to the tune of $50 million, as would have been the cost to Mobil if it had been required to fully remediate the land.
Risks with permitted use
The Mobil case teaches us in New Zealand that it is important to consider the risks associated with a use permitted in a lease at the time of signing, at assignment and when activities change to ensure appropriate risk allocation. Where a change of use is requested, both parties need to consider what new risks arise from the proposed use and whether the current terms of the lease adequately address those risks. In some cases, it may be necessary to draft additional obligations to address new risks.
When considering a lease transaction, whether it is a new lease, an assignment or a renewal, it is important for parties to think about what impact a transaction can have on lease obligations involving remediation. What can appear to be a simple change in entity or modernisation of a lease can catch a landlord out, and result in a tenant being off the hook or having reduced liability. For example, where a tenant has been in occupation of property under previous arrangements, updating a lease (and effectively entering into a new lease) needs to reflect the prior occupation. In such a case, the condition of the premises might need to refer to the previous lease or start of occupation, not the commencement date of the new lease.
More lessons are sure to come
The Mobil decision relates to a specific set of circumstances. But on a broader level, it concerns familiar issues, including the interpretation of leases, liability under them and implied terms. Moreover, it is a decision of the country's highest court and will therefore be poured over by lawyers for years to come in relation to these issues.
This article has set out some of the key lessons from the case, including the Supreme Court's affirmation that the overall meaning of the words and the scheme of the lease is important to interpretation. It has also explored lessons relating to the issues of contamination incidental to a use, implied terms and new events in relation to leases. As the Mobil decision settles into New Zealand's legal landscape, one thing is certain: there will be many more historic leases that need examining to evaluate the extent of remediation liability.