EPA Issues Strategy for Addressing the Retail Sector under RCRA

When negotiating a commercial lease for a retail store, environmental issues are typically not as high on the priority issues list as they would be if the property was industrial. However, the EPA’s waste generation rules apply to retail stores too.

In a typical retail lease, as in any lease, at a minimum it will include a broad requirement that the tenant must comply with all laws applicable to it and it will also often include a simple covenant to not violate environmental rules and regulations. It may not run on for a page or two but the point will be the same….tenants must comply with environmental regulations applicable to their operations at the leased premises.

The EPA’s rules and regulations with respect to hazardous waste generation are one example of rules drafted a long time ago with industry in mind now apply to retail stores. While it is easy to see how that could be true when talking about an automotive supply store with the typical products that would be sold in such a location, the reach is much broader.

Stores have to deal with slow moving merchandise that takes up valuable shelf space. Items that are obsolete or damaged or otherwise not salable need to be removed to make room for new merchandise. However, the disposal of some of these items can trigger the EPA’s regulations on hazardous waste generation. Think of batteries of all shapes and sizes, aerosol cans and nicotine patches and other medications (including some over the counter products), just to name a few.  Many small retail tenants are probably not even aware that such rules and regulations apply to them, and therefore may be in breach of environmental covenants in their leases without knowing it.

The EPA has finally started to focus on the need to revamp the regulations for application to the retail sector and earlier in the fall issued its Strategy for Addressing the Retail Sector under the Resource Conservation & Recovery Act (RCRA) Regulatory Framework.

Landlords of commercial retail property should take care to ensure that their leases require tenants to comply with all environmental rules and regulations, and indemnify for violation. Retail tenants need to be aware that their operations, particularly when it comes to disposal of merchandise, can be subject to RCRA and similar laws on a state level.
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Retail Leasing: Can The Landlord Force Your Store to Open on Thanksgiving?

With the Thanksgiving holiday only a few days away, we’ve been hearing news stories about which stores will open on Thanksgiving Day and which will remain closed. Every year there seems to be contest as to which stores can get the earliest jump on the shopping frenzy known as “Black Friday,”  while others take the opposite approach and refuse to open on Thanksgiving Day, considering it to be a day best spent at home with one’s family. I happen to subscribe to the latter view. However, one’s personal preference doesn’t always dictate a retail store’s hours of operation.

A standard clause in retail leases deals with the hours the store is expected to be open for business. Typically, it is the landlord who dictates what those store hours will be. In some leases, the days of the week and the hours a store is open each day are negotiated in great detail. Below are three sample lease provisions regarding store hours, starting with a very detailed provision and ending with a very simple provision, all of which keep the landlord primarily in control when it comes to dictating a store’s hours of operation.

Sample 1—

“Tenant shall cause its business to be conducted and operated in good faith and in such manner as shall assure the transaction of a maximum volume of business in and at the Premises.  Unless other hours are designated or approved by Landlord in writing, Tenant shall cause the Premises to be open from 11:00 a.m. until 10:00 p.m. Sunday through Thursday and from 11:00 a.m. until 11:00 p.m. on Friday and Saturday.  The Shopping Center shall be closed for business on Thanksgiving Day and Christmas Day.  Landlord, in its sole discretion, shall have the right to reduce or eliminate operating hours on any or all of New Year’s Eve, New Year’s Day, Easter Sunday, Thanksgiving Eve, Christmas Eve, Labor Day, Memorial Day, and the Fourth of July.  Tenant agrees that during each Rental Year, from Thanksgiving Day through December 31 and on at least five (5) additional days, Landlord shall be permitted to extend Tenant’s operating hours up to an additional three (3) hours per day.  If Tenant shall fail to operate during all such hours, in addition to constituting an Event of Default hereunder, Tenant shall be required to pay, for each hour that Tenant shall fail to be open, liquidated damages equal to the greater of Fifty and 00/100 Dollars ($50.00) or ten percent (10%) of Tenant’s average hourly Gross Sales computed for the month immediately preceding the month in question.  If Tenant shall request Landlord’s approval of the opening of the Premises for business for periods exceeding those specified above and Landlord shall approve such request, which approval may be granted or withheld in Landlord’s sole discretion, Tenant shall pay for any additional costs incurred by Landlord in connection with Tenant’s opening the Premises for business during such additional hours, including but not limited to, any additional amounts of Landlord’s Operating Costs, additional costs of heating, ventilating and air‑conditioning the Common Areas and the Premises, and additional utilities furnished to the Premises by Landlord.” [emphasis added]

This first provision has been more heavily negotiated and provides the tenant with a little more flexibility, but not much. 

Sample 2—

“Daily, except for Sunday, the Premises shall be open for business to the public not later than 10:00 A.M., and on Sunday the Premises shall be open for business not later than Noon.  The Premises shall remain open for the conduct of business to the public until at least 9:00 P.M. on Monday through Wednesday, 10:00 P.M. Thursday through Saturday, and 6:00 P.M. on Sunday.  In addition, the Premises shall be open for business on such legal holidays and for such hours as may become the standard as reasonably established by Landlord.” [emphasis added]

 

The last sentence of Sample 2 is the slippery slope that can trip up a retail tenant who desires to remain closed on a traditional holiday when the standard starts to change. As more and more stores elect to start “Black Friday” shopping hours on Thanksgiving evening or even earlier, a landlord may reasonably argue there is a new standard and it expects all the retail tenants to conform.

Sample 3—

 

“Tenant will keep the Leased Premises open for business during hours designated by Landlord, from time to time, as the Shopping Center’s hours of operation.”

 

This last sample, while simpler, gives the landlord total control over what the retail tenant’s hours of operation will be.

Retail tenants need to be aware of the store hours required in their leases and the level of discretion afforded to the landlord to change those hours. As more and more retail establishments push the envelope on opening during major holidays, the remaining tenant may find themselves forced to go along regardless of their personal beliefs and preferences, or risk being in breach of their lease and/or subject to substantial financial penalties.

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Protecting Claims for Indemnity Obligations When a Commercial Tenant Files Bankruptcy

As a landlord of commercial property, one of the more frustrating situations to endure is a tenant in bankruptcy. While the bankruptcy code provides more protections for commercial landlords than in the residential context, there are still many gray “no man lands” that can trap a landlord.

 

One area that can create issues for a landlord is the indemnity obligation a tenant may owe the landlord under a lease.  Consider a scenario where tenant signs a lease and proceeds to initiate a very expensive build out of the premises only to file bankruptcy before the construction is completed and the contractor paid.  Contractor proceeds to file a mechanics’ lien on the property. The landlord can be forced to spend significant amounts of money in litigation and settlement costs with the contractor to resolve and remove the lien, not to mention the litigation costs in bankruptcy court over the priority of its related indemnification claim against the tenant debtor.

 

This was the situation the landlord, WM Inland Adjacent LLC (MW Inland), found itself in after its tenant, Mervyn’s LLC (Mervyn) filed for relief under chapter 11 of the Bankruptcy Code.

 

MW Inland requested that its claim was entitled to priority treatment under section 365(d)(3) of the Bankruptcy Code while Mervyn objected claiming it should be treated as a general unsecured claim.  Section 365(d)(3) of the Bankruptcy Code provides that the debtor much timely perform all of its obligations under an unexpired lease until that lease is assumed or rejected.

 

Critical to the bankruptcy court’s decision in favor of MW Inland was the distinction of an “obligation,” which is “something one is legally required to perform under the terms of the lease” from a “claim,” which is “an unmatured right to payment.” (WM Inland Adjacent LLC v. Mervyn’s LLC (In re Mervyn’s Holdings LLC), No. 08-11586, Adv. Pro. No. 09-50920, 2013 WL 85169 (Bankr. D. Del. Jan. 8, 2013)) The court further found that the obligation arose when the contractor recorded the mechanics’ liens and sued WM Inland to foreclose upon the liens (prior to rejection of the lease), which entitled WM Inland’s claim to treatment as WM Inland had requested under section 365(d)(3).

 

The takeaway for a commercial landlord is to consult competent commercial bankruptcy counsel as soon as possible after a tenant files for relief in the bankruptcy court to develop a useful strategy for preserving pre-and post-petition claims it might have related to the tenant’s lease obligations.

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Brokers' Lien Laws for Commercial Real Estate Transactions

Approximately 30 states now grant a commercial real estate broker the right to place a lien on real property when his or her fee isn't paid. Most states address the lien right in a specific lien statute for brokers’ liens but a few states provide for brokers’ liens as part of their mechanics’ lien law. Delaware is the most recent state to join these ranks with its passage of a commercial real estate brokers’ lien act.

Ohio’s lien law for commercial real estate brokers can be found at ORC 1311.85 through 1311.93 and has been around since the late 1990s.  Ohio recently passed legislation which took effect March 27, 2013 and clarifies the various services covered by the lien act and other details surrounding the creation and enforcement of the lien with respect to each type of services.

The purpose of the lien law is to protect commercial real estate brokers who provide services and then are not paid their brokerage fees. The amount of the fees are at a level where litigation to collect the fees typically eats up the entire amount of the fee and can take a couple of years to work its way through the legal system. Having the ability to enforce a lien on the real property provides the real estate broker with some leverage to ensure prompt payment.

However, as it is typically the case, the devil is in the details. Each state’s definition of what constitutes “commercial real estate” can differ. Typically, it will carve out single family residences and real estate containing a limited number of residential units, although the number of units will vary from state to state. In Ohio, real estate containing one to four residential units falls outside the definition.

Most lien law states require the real estate broker’s fee arrangement to be contained in a written agreement and a handful of states also require that the written agreement contains disclosure of the lien rights. Ohio law requires a written agreement but does not require mandatory disclosure of the lien rights.

The types of real estate transactions covered by the lien rights also differ from state to state. In Ohio, transactions covered by the statute include services related to selling, leasing or conveying any interest in commercial real estate. While the majority of states with brokers’ lien rights apply these rights to both sale and lease transaction, some states limit the brokers’ rights to only sale transactions or to only lease transactions.

Each state’s law also provides specific time frames for filing the lien affidavit and other actions. It is important to carefully review the applicable state’s statute to ensure compliance or risk losing the lien right.

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EPA Extends “Bona Fide Purchaser” Protection to Tenants

Reprinted with Permission from Author: Claire Juliana of Aon Risk Solutions

Earlier this year, the United States Environmental Protection Agency (“EPA”) issued revised enforcement guidance for the treatment of tenants under the Bona Fide Prospective Purchaser (“BFPP”) provision of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). (See: http://www.epa.gov/enforcement/cleanup/documents/policies/superfund/tenants-bfpp-2012.pdf). This guidance supersedes the EPA’s previous January 2009 guidance and is intended to address remaining uncertainty regarding the potential liability of tenants under CERCLA and the applicability of the BFPP provision given that the provision makes explicit reference to tenants in § 101 (40). Under previous guidance, the BFPP protection was only available if the tenant’s landlord itself qualified and maintained its status as a BFPP or if the tenant’s leasehold right was the equivalent of an owner. The new guidance provides the EPA with expanded enforcement discretion to a tenant of a contaminated site whose owner loses BFPP status or a tenant that itself meets the necessary BFPP criteria as applied to a tenant. This summary is intended to provide details of the new policy.

Under Section 107(a)(1) of CERCLA, “the owner and operator of a … facility….from which there is a release, or a threatened release which causes the incurrence of response costs, of a hazardous substance, shall be liable for …(A) all costs of removal or remedial action incurred by the United States Government….” So, absent liability protection, an owner or operator of a contaminated property is a potentially liable party under CERCLA. Section 107 (r)(1) is the provision of CERCLA that articulates the statutory liability protection for BFPPs as follows:

 

Notwithstanding subsection (a)(1) of this section, a bona fide prospective purchaser whose potential liability for a release or threatened release is based solely on the purchaser’s being considered to be an owner or operator of a facility shall not be liable as long as the bona fide prospective purchaser does not impede the performance of a response action or natural resource restoration.

In general, a BFPP is "a person (or a tenant of a person)" that acquires ownership of a facility after January 11, 2002, and satisfies the following criteria:

·         Conducts "all appropriate inquiries" into the previous ownership and uses of the property.

·         No disposal of hazardous substances at the facility on or after acquisition.

·         Provides all legally required notices.

·         Takes reasonable steps with respect to any hazardous substance releases.

·         Provides cooperation, assistance and access to those conducting response actions.

·         Complies with land use restrictions and institutional controls.

·         Complies with information requests and administrative subpoenas.

·         Is not potentially liable for response costs at the facility or has no affiliation with a responsible party (i.e., other than an affiliation created by the instruments by which title to the facility is conveyed or financed or by a contract for the sale of goods or services).

 

Under the new guidance and on a site specific basis the EPA has the enforcement discretion:

1.    To treat a tenant who derives BFPP status from its owner/landlord as a BFPP even if the owner/landlord has lost its BFPP status (through no fault of the tenant) as long as the tenant meets all of the BFPP provisions, except the all appropriate inquiries provision. That said, the EPA notes that a tenant may still wish to obtain information on prior uses of the facility in order to have an informed basis upon which to perform the other requirements of the BFPP provision. With respect to the “no affiliation” provision, although a lease “is [not] created by the instruments by which title to the facility is conveyed or financed or by a contract for the sale of goods or services” per §101(40)(H)(i)(II), the EPA has the discretion to treat a lease between the tenant and owner an as acceptable affiliation.

 

2.    To treat a tenant as a BFPP as long as the tenant satisfies all of the BFPP criteria including conducting all appropriate inquiries.

 And, like a purchaser who wishes to assert the BFPP defense, the tenant protections will only apply to leases entered after January 11, 2002.

The new guidance addresses a gap in the CERCLA liability protections and allows tenants to follow the same steps as purchasers in order to establish the protection as a BFPP. Many tenants of commercial and industrial properties already routinely perform Phase I environmental assessments as part of their due diligence practices so to the extent that this satisfies the all appropriate inquiries requirement and the other criteria are met, the tenant has some measure of comfort that the EPA is not likely to hold the tenant liable for pre lease contamination. The guidance itself, however, cautions that the EPA has enforcement discretion so where a lease is, for example, designed to allow the landlord or tenant to avoid CERCLA liability, the EPA would likely decline to exercise its enforcement discretion. As always, tenants should consult with experienced advisors in ascertaining what steps should be undertaken to help protect against CERCLA liability.

Copyright © Aon plc 2013.  This Alert is for general informational purposes only and is not intended to provide individualized business or legal advice.  The information contained in this Alert was compiled from sources that Aon considers to be reliable; however, Aon does not warrant the accuracy or completeness of any information herein.  Should you have any questions regarding how the subject matter of this Alert may impact you, please contact your Aon team member or other appropriate advisor

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Aon plc (NYSE: AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 61,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. M. Claire Juliana J.D. is the Director of Environmental Claims at Aon Risk Solutions. Visit www.aon.com for more information.

 

Commercial Landlord’s Duty to Mitigate in Ohio- a Primer

Is a lease a transfer of a property interest, a contract or both? The answer to this question has changed over the years, and Landlord’s obligation to mitigate (i.e., lessen) damages (as a result of a tenant’s default) has changed along with it.

Background/History. Under common law, leases were traditionally understood to be mere transfers of a property interest. So, when a tenant abandoned its leasehold interest, the landlord no longer owed any duty to the tenant. There would be no duty to mitigate damages, because that was a contract principle of law, not one of property law.

Over the years, the nature of commercial leases changed. As deals became complicated, the leases became more complicated. Modern commercial leases soon contained a number of covenants and conditions such that they looked more like an exchange of promises (i.e, a contract) than a mere transfer of a property interest. Accordingly, as summarized by the Court of Appeals of Ohio for the 6th Circuit in New Towne Limited Partnership v. Pier 1 Imports, 1996 Ohio App. LEXIS 3203, “various jurisdictions shifted the law regarding commercial leases away from traditional property rules toward the more modern approach of analyzing leases under contract principles”.

The Law in Ohio. While there had been some prior authority, Ohio emphatically adopted the “modern approach” in Frenchtown v. Lemstone, Inc., 2003 Ohio LEXIS 1977 by holding: “the duty to mitigate arises in all commercial leases of real property, just as it exists in all other contracts”. The court in Frenchtown simply reasoned that the duty to mitigate damages (otherwise known as the doctrine of avoidable consequences) is a basic principle of contract law, and since commercial leases were recognized as at least part-contract, contract principles would apply.

What Exactly Must Landlord Do? According to the court in Frenchtown, the duty to mitigate requires only “reasonable” efforts, and a Landlord can consider its “tenant mix” when trying to find replacement tenants. For example, a landlord could reject an offer from a prospective bail bonds tenant as a potential replacement tenant in an upscale retail/office building. The reasonableness of the Landlord is a question of fact for the judge or jury, and may change based upon the circumstances. Two Eighth District Court of Appeals cases may help landlords understand what specifically is required to mitigate damages. In Oakwood Estates v. Crosby, 2005-Ohio-2457, the court ruled that running advertisements for a 600 unit building with a vacancy rate of 15-20% was not enough. According to the court, the landlord should have supplemented the ads (at least in the spring/summer months) with “unit specific marketing” such as open houses with sign-up sheets. In The T Building Company v. HVL, Inc., 2013 Ohio App. LEXIS 824, the Eight District Court of Appeals held that sending out hundreds of marketing flyers to brokers and personally calling and meeting with a few of them constituted reasonable efforts to mitigate.

Can Landlords and Tenants Contract to Eliminate Landlord’s Obligation to Mitigate?

Contract law principles such as mitigation favor the tenant in a commercial lease. On the other hand, commercial contract law principles regarding enforceability of contract terms often favor the landlord (except re: “tenant form leases”). Generally speaking, courts will typically uphold language in a commercial lease, unless it is contrary to statutory law or public policy. Consequently, commercial landlords and tenants have a lot of leeway in allocating the risk and responsibility of issues inherent in commercial leases. While there has not been a Supreme Court of Ohio case that definitively addressed written disclaimers of mitigation obligations, the court in Frenchtown came close. That court held that “…barring contrary contract provisions [emphasis added], a duty to mitigate damages applies to all leases". The only Ohio Court of Appeals case discovered that specifically addressed disclaimers of mitigation rights was the New Towne case. The court in New Towne could not have been clearer by holding: “In the present matter, the term negating any duty to mitigate damages contained in the lease does not violate any principle of law. Similarly, it does not injure the welfare of the public in any way. As a result, the provision does not violate public policy”.

Moral of the story for tenants? If you don’t specifically see language in the lease requiring the landlord to use commercially reasonable efforts to mitigate damages, don’t worry, they have that duty by law (of course, it never hurts to specifically add mitigation language). On the other hand, if you see language nullifying or disclaiming or waiving the obligation of landlord to mitigate damages, insist that it be deleted.

Special Holiday Leasing Issues Affecting Retail Leases

Tis the season for special shopping hours and a whole host of special issues that uniquely affect retail tenants—longer hours of operation, seasonal help, special decorations and possibly additional seasonal signage, special events, extra common area maintenance expenses and lots more advertising.

I could barely lift the paper this past week with all the special advertising inserts for “Black Friday.” Some stores that have rarely bought an ad for the last several months went all out for this huge shopping day.

Landlords and tenants don’t always think about the issues related to these special issues. 

Consider the special holiday hours most retail stores have this time of year. Does the lease require that the tenant stay open longer? On the other hand, does the tenant want to stay open longer than the lease addresses? And with multi-tenant retail site, such as a shopping center, how does the longer hours affect the common area charges? If one tenant keeps much longer hours than another, does it pick up more of the expenses for the common areas? What about all those extra seasonal employees? Where do they all park? Any requirements in the lease to park in specific areas? How does this get policed?

What about special holiday signage or decorations? Are there any limitations in the lease about the type of signage or decorations? Does the landlord have the right to approve the tenant’s signs or decorations before they go up?

What about special activities that a tenant might want to engage in, such as having the high school choir sign outside its storefront or handing out special promotional materials? How does the landlord deal with competing requests from tenants?  Tenants need to keep in mind that some of the rules and regulations affecting what they want to do may not be in their respective leases, but in the rules posted for the common areas.

The best time to think about these issues is long before the holiday shopping season starts. If your lease fails to cover any of the above issues, you should consider addressing any concerns prior to the start of next year’s holiday season.

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