Canadian Underwriter

How commercial lease terms affect gas bars’ pollution liability

March 12, 2020   by Greg Meckbach

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If a retail gas station has to remove underground tanks and contaminated soil, is the landlord or tenant responsible for the costs?

Much of it depends on the terms of the lease and case law around commercial tenants’ trade fixtures, a recent Alberta Court of Queen’s Bench ruling suggests.

In 1200144 Alberta Ltd v Land’s Happy Mart Ltd, Justice Wayne Renke awarded more than $100,000 in damages to the numbered company that owns a mall in Sherwood Park.

In 2016, civil engineer Jagjit Dhatt, who effectively controlled the mall through 1200144 Alberta, hired a contractor to remove 27-year-old fiberglass underground gasoline tanks. The area used to be occupied by Happy Mart, which ended its tenancy in early 2014.

The landlord and former tenant took their disagreement over who was responsible for paying to court. The landlord asked for a damage award of more than $400,000, of which $100,00 was for removing the tanks and hauling away 242 cubic meters of contaminated soil; another $100,00 was for nuisance costs.

Ultimately, Justice Renke awarded damages against Happy Mart of about $143,000, not including interest and costs. Based on the evidence before the court, the judge concluded the contamination likely happened in the late 1970s when steel underground tanks were holding the gasoline. Those steel tanks were replaced in 1989 with the fiberglass tanks, which in turn were removed in 2016.

The court found the tenant liable due mainly to terms in multiples leases with successive owners of the mall from 1977 through 2009. For example, the 2004 lease has a section that says trade fixtures are improvements installed by the tenant, and that the landlord can require the tenant to remove such fixtures.

Historical contamination is an issue for pretty much any commercial client that owns or is somehow responsible for a piece of property.  It is not necessary for the current owner to have caused the contamination to be ultimately liable for clean-up costs. Though specialty insurance policies are available, commercial general liability generally excludes historical contamination, while some pollution policies only cover recent sudden and accidental releases of pollution.

In Happy Mart, common law was a factor. Previous court rulings indicate a tenant’s trade fixture is one not intended to be a permanent improvement to real property, Justice Renke suggested.

It was not clear exactly how the soil got contaminated, but Justice Renke found it most likely happened in the late 1970s.

Happy Mart started operating a gas bar and convenience store at the Sherwood Park mall in 1977. County records indicated that steel underground tanks were installed in 1975. Justice Renke was not absolutely certain of the installation year but his conclusion was based on a letter from the county entered as evidence.

In 1989, Happy Mart removed the steel tanks and installed fiberglass tanks. Then in 2015, Happy Mart was ordered by Alberta’s Petroleum Tank Management Association to remove the tanks. Happy Mart took the position the landlord was responsible, with the landlord ultimately hiring a contractor to remove the tanks and remediate the soil. PTMA has delegated authority to enforce several provincial codes – including the fire code, which requires that tanks removed from service if they have not been used for two years.

Justice Renke found that contamination occurred nearly 20 years before the current landlord took interest in the land in the 2006 time frame.

There was a small amount of surface contamination, which a witness attributed to waste oil being deposited. In one area, soil from the surface down to about seven feet was not contaminated. But between seven and 10 feet below, there was a concentration of contaminated soil.

The witness, the contractor that removed the tanks, testified that the only way contamination of this pattern could have happened was if the underground tanks leaked. His opinion was that the leakage took place over a period of five to 10 years, and that it was the steel tanks (removed in 1989) that leaked.

Steel tanks begin to corrode after about two years and pinholes develop, the court was told.

The witness said the contamination could not have occurred while the gas pumps were removed in 2016, because that would have left contamination from the surface. So the soil would not have been clean from the surface to the seven-foot mark.

The 2009 lease includes a “surrender clause,” which Justice Renke found Happy Mart to have breached. That clause requires the tenant to “remove all trade fixtures, alterations, additions and improvements to the demised premises at the sole expense of the tenant and to repair any damage occasioned to the demised premises by such removal.”




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