Leases trumps late pays

The no-nonsense wording of the lease between an Indiana shopping center and one of its tenants has resolved a dispute between the two parties over rental responsibility.


from PlainVanillaShell.com


"The lease required, among other demands, rental payments no later than the first day of each month. Plus, it made the tenant personally liable for those rental payments. Just as important, the lease stated that despite any relaxing of the conditions of the lease by the center's owners, the tenant still must comply with the lease requirements.


That last provision was tested when the tenant consistently failed to pay rent on time and the center's owners nevertheless accepted the late payments. The tenant apparently understood that laxity as a sign that the lease was flexible and compromising.


That thinking was tested when new owners began the center. Those owners required a strict honoring of the terms of all leases they inherited. So when the tenant continued to make late rental payments, the owners finally evicted him and demanded personal payment of all back rent and penalties.


The tenant replied that the new owners had in fact accepted some late rental payments and by doing so had waived their right to claim a lease default on his part. In response, the new owners pointed to the terms of the tenant's lease. It stated, in part, that:


the acceptance of rent by the landlord shall not be deemed a waiver of any earlier breach [of the lease] by the tenant.


Furthermore, the guaranty stated that the tenant's liability as
guarantor:
shall in no way be affected, modified or diminished...by reason of any dealings or transactions or matter or thing occurring between landlord and tenant, its successors or assigns.


An Indiana appellate court, in ruling in favor of the center's owner, explained,


Under the clear language of the lease, the new owners did not waive the tenant's default by accepting the late payments. Further, the guaranty of the tenant was not affected by the owners' failure to assert its rights against the tenant. We conclude that the tenant was in default because he failed to make timely rent payments. Consequently, the owners did not waive their right to enforce the guaranty.


HK New Plan Marwood Sunshine Cheyenne v. Onofrey Food Services, 2006 WL 1098590), Decision: April 2006, Published: May 2006."



from RE Business Online, October 9, 2006


"Successfully managing environmental risks that arise from both known and unknown environmental liabilities lying below the surface of a brownfield is the challenge facing any developer. While most developers are well acquainted with managing risk, environmental risk can be particularly difficult to manage given the uncertainties relating to the presence or extent of contamination, governmental cleanup requirements, cleanup costs and potential third-party exposure. The industry has come a long way, though, since the days when even the smallest hint of environmental contamination could kill a deal. Experience and technology have spurred the development of a number of useful tools for managing environmental risk. One of the most important is environmental insurance.


Environmental insurance refers to a fairly specialized set of insurance products offered by a handful of insurers to address various risks arising from environmental conditions. Unlike the rigorously standardized policies and endorsements found in other types of insurance, such as commercial general liability insurance, each insurer offers a somewhat different take on the environmental insurance it offers. And unlike most insurance policies, the terms, conditions and endorsements in environmental insurance policies are negotiable.


In brownfield deals, two types of environmental insurance are usually the most useful.


One is an environmental cost cap or stop loss policy (Cost Cat), which addresses non-contingent cleanup liability and protects the insured from the risk that cleanup costs will exceed cost estimates.


The second is pollution legal liability insurance (PLL), which addresses unknown, contingent liabilities such as cleanup costs (where there are no pending cleanup requirements or claims), bodily injury and property damage claims. These are all claims-made policies, which means that the claim must be asserted against the insured and reported to the insurer during the policy period, which usually ranges from 3 to 10 years.


Assume that the buyer intends to acquire and develop a 5-acre former industrial facility. On one corner of the property, there is significant contamination of groundwater by solvents emanating from the site of a former waste solvent tank. The state environmental agency is requiring the investigation of the solvent plume and will require cleanup at an estimated cost of $2 million. Petroleum contamination also has been found in shallow soils throughout the site, but concentrations appear to be low enough that remedial action will not be required. The buyer is concerned, however, that the site has not been adequately investigated and other contamination may be discovered during development. The buyer is also concerned that the plume of contaminated groundwater appears to be migrating into a nearby residential neighborhood. For various business reasons, the buyer is assuming all environmental liabilities with an appropriate adjustment in the purchase price."


Breaking it down, we have different risks that must be managed:


1. Risk that remediation of the solvent plume will exceed assumed costs.
While the buyer's consultant estimates the cost of cleanup should be
$2 million, those costs could increase for a number of reasons, such as the presence of more contamination than expected or a change in governmental cleanup requirements. The buyer risks losing his financing unless he can figure out how to contain the potential cost overruns. A Cost Cap policy provides protection against these cleanup cost overruns.
In effect, there is a self-insured retention that equals the estimated costs, and often a buffer of 10 to 20 percent of the estimated cleanup costs will be added to increase the self-insured retention in exchange for a reduced premium. The Cost Cap policies do not provide unlimited coverage; so adequate limits of liability (how much the policy will pay
out) to assure the risk concerns of the buyer and its lender must be considered. There are other solutions, too, such as a "finite-risk" policy or fixed-sum contract with the remediation contractor backed by environmental insurance, but these are usually more suitable for larger projects.


2. Risk that exposure (real or alleged) to known and unknown contamination will result in toxic tort claims.
For most developers, the risks from potential toxic tort claims are particularly difficult to handicap and manage. Insurers providing PLL coverage will ordinarily defend and indemnify toxic tort claims arising from both unknown and known contamination, provided the known contamination was disclosed to the insurer.


3. Risk that known or unknown conditions will result in new cleanup claims.
The cleanup cost coverage under a PLL policy should protect the buyer against the risk of being required to cleanup contamination missed in prior investigations, including possible cleanup requirements for the known minor petroleum contamination. Of course, the insurer will exclude the solvent plume in our example because it is subject to existing cleanup requirements.


Careful attention must be given to how the insurer proposes to exclude known contamination. For example, an insurer would probably propose to exclude coverage for all the chemicals found in the contaminated groundwater plume, even if the contamination arose from a release on another part of the property unrelated to the known plume or the solvent tank. Through negotiations with the insurer though, the exclusion can usually be limited to the known solvent plume.


As for the petroleum contamination, the insurer will probably exclude coverage for any remediation required as a result of site development activities. This is a fair exclusion if soil that could be left in place otherwise has to be removed and disposed due solely to site grading or excavation activities. Some insurers will also seek to exclude any contamination that is discovered during site work, even if the contamination is so significant that it would have to be remediated (assuming it was discovered later) regardless of the site work. In other words, the mere fortuity of how the contamination was discovered could determine whether its remediation is covered or not.


There are a number of other issues that must be considered, such as limits of liability, self-insured retention, policy term, what to do when the policy expires, additional insured parties (such as the seller) and notice issues. There are any number of other risks that may need to be addressed as well. Careful evaluation of the policy and its endorsements is essential.


Indeed, it is critical that one enlist the help of specialists in the field. All of the major insurance brokerages have specialists in environmental insurance. Use them — it will cost you nothing. It is also essential to enlist the help of an attorney who understands these policies. While the environmental insurance market is providing a valuable service, the policies create many traps for the unwary through the use of exclusions, endorsements and conditions. It is important for an attorney, well versed in both environmental liabilities and insurance coverage, to go through the policy to assure it provides the coverage that is necessary and adequate and, if not, to negotiate language that does." For more information see : www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net