Leases – Contamination and Remediation

September 2015



In Auckland Waterfront Development Agency Limited v Mobil Oil New Zealand Limited [2015] NZCA 390, the Court of Appeal has overturned a decision of the High Court regarding the liability of a tenant on Auckland’s waterfront to remediate subsurface contamination in the Wynyard Quarter “tank farm” area. This important judgement raises issues about a tenant’s liability to remediate contaminated land pursuant to repair covenants under leases.

Various Mobil companies had leased the premises since 1925, at which time the tank farm area was established.  Mobil occupied the site between 1952 and 1963. The lessees preceding it comprised separate but related companies that were part of the wider Mobil group’s Australian operations.

During the 1970s the land had become so polluted as to require complete remediation. A new lease was entered into between the parties in 1985.  The knowledge of the parties about the extent of contamination at the time that new lease was entered into and the liability of Mobil to clean up the site so as to achieve the terms of the lease were at issue in these proceedings. The future use of the site is now intended to be mixed residential and commercial land use, but that was not known at the time the 1985 lease was entered into. At that time it was expected the future land use would probably comprise industrial use.

Lease repair clause

The Court noted that the relevant repair clause created the following obligations:

These obligations all related to the land at issue, not simply the structures placed on the land. Importantly, the requirement in (c) above included the ability of the lessor to require the work to be done to a reasonable standard only, to its satisfaction. That qualification was found to be significant here because as at 1985 the residential and light commercial use was not reasonably in prospect. The reasonable standard under the tenancy would reflect the less sensitive requirements of industry, consistent with the land’s zoning as it stood in 1985.

Mobil ran an argument that there was no foreseeable need for any remediation of the land on termination. The Court rejected this, finding it was incorrect to say that every future new industrial tenant would be indifferent to the contamination once made aware of it. Any new land use would involve construction on the land and it would be expected that the contamination would have to be addressed as it would otherwise create potential risk to future site occupants and workers from flammability or explosion of free product that had pooled underground and from thermal contact or inhalation especially during site works.  It was therefore not appropriate to read down Mobil’s obligations assumed on termination of the lease.

Good order and clean and tidy

In considering what was meant by delivering the land in good order and clean and tidy, the Court found that this included the subsurface of the land as Mobil did not confine its activities to the surface.  It built the improvements, necessarily using the subsurface to create foundations, bury pipes and to build bunds and the tenancy authorised it to remove its improvements.  Much of the contamination at issue would have resulted from petroleum products being discharged or spilled onto the surface from which they found their way into the subsurface.  Damage to the subsurface was a direct consequence of contamination of the land surface.   At issue here was the extent to which that practice fell within the land use permitted by the lease.

The Court also considered whether the obligation to remediate extended to contamination pre-dating the tenancies. On the evidence the Court was not satisfied that the pre-1985 leases excluded liability for contamination.  On the contrary, they contained a covenant prohibiting injury to the lessor.

Mobil has been found liable for a $10 million remediation cost.

What does this mean for leases?

Even if the leases had not contained an explicit obligation to remediate contamination, the Court decided that it would have implied the ancient tort of waste into the leases. Noting that the law of waste remained centrally relevant to the relationship of landlord and tenant, the tenant’s obligation not to commit waste is self evident, meaning that parties must normally be taken to recognise this relationship even if they did not define its parameters in the lease document.

The Court’s decision also confirms that the new lease in this case did not excuse Mobil from its own liability for past breaches even if those breaches had occurred under different contractual relationships and through different company entities.

If there is a specific clause in a lease dealing with contamination, it normally requires a tenant to remove contamination of the property unless the contamination was not caused by the tenant or took place prior to the commencement date of the lease term. However if the lease does not expressly refer to contamination, things could be quite different. The repair covenant may then kick in and reference made to the obligation of the tenant to keep the land in “clean and tidy order”. As occurred in this case, the obligation of the tenant then becomes a little uncertain.  Questions will be asked about the contaminating practice that has occurred and whether that reasonably fell within the use permitted by the lease arrangement.