• Landlord's Failure to Disclose Voids its Lease!
  • December 30, 2010 | Author: Alan C. Schwartz
  • Law Firm: Miller Johnson - Grand Rapids Office
  • A recent Michigan Court of Appeals decision voided a lease because the landlord failed to tell its tenant about the property’s environmental contamination. The case is significant because of the drastic remedy—a 10-year lease disappeared after two years. Read on for more information and for tips on how to avoid this highly unpleasant surprise.

    In this case, the landlord and tenant entered into a 10-year lease of a gas station in 2006. Apparently, the site had been environmentally contaminated ten years earlier. The landlord knew that but did not disclose it to the tenant when the lease was signed. The tenant sued the landlord two years later, after discovering the contamination.

    The landlord’s duty to disclose contamination to the tenant is nothing new. Since 1994, Michigan’s Natural Resources and Environmental Protection Act (NREPA) has required those who sell or lease contaminated real estate to notify the prospective purchaser or tenant, in writing, that the property is a “facility” and disclose both the nature and extent of the contamination as well as any land or resource use restrictions that apply to the property. Under NREPA, a “facility” is any property where hazardous substances are present in the environment (soil or groundwater) in concentrations above those cited in clean-up criteria established by the State for residential property, even if the property has previously been cleaned up to commercial or industrial standards.

    For example, if a gas station has been contaminated by a leaking underground storage tank, the seller of that gas station would have to tell a prospective purchaser that the property is a “facility,” that the contamination consists of gasoline, whether the gasoline spill has affected soil, surface water, or groundwater, and the extent to which the gasoline has migrated or spread. In addition, a seller who has recorded a restrictive covenant to prevent people from coming into contact with contaminated soil or drinking contaminated groundwater, would have to fully disclose the existence of those restrictions to the purchaser.

    NREPA doesn’t specify a remedy for the failure to disclose. That’s why the recent case is significant: it specifies that the remedy for a buyer or tenant is to void the entire transaction. Obviously, the case is a warning to sellers and landlords, who should consider doing several things:

    • Determine whether the property is a “facility” under NREPA

    • Insert the appropriate disclosure into a sale agreement or lease
    • Better yet, send that disclosure by written communication before the sale agreement or lease is signed
    • Make sure the recipient acknowledges receipt of the notice

       

    Buyers and tenants will want their sellers and landlords to certify that the property is not a “facility.” That language should be inserted into the purchase agreement or lease. This case dramatically raises the stakes for a failure to disclose.