Legal Briefs

Hidden Hazards

Gas stations may present underground environmental problems.

Rising gas prices and a highly competitive market have closed more than 3,000 of the nation’s 164,292 gas stations in the last year, the biggest drop in five years, according to National Petroleum News. In June, ExxonMobil announced it was selling all of its 2,235 U.S. gas stations, adding even more inventory.

Despite the current market, no one is forecasting the corner filling station’s demise. In fact, gas station sites are often highly sought-after locations in busy retail areas. However, owning and leasing gas stations requires as much attention to what’s underground as what is above: Storage tanks present environmental issues not common to other retail businesses.

Since 1998, when new federal rules regarding standards for underground storage tanks became effective, both landlords and their gasoline tenants have learned more about identifying, quantifying, and apportioning the risks associated with leaking tanks. During the last decade, regulations governing petroleum storage have become increasingly complex. To keep up with the ongoing changes, parties on both sides of retail leases should keep several factors in mind to ensure their properties are up to the highest standards.

Buyers Take Note

Most retail property environmental site assessments are conducted at the time of a transaction. If a property includes a gasoline retail tenant, due diligence should focus on the following environmental questions:

  • Were gas leaks encountered at the site when the tenant upgraded to meet the 1998 standards?
  • Has the tenant reported any subsequent leaks to regulators?
  • If there have been petroleum leaks, has the tenant addressed them as required by law?
  • Has the tenant operated its underground tanks in accordance with legal requirements?

If gas has leaked from tanks, buyers should ask for and review all subsequent required reports and government communications. Buyers also should examine the previous six months’ leak detection test results along with equipment- integrity test results.

Getting Clean

If there has been a gas leak, buyers should determine if the tenant has properly addressed the release. This question often is answered by the receipt of a letter from the responsible government authority — typically the state environmental agency — indicating that no further remedial action is necessary. No further action or closure letters are issued when the responsible party has sufficiently delineated the nature and extent of the release.

Buyers should be aware of the variety of ways to mitigate the effects of petroleum releases to ensure the property is no longer at risk. The most logical choice — source removal — includes removing the leaking tank and soil saturated with petroleum. However, since natural factors can degrade some petroleum constituents, another approach — monitored natural attenuation — may be more acceptable. This method works best when petroleum leaks are not attenuating naturally at an acceptable rate or are not affecting ground or surface water. Injecting substances that speed natural processes is another way of accelerating degradation.

Activity and Use Limitations

The imposition of an activity and use limitation on the gasoline retail location often facilitates receipt of no further action letters. In this context, AULs are legal or physical restrictions on a facility’s use to eliminate or minimize potential exposure to the residual petroleum. AULs come in a variety of forms including the following:

  • proprietary controls such as restrictive covenants, easements, and deed restrictions, including an agreement not to use the property for residential purposes. The effectiveness, however, can be hampered because the agreements generally are contractual in nature and only can be enforced by parties to the contract.
  • state and local government controls such as zoning regulations that prohibit certain land uses or the installation of groundwater extraction wells. However, it should be noted that zoning and land restrictions are subject to change through political processes.
  • informational devices, including notice in the land records, which, in some jurisdictions, can be filed without the property owner’s consent.

To overcome these limitations, 19 states including Delaware, Maryland, Oklahoma, and Washington, have adopted new legal infrastructures for creating, modifying, terminating, and enforcing AULs.

Modifying Lease Terms

Not all standard commercial lease terms are ideal for gasoline retail tenants and often are misapplied. Landlords should expect broad environmental indemnities not only for the tenant’s breach of its covenants but also for any environmental impairment of the property.

The standard provision that the tenant will remove fixtures unless the landlord wants to keep them at the end of the lease term sometimes can be a source of confusion. This provision only works for underground tanks if the landlord notifies the tenant to remove the tank well in advance of the lease’s end. If the tenant leaves the tank in the ground too close to the lease’s end and then encounters petroleum leaks upon removal, the tenant must negotiate post-lease-term access to complete necessary cleanup operations.

While most commercial leases require that tenants return properties to their original condition, this can be difficult to apply to gasoline retail properties. Some courts have found cleanup guidance for interpreting such lease terms in federal cleanup provisions, but there can be difficulty in establishing the condition of the leased property when first occupied, especially if a significant number of years have passed. However, requiring the tenant to return the property in the pre-tenancy condition may fail to account for the cleanup levels that government authorities would deem acceptable for the property.

Maintaining Performance

Typical commercial leases require tenants to provide landlords with notice of leaks of gas or other hazardous substances. Fulfilling such clauses may be difficult if the lease is negotiated with the headquarters of the gasoline retailer, while day-to-day operations are carried out locally. Therefore, the affected facility may be unaware of its lease obligation, or there may be several organizational layers between the operating location, its headquarters, and the landlord.

To avoid this, landlords can require the tenant to annually certify its compliance with the lease covenants. This will work if the lease is specific enough as to what the tenant is certifying.

Landlords also can send an annual environmental document request to the gasoline retail tenant. In this request, landlords should ask for a copy of the tenant’s current tank registration, proof of financial responsibility to address releases as required by state regulation, six months of monthly leak detection results, the results of any equipment integrity tests results during the past 12 months, and any communications from government authorities pertaining to the facility’s tank systems.

By focusing attention on the nuts and bolts of these issues, landlords and gasoline retail tenants demonstrate the unified commitment to keeping their properties up to the expected standards.

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