Terms of lease
Lower court judgments
Supreme Court judgment
The Supreme Court recently reversed a Court of Appeal decision,(1) holding that Mobil Oil NZ Ltd was not responsible for remedying the contamination of land that it and its predecessors had occupied from 1925 to 2011.(2) A clause requiring Mobil to keep and deliver up the premises "in good order and clean and tidy" did not extend to a requirement for it to remediate the subsurface of the land, which had become so contaminated that it required the removal of soil to a depth of 3.5 metres at a cost of NZ$10 million.
The case involved waterfront land in central Auckland which was owned by the Harbour Board and used for the bulk storage and transportation of oil products. The land had originally been used by predecessors of Mobil, which became the tenant in the 1950s and 1960s (under two separate leases). The land had originally been reclaimed by the Harbour Board in the early 1900s. The fill used to create the land included demolition debris, gas works waste, refuse from city tips and material extracted from the harbour in the vicinity of discharge from sewage and gas works. The site was therefore contaminated to some extent from the outset. Operations on the land from 1925 onwards led to further contamination through leaking tanks and pipes and certain practices for flushing the lines. A significant spillage of aviation fuel from a neighbouring site also contributed to the contamination. By the 1970s, the land was contaminated to such an extent that it required complete remediation; however, the parties were unaware of the extent of the contamination until after 1985.
The sites had originally been leased to Australian entities in 1925 for 50 years. Through corporate amalgamations during that time, the entities became Mobil. In 1975 five-year tenancy agreements were executed. Mobil held the premises over from 1980 to 1985, when new agreements were signed. These tenancies continued until 2011, when the land was handed back to Development Auckland.
The relevant leases were those entered into in 1985. The demised land comprised of five parcels and there was a tenancy agreement for each one. The agreements were divided into two forms: for Lots 1, 4 and 5, the leases were intended to be long term; whereas the agreements for Lots 2 and 3 were intended to be short term and relinquished once new premises were available for Mobil. For the long-term set of agreements, Mobil was required to purchase the improvements which belonged to the Harbour Board at that time and remove them at the conclusion of the lease. However, the terms of the agreement contemplated that Mobil could leave the improvements at the conclusion of the lease with the Harbour Board's consent. The short term agreements did not expressly deal with the ownership of fixtures (which meant that they were retained by the Harbour Board), but permitted Mobil to remove them on termination and provided that it had to remove them on the Harbour Board's request.
All of the tenancy agreements permitted the storage and handling of petroleum, but prohibited offensive trade. Further, they expressly excluded covenants that would otherwise have been implied by Section 103 of the Property Law Act, including a term which would have required the premises to be kept and yielded up in good and tenantable repair, having regard to their condition at the start of the lease.
The leases all contained the following repair clause:
"At all times to keep the land hereby demised in good order and clean and tidy and free from rubbish weeds and growth ....and will upon the determination of this tenancy or any new tenancy yield and deliver up to the Board the said land and any improvements left thereon in such good and tenantable repair and condition and clean and tidy to the reasonable satisfaction of the Board."
The issue to be determined was whether the repair clause required Mobil to remediate the subsurface soil so that it was no longer contaminated. The parties had agreed that remediation would cost NZ$10 million. A secondary issue was whether, if remediation were not required by the express terms, a term should be implied requiring Mobil to remedy subsurface contaminants.
The High Court held that that the repair clause did not require remediation. The Court of Appeal overturned the High Court decision, holding that the repair clause extended to the subsurface. The majority held that, as Mobil had entered into the 1985 leases with a subsisting liability for the prior contamination, it was liable for full remediation of the subsurface. One judge dissented, holding that Mobil was liable for remediation of the contamination only since 1985.
The Supreme Court began its interpretation by listing the matters that it considered material to the interpretation and implied-term issues:
- the existence of multiple causes of contamination that could not be attributed to particular parties;
- the scope for the argument of whether contamination was authorised under the leases as an incident of bulk oil storage;
- Mobil's connection to its Australian predecessors;
- the insertion of a repair clause for the first time in the 1985 lease, which provided for the removal of improvements;
- the lack of any clear understanding by the parties in 1985 about what the future uses of the land might be; and
- the lack of any claim in 1985 by the Harbour Board that Mobil was required to remediate the land.
The Supreme Court considered that, although the word 'keep', which was used in the repair clause, could mean more than the mere maintenance of the status quo, it was not apt to signify an obligation to effect transformative change, which would have been required in order to remedy the contamination. The court found it compelling that, if it had been another tenant in 1985 and not Mobil, the repair clause could not be said to require subsurface remediation. This indicated that such an interpretation was heavily dependent on context, rather than on natural and ordinary meaning. The court also considered that interpreting the clause to require subsurface remediation was inconsistent with the obligation to deliver up any improvements remaining at the end of the lease in tenantable repair.
In relation to the argument that a term requiring subsurface remediation should be implied, the court held that such a term would not satisfy the requirements for implied terms, as it:
- was not necessary for business efficiency;
- was not so obvious that it went without saying; and
- went beyond, and therefore contradicted, the repair clause.
A repair clause in a lease could take on a different meaning in different contexts. The meaning of this clause in the context of the 1985 leases was clear to the Supreme Court:
- neither party had considered that the complete remediation of the subsoil would be required;
- this would have been inconsistent with:
- the word 'keep', which implies that the land was in good condition at the outset; and
- the obligation in the repair clause to keep buildings and improvements left on the land in tenantable repair (as these would have needed to have been completely removed for remediation to occur).
For further information on this topic please contact Chris Browne or Felicity Monteiro at Wilson Harle by telephone (+64 9 915 5700) or email (email@example.com or firstname.lastname@example.org). The Wilson Harle website can be accessed at www.wilsonharle.com.
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