Former Property Owner Responsible For Tenant’s Hazardous Waste Discharge Despite No Actual Knowledge

In United Artists Theatre Circuit, Inc. v. Regional Water Quality Control Board (Ca. Crt. App., 1st Dist., Div. 5, Nov. 27, 2019), Case No. A152988, the Court of Appeals ruled that a landlord of a strip mall could be held responsible for the costs of hazardous waste clean up caused by a dry cleaning tenant without the landlord’s knowledge or consent if the landlord “knew or should have known that a lessee’s activity created a reasonable possibility of a discharge of wastes into waters of the state that could create or threat to create a condition of pollution or nuisance.” The Court further held the cleanup claim was not discharged by bankruptcy.

In the 1970’s, UATC owned The Moonlight Shopping Center - a strip mall along a busy thoroughfare separated from nearby Saratoga Creek by only an alleyway-style road. For 35 years, the Moonlight Shopping Center housed a dry-cleaning tenant which used a hazardous chemical, PCE, in their operations. When PCE was found in the groundwater at the center, the Regional Water Quality Control Board issued a cleanup order naming both the center’s current owner and UATC - who had sold the property years before.

UATC challenged the order in Santa Clara County Court arguing that the Board had not shown evidence that the PCE contamination occurred during the time UATC owned the property, that UATC knew about the discharges of PCE, or that UATC had an obligation to prevent a discharge. UATC further pointed out that any claim the Board might have had would have been discharged through UATC’s Chapter 11 proceeding from over 16 years ago. The trial court agreed and reversed the Board’s cleanup order as to UATC and the Board appealed.

The Court of Appeals reversed, holding that “if an owner, who necessarily profits from the activities of its lessees” who operate a business that “creates a reasonable possibility of discharge” and the landlord “knows or should know of such a risk and chooses to lease to an operator of that type of business, the owner may properly be held responsible for any discharges that occur.”

The record regarding UATC’s knowledge of the risks of a discharge from dry-cleaning (let alone the particular risk of PCE in this case) appears scant, at best. The Court of Appeals noted that a 1953 California Supreme Court case made reference to hazards from dry cleaning operations, that the California Fire Marshal permit for the dry cleaner (which the record does not indicate UATC had knowledge of) required the tenant to prevent the discharge of unspecified vapors, that the legislature set statutory limits in 1965 for PCE vapor discharge, and subsequent government actions showed that the risks of PCE became increasingly known through the 1980’s. This, the Court of Appeals reasoned, was sufficient to show that UATC should have known of the risk of a hazardous waste discharge from the tenant such as to hold UATC liable for the costs of cleanup.

As to the effect of UATC’s bankruptcy, the Regional Board argued the cleanup liability had not arose to a “claim” which could have been discharged where the Regional Board had not contemplated the claim’s existence until well after the bankruptcy filing. In short, as pointed out by UATC, the Regional Board’s position was that "a [landlord that operates movies theaters] should have known that dry cleaners always cause contamination, while simultaneously arguing that a state environmental agency could not have known the very same thing” despite the Regional Board admitting it “knew by the 1980’s of the risk of PCE discharges into groundwater.” The Court of Appeal rejected this point seemingly solely because the Regional Board was not informed of the PCE contamination until after the bankruptcy, arguing that it would be inappropriate to require the Regional Board “to stay abreast of any bankruptcy filings by any entity or individual that owns or owned any site where any number of other businesses carry a risk of waste discharges operate or operated.”

With the exceptionally high costs of hazardous waste cleanup clearly lingering for decades, it is more important than ever that landlords protect themselves by knowing their tenants well, and knowing better counsel.

Hall Griffin LLP’s Real Estate team is trusted by some of the nation’s largest and smallest developers and land owners alike to deliver appropriately aggressive, creative, effective, and efficient results in California, Arizona, Texas and Washington.


Jered T. Ede, Hall Griffin, Partner

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