Leases – it’s all in the Wording

The importance of clear and explicit wording in your contractual arrangements has been confirmed by the recent quashing by the Supreme Court of the Court of Appeal’s judgment against Mobil Oil – Mobil Oil New Zealand Limited v Development Auckland Limited [2016] NZSC 89.

The Court of Appeal – disagreeing with the High Court – found that Mobil had to remediate the land that it had leased from the Auckland Harbour Board (and its successors) and that the natural and ordinary meaning of the words in the lease did mean that the remediation included the sub-soils which had been contaminated over many years prior by its use as a bulk storage of oil.

The lease agreements all contained a repair clause dealing with Mobil’s obligations to keep the land “in good order and clean and tidy” during the term and to deliver it in that condition on termination. The leases permitted the storage, handling and blending of petroleum products but prohibited any noisy or offensive trade or business and required Mobil to comply with all relevant regulatory requirements.

The question for the Court was whether delivery of the land at termination meant remediation of the contamination.

Factually, the key findings were that Mobil’s predecessors had occupied the site since the 1920’s and that the parties knew the land was contaminated from the 1970’s. The relevant leases were entered into between the parties in 1985. At the time the tenancies came to an end in 2011, remediation work costing between $10-50 million (depending on who was doing the work) was required.

Development Auckland said Mobil was to foot the bill under the terms of the lease. Mobil said that the terms of the lease did not require it to foot the bill.

The High Court found in Mobil’s favour and found that having regard to the land’s contamination in the 70’s one would have expected any remediation from contamination to be explicitly addressed in the lease rather than left for inference from the general wording of the clean and tidy clauses.

The Court of Appeal disagreed. It reviewed, at some length, the law of waste, and took the view that permission to use the site for oil storage did not amount to authorisation of incidental contamination. It was of the view that there had been a breach of the covenant not to injure the lessor. The Court saw the clean and tidy obligation as naturally extending to the subsurface and it saw Mobil as coming to the negotiating table in 1985 with an actual or potential liability for its prior contamination. The Court traversed all the correspondence between the parties leading up to the execution of the 1985 leases in order to get to that point and the majority found that all the contamination – not just the contamination caused post-1985 should be remediated by Mobil.

Mobil appealed and were successful. Amongst other things the Supreme Court considered it important that there were multiple causes of the contamination; that contamination was an incident of the permitted use of bulk oil storage; and that there was no claim by Auckland Harbour Board for Mobil to remediate the land when it was surrendered to it in 1985; as relevant. The Supreme Court favoured the High Court’s assessment of the contractual terms and emphasised that the word “keep” in keep tidy, is future looking and not a word which is apt to signify an obligation to effect transformative change (such as extensive and expensive remediation). The Supreme Court rejected that the clean and tidy clause meant that Mobil would be liable for any contamination and also rejected the suggestion that a term be implied into the contract which would require Mobil to prevent contamination – such a term was not necessary to give business efficacy and did not “go without saying”.

In short, be very clear from the outset what each party’s obligations and rights are to be – particularly having regard to the nature of the use of the premises – and ensure they are clearly spelt out in the agreement. In this case, after years of legal flip-flops, Auckland now has to wear the costs of site remediation which would arguably take away any profit to it after all the years of leasing it plus pay costs to Mobil – the ratepayers will not be happy!

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