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Landlord Disclose contamination to New tenant or your lease may be void
The latest shocker from the Michigan Court of Appeals: If a landlord fails to disclose to a new tenant the existence of environmental contamination on the premises exceeding levels permitted by law, then the lease is void.
In 1031 Lapeer LLC v. Rice, published by the Michigan Court of Appeals Oct. 7, 2010, the court considered a suit by a tenant to rescind a commercial lease of a gas station site. The landlord had failed to disclose that the site was a "facility" as defined under Part 201 of the Natural Resources Environmental Protection Act — meaning that environmental contamination was present at the site in excess of levels permitted by law. Part 201 requires that a person who transfers an "interest" in a facility give a written notice to the transferee that the property is a facility and explains the nature of the contamination that makes it a facility.
The court held that the lease was a transfer of an interest in the facility. Thus, the landlord should have notified the tenant of the environmental contamination before entering into the lease. Though Part 201 contains no such remedy, the court decided as a matter of public policy that the only fair thing to do was void the lease entirely.
It's always a good idea to disclose environmental problems with premises, no matter how minor. Failure to do so might result in an unhappy tenant suing for fraud. Now, this decision stands as a warning to all landlords that if you know your property is a "facility," then you must give a new tenant the written notice required by Part 201. Otherwise, the tenant may use your failure to notify as an excuse to back out of the lease. If you are the tenant and your landlord failed to give you a Part 201 notice, then you may use that failure to rescind the lease.
Unfortunately, this decision raises as many questions as it answers. The court said the lease was "void," not "voidable." In other words, the lease was invalid the moment it was signed, without the need for landlord or tenant to cite the failure to provide the notice of facility status as grounds to rescind the lease.
If you are purchasing a piece of rental property, you no doubt will check to see if the property qualifies as a "facility." Following this decision, you should also insist the seller prove that he or she properly gave a notice of facility status to the tenant. If you are buying a tenant, or taking an assignment of a tenant's lease, you will want to make sure any required notice of facility status was given. Otherwise, the lease may be void, and you will get nothing.
As unfair as it sounds, a landlord might possibly use his or her own failure to provide the Part 201 notice as an excuse to cancel a lease with a tenant who is perfectly happy with the premises.
This decision makes clear the transfer of an "interest" in real estate includes a sale or a lease. What about a mortgage? If the borrower fails to give a Part 201 notice to its lender, is the mortgage void? Can either the borrower or the lender rescind the mortgage (and loan)? How about an easement? Absent delivery of a Part 201 notice, is an easement void?
Watch out! These questions have yet to be answered by the courts.
Bill Hall is a partner at Warner Norcross & Judd LLP with nearly 30 years of experience as a commercial real estate attorney. He can be reached at firstname.lastname@example.org