Failure to Include Deed Notice Invalidates Lease for Brownfield Site
I came across an interesting case in Massachusetts in which a judge declared a lease for a brownfield site invalid because the landlord failed to include the proper notice of the relevant land use restrictions required by that state's Brownfields Act. I haven't seen a similar case in Pennsylvania, but I don't see why the same logic couldn't be applied to an Act 2 site in which the seller failed to provide proper notice of the required deed restriction. Here's a summary of the case.
The case is Cummings Properties, LLC v. Massachusetts General Physicians Organization, and the decision was issued by the Massachusetts Superior Court on October 2, 2007. A copy can be found on Westlaw at 2007 WL 3261299. In this case, the owner of a property at 10-P Commerce Way in Woburn, Massachusetts executed a Notice of Activity and Use Limitation (referred to as an AUL) on the property in 1996, as required under Massachusetts Chapter 21E. The AUL was prepared and recorded in lieu of removing certain hazardous substances found in the soil and the groundwater. The AUL recorded in 1996 expressly permitted the property to be used for "office, industrial, commercial, retail, hotel/lodging, warehouse, healthcare, and research and development." In 2002, the Massachusetts DEP audited the property under the State's Brownfields Act and required that the owner amend the AUL to expressly prohibit "child care, day care and residential purposes."
Several years later, in June of 2005, the Massachusetts General Physicians Organization (MGPO) contacted the property owner with a request for proposal to lease space to house its LADDERS program, which provides medical and therapeutic care for children with autism and related disorders. The property owner owned several properties in the area under consideration by MGPO. A lease was prepared for one of those properties, 10 Gill Street in Woburn, Massachusetts. The lease included a rider which contained the AUL deed restrictions that were applicable to 10-P Commerce Way. The lawyer for MGPO deleted the AUL language from the lease, because it didn't apply to the property at 10 Gill Street. There was a delay in negotiations between the property owner and MGPO, and the property owner decided to lease the property to another party. The property owner then suggested that MGPO could lease a different property that it owned, 10-P Commerce Way, on the same economic terms as previously provided for 10 Gill Street, and MGPO agreed to that. A new lease was presented, and for some unknown reason, most likely mistake, the AUL applicable to 10-P Commerce Way, was not included in the lease presented to MGPO. The parties went on to execute the lease without the required AUL.
There was a build-out required to get the property ready for MGPO. Sometime after the lease was signed and before MGPO was scheduled to take occupancy, the property owner realized that the reference to the AUL (which had been deleted from the draft lease for 10 Gill Street), should have been reinserted in the lease for 10-P Commerce Way. The attorney for the property owner then notified the attorney for MGPO of the oversight. While MGPO was considering the implications of the AUL, the owner continued the build-out of the property. The MGPO retained an environmental consulting firm, which provided a list of work that would need to be performed by the property owner to satisfy MGPO, including placing a geotextile barrier fabric and three feet of clean fill on all existing landscaped areas of the property. The property owner rejected that demand and offered reassurances that the building had been in existence for 20 years with no problems, that DEP itself had been a prior tenant, and it made a wager that the soil at the site was "cleaner than that in front of Massachusetts General Hospital itself." At that point, MGPO decided the 10-P Commerce Way site was a no-go. The property owner notified MGPO that it had spent almost $600,000 building out the site to MGPO's specifications and that it expected to be reimbursed. MGPO refused to make payment, saying that it never would have signed the lease had it known of the AUL. At that point, the property owner sued and MGPO countered by saying the lease should be declared void for the owner's failure to incorporate the AUL as required by Massachusetts law.
The court agreed with MGPO and held that the lease was void and against public policy because it failed to include the Notice of Activity and Use Limitation as required by Massachusetts DEP and the Massachusetts Brownfields Act. First, it found that Massachusetts had established a comprehensive regulatory program for remediating contaminated properties. Second, it found that an integral part of that regulatory program was the requirement that "deeds, leases and other instruments of transfer" incorporate the required AUL explicitly or by reference. Third, it concluded that the lease signed by the parties did not reference the AUL, so Massachusetts law was, in fact, violated. Notwithstanding the fact that MGPO's intended use of the property (as a health care facility) would have been permitted under the AUL, the court found that the failure to include the AUL deprived MGPO of notice which would have been relevant to any potential sub-leasing or assigning of the lease. MGPO also argued that its patients might be alarmed knowing the property was a "less-than-fully remediated brownfields site." The court concluded that whether such concerns were well or ill-founded, the breadth of the notice requirement in the law underscored the point that MGPO had "a legal right to be informed of the AUL and to make its own decisions", and that the property owner bore the responsibility for providing that information.
Having declared the lease void, the court did not rule on the issue of whether MGPO should have to share in the costs of the build-out (because at some point it did learn of the AUL and allowed the owner to continue the build out ). It said that issue presented a question of fact beyond the bounds of the summary judgment motion that the court was asked to rule upon.
Could a similar scenario happen in Pennsylvania? Act 2 specifically requires that deed notices be provided for all brownfield sites that do not meet either the background or residential statewide health standard. In addition, agreements entered into with PADEP under Act 2, such as SIA Agreements and Buyer-Seller Agreements, contain provisions requiring specific deed notices restricting future uses of the property. In the event that such a notice was not provided, could a lessee argue that the failure to include the notice in a lease voids the relevant lease agreement? Probably not. Unlike in Massachusetts, there is no language in Act 2 or, for that matter in HSCA, indicating that the notice is for the benefit of lessees. In both instances, the statutes talk about a "deed notice". HSCA puts the responsibility for making the deed notice on a "grantor" as part of the "conveyance of property." With that said, what about a situation in which the seller of a property failed to include the deed notice required by HSCA and Act 2? Well, there you might find yourself in a situation similar to the Massachusetts Superior Court looking at the facts in the MGPO case. You'd have a comprehensive state regulatory program that governs the remediation of contaminated properties. You'd also have state law requiring the inclusion of a deed notice for the conveyance of property that doesn't meet the background or residential statewide health standard under Act 2. It would be possible, therefore, for a court in Pennsylvania to reach a similar conclusion (declaring a purchase agreement void) given the right factual circumstances.
The MGPO case is a very interesting case for brownfield practitioners. The lesson of the MGPO case is that when a state brownfield law requires that notice be provided of relevant land use restrictions, failure to provide that notice could trigger litigation and potentially undo a transaction. It's best to always understand the relevant notice requirements and be mindful of them.
