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Failure to Disclose Activity and Use Limitation (AUL) Voids Lease
January 1, 2008
A tenant was permitted to void a lease for a use permitted under an Activity and Use Limitation (AUL) because the lease did not either reference the AUL by recording information or include it in its entirety. The case,Cummings Properties, LLC v. Massachusetts General Physicians Organization, was filed by the landlord after the tenant repudiated the lease. The tenant refused to occupy a commercial building that had been built out to their specifications on the grounds that it was not aware an AUL pursuant to Massachusetts General Laws Chapter 21E (“Chapter 21E”) had been recorded for the property in question. The Superior Court judge found that the lease was void as against public policy.
Chapter 21E and its implementing regulations, the Massachusetts Contingency Plan (MCP), govern the remediation of contaminated property in the Commonwealth. AUL’s were created by a 1993 re-write of the MCP that allowed the use of risk-based standards for cleanup of a property based on its anticipated use. As an example, the MCP permits a brownfields site that will be re-used for commercial purposes to retain a level of residual contamination that would not be permitted for residential use. In order to utilize these benefits, the MCP requires that the landowner record at the Registry of Deeds an AUL, which is intended to put the world on notice that residual contamination has been permitted to remain on the site, and that certain uses are permitted and other uses are prohibited at that location.
A further regulatory change in 1997 added to language to the MCP requiring “notice to holders of any interest(s) in a property or a portion thereof (including without limitation, owners, lessees, tenants, mortgagees, and holders of easement rights)” of the presence of oil and hazardous materials and the existence of an AUL.
The requirement of notice to the users of property covered by an AUL is supported by the content requirements of an AUL, also contained in the MCP. Namely, the regulations require that any recorded AUL contain:
an agreement to reference this Notice in all future deeds, easements, mortgages, leases, licenses, occupancy agreements, or any other instruments which convey an interest in and/or a right to use the property subject to the Activity and Use Limitation.
This requirement is also contained on a form developed by the Department of Environmental Protection that must be submitted with any AUL.
The Cummings Court determined that the ‘public policy’ behind the regulatory notice requirements was to ensure that a prospective tenant was aware of the restrictions contained in an AUL and could use that information in determining whether or not to lease the property. Given this articulation of the regulation’s purpose, the Court quickly determined that purpose could not be achieved if the lease were enforced.
Moreover, the Court declined to attribute knowledge of the AUL to the tenant. In Cummings, counsel for landlord and tenant initially negotiated a lease for a different property. That lease contained a reference to the existence of an AUL on the property that was involved in the lawsuit that was stricken at the request of tenant’s counsel. After the original building was leased to third parties, the parties used the previously negotiated lease (absent the AUL reference) to negotiate the lease that was the subject of the lawsuit. The Court reasoned that at the time the AUL reference was stricken it was a matter “irrelevant” to the negotiation of the lease at issue and counsel had no obligation to report it to their client. Moreover, the Court stated that counsel was free to discard that information as unimportant and could be expected not to recall it a few weeks later when negotiations commenced on the new building.
Although the Cumming’s Court voided a lease to property that had previously been rented by the Department of Environmental Protection itself, based solely on the failure to reference the AUL in the lease, it allowed one of the landlord’s claims to proceed. Specifically, the landlord sought to recover build-out costs from the tenant. The landlord incurred almost $600,000 in direct costs for the tenant build-out which continued during a two month period between the tenant’s initial knowledge of the AUL and their repudiation of the lease. The court preserved the landlord’s claim that the tenant should have promptly informed it of the intention not to occupy. The extent of the costs that can be attributed to the tenant’s unwarranted delay remains to be seen.
In light of this decision, a prudent landlord should prioritize its procedures that all leases involving property subject to an AUL either include a reference to the AUL and its recording information or include the entire AUL as part of the lease.