Opinion
I
This сase centers on a toxic substance clause in a lease of land to an aerospace manufacturer. The former lessee, defendant Tolo Incorporated, manufactured fusion reactors, particle accelerator parts and radar antennas, among other things. Tolo occupied the property, which is just off the Costa Mesa Freeway, from the late 1960’s to the mid-1990’s. It began leasing the land from plaintiff SDC/Pullman Partners in 1985 after a sale-leaseback deal. The lease was renewed in July 1989. It is that lease 1 which contains the clause in question.
Quite remarkably—for an aerospace manufacturer—the land in question is not the subject of any cleanup actions on the part of any government entities, local, state or federal. Unlike some of Tolo’s neighbors,
2
the property has suffered no groundwater pollution; levels of toxic and hazardous substances
Thе case comes to us after the trial judge directed a verdict for defendant Tolo. The plaintiff and drafter of the toxic substance clause, SDC/Pullman Partners, appeals from the ensuing judgment, arguing that the toxic substance clause in the lease obligated Tolo to clean up all toxic and hazardous substances at the property, and therefore the presence of detectable amounts of various chemicals, particularly in the oakite processing area of the facility, precluded the directed verdict. According to SDC, it makes no difference that the amounts of toxic or hazardous substances have not warranted governmental legal action; Tolo must still spend whatever is necessary to clean up even the trace amounts that do exist, and is in breach of its lease if it hasn’t.
We disagree. The toxic substance clause here must be examined in light of the circumstances under which it was made and in light of principles articulated by our Supreme Court in the analogous cases of
Brown
v.
Green
(1994)
II
As this case is fundamentally a dispute over a clause in a lease, we begin our analysis with the text itself, which, as the Hadian court said, is “presumptively controlling.” (Hadian v. Schwartz, supra, 8 Cal.4th at pp. 844-845.) The toxic substance clause itself is a block of text arranged into one densely worded paragraph of over four hundred words. Rather than set forth the entire text all at once, we will exegete the language sentence by sentence.
The first sentence opens with the words, “except as provided below,” and then sets out a blanket prohibition on the presence of any toxic material on
The next sentence—one of the two mainly relied on by SDC here—states that if “any such wastes, substances or materials” are “found” on or under the property resulting from the tenant’s use, the tenant will spend all
The ninth sentence in the clause deals with the tenant’s duties in the event that the tenant receives notice of violation of any environmental laws, which duties include immediately curing the “deficiency or complained of matter” and giving the landlord proof of that curing. 13 Sentence No. 10 affords the landlord the “right but not the duty” to step in and cure—but at the tenant’s expense—any default or failure of performance by the tenant under the clause. 14
The penultimate sentence provides for the indemnification of the landlord by the tenant by reason of the tenant’s failure to perform its obligations
In the 1994
Brown
and
Hadian
cases, our Supreme Court was confronted with the construction of certain lease clauses operationally similar to the toxic substance clause at issue here. Both cases involved “compliance with laws” clauses which regulated the tenant’s use of the property, and which, ostensibly, could be read to require that the tenant bear the cost of expensive capital improvements mandated by a governmental agency. In
Brown
the question involved asbestos cleanup; in
Hadian
it was earthquake retrofitting. In reaching different results for each case (in
Brown,
the tenant had to pay, in
Hadian
it was the landlord) the high court emphasized that not only must there be “a close consideration ... of the terms of the lease but of the circumstances surrounding its making.”
(Brown
v.
Green, supra,
We need only note here that emphasis placed by the Brown and Hadian courts on the circumstances of the lease could hardly have been unexpected. Since as early as 1872 California statutory law has admonished judges that the circumstances under which a contract is made is necessary to its proper construction. (See Code Civ. Proc., § 1860; Civ. Code, § 1647.)
In the present case, we affirm the trial court’s judgment because the terms and circumstances of the toxic substance clause, confirmed by the
Ill
If one thing is clear from the toxic substance clause here, particularly in light of the circumstances under which the lease was made, it is that the рarties certainly intended that Tolo would be allowed to continue its normal, high-tech manufacturing operations, and would be allowed to use toxic materials incidental to those operations. Taken as a whole, the entire toxic substance clause here is devoted to conditioning and regulating Tolo’s use of “toxic” materials, not blanketly prohibiting their use. Most of the sentences in the clause revolve around the need for precautions to be taken and Tolo’s responsibilities if precautions are not. The only real ironclad prohibition is of toxic materials in underground storage tanks.
If there is any doubt from the text, the circumstances of the lease are dispositive. At the time the lease was made Tolo was engaged, as it had been for about 20 years, in the manufacture of parts for the aerospace industry. There is no way that such parts can be made without using toxic materials; radar antennas and such things, if we may be forgiven for making the point facetiously, are not made of tofu and sprouts. The idea therefore, which permeates SDC’s brief, that in 1989 the parties were starting from ground zero and that Tolo was going to have to obtain written permission every time any toxic materials came onto Tolo’s plant after 1989, even if such materials were part of its normal manufacturing processes, is untenable. SDC reads the first sentence in a way which would have frustrated the purpose of the lease, forcing Tolo to go out of business altogether.
SDC places great stress on the need for written permission, and asks what purpose could those words have if not to first establish a blanket prohibition on the use of toxic substances, subject to the written permission requirement. SDC argues that the lease could hardly have contemplated that (a) Tolo would have blanket permission to use toxic materials but (b) would have to obtain permission if it wanted to use them in such a way as to violate environmental law. One would be left with the proposition that the lease would have contemplated the use of toxics in violation of law if written permission had first been obtained.
That leaves sentence number seven, with its statement that if “any” toxic wastes, substances or materials are “found” on or under the property resulting from the tenant’s use, the tеnant will spend all necessary sums to “cause the same to be cleaned up.” If read in literal isolation, that is, apart from the balance of the clause and the circumstances under which the lease was made, and if one interprets the word “any” in an extreme and absolutist way, one can indeed conclude that Tolo was required to spend untold sums of money to eliminate every last vestige of any toxic substance “found” anywhere on the property.
But contract terms cannot be read in isolation. (Civ. Code, § 1641.) They must be read as a consistent whole, so that some effect will be given to all clauses, consistent with the general intent and purpose of the instrument. (Civ. Code, § 1652.) The words of a contract may be explained by reference to the circumstances under which the contract was made. (Civ. Code, § 1647.) In fact, literal language of a contract does not control if it leads to absurdity (Civ. Code, § 1638) or if it is wholly inconsistent with the main intention of the parties (Civ. Code, § 1653). And if these rules are not enough, the language of a contract should be “interpreted most strongly” against the party who caused the uncertainty to exist (Civ. Code, § 1654), in this case SDC, as it is undisputed its in-house counsel wrote the document. In light of these rules, there are three reasons we reject the absolutist reading of “any” in the seventh sentence proffered by SDC.
First, such a reading is inconsistent with textual context. The balance of the toxic substance clause—important because the very first words of the oрening line indicate that some use of toxics
is
being provided for— contradicts SDC’s proffered interpretation. As we have already indicated, most of the clause is predicated on the idea that Tolo
would
use toxic materials, but such use would have to be regulated to ensure that SDC incurred no legal liability under applicable environmental law because of
Second, an absolutist reading of the seventh sentence is unreasonable under the circumstances of
this
lease. This is not a residential lease. Tolo’s use of the property was alrеady ongoing when SDC bought the property and became a landlord with a tenant already in place. SDC knew that Tolo was an aerospace manufacturer and could not conduct even the cleanest operations without some use of toxic substances.
17
Obviously, in such circumstances, Tolo had to be cut a little slack as far as the containment of those substances was concerned. “ ‘[S]afe,’ ” as the United States Supreme Court noted in
Industrial Union Dept.
v.
American Petrol. Inst.
(1980)
Third, an absolutist reading of the seventh sentence is unreasonable from the standpoint of actual hazard or toxicity. The list of hazardous substancеs found in appendix A to section 302.4 of title 40 of the Code of Federal Regulations contains a number of common materials which are not “toxic” in de minimis or infinitesimal concentrations. The list contains zinc and chromium, for example, which one can obtain at health food or vitamin stores, and cadmium, which is contained in stainless steel cutlery. Nickel and silver are also listed, even though no one would ever think that collections of silver coins were “hazardous.” Another example is acetone. Acetone is formed in the human liver when fats are metabolically broken down (see Stryer, Biochemistry (Freeman and Company, 3d ed. 1988) pp. 478-479 [discussing formation of ketone bodies in the liver from acetyl coenzyme if fat breakdown predominates]), as, for example, in exercise. And, as this very record shows, another listed hazardous substance, tetrachloroethene, naturally occurs in chocolate.
It would be ludicrous to hold that, say, a buried bag of silver coins constituted a “hazardous substance." Obviously, a rule of reason must be used in explicating what is hazardous. (See
Industrial Union Dept.
v.
American Petrol. Inst., supra,
IV
In addition to basic contract interpretation rules, our conclusion is confirmed by reference to the six judicially developed factors actually used in the context of compliance with laws clauses as explicated in Brown and Hadian. Those six factors are: (1) the relationship of the cost of curative action to the rent reserved; (2) the term for which the lease was made; (3) the relationship of the benefit to the lessee to that of the reversioner; (4) whether the curative action is structural or nonstructural in nature; (5) the degree to which the lessee’s enjoyment of the premises will be interfered with while the curative action is being undertaken; and (6) the likelihood that the parties contemplated the application of the particular law or order involved. (Brown v. Green, supra, 8 Cal.4th at pp. 830-833; Hadian v. Schwartz, supra, 8 Cal.4th at pp. 847-849.)
Preliminarily, of course, we should note that the six factors were not developed to explicate toxic substance clauses, and do not readily lend themselves to rote, mechanical application to such clauses. Even so, the factors are instructive because their very existence indicates a judicial policy to take a common sense, rather than absolutist, approach to contractual risk allocation between landlords and tenants.
Thus, the first factor (cost of curative action as a proportion of total rent received) reveals that the law disfavors the allocation of curative burdens in a grossly disproportional wаy. Yet the elimination of pollution is subject to the law of diminishing returns. The cost of eliminating every last molecule otherwise toxic in larger quantities is necessarily prohibitive. (Cf.
Industrial Union Dept.
v.
America Petrol Inst., supra,
The Supreme Court illustrated the importance of disproportionality by self-consciously contrasting the results it reached in
Brown
and
Hadian.
Thus in
Brown,
the absolute cost of the curative action was high (about
The next four factors used in Brown and Hadian convey roughly the same idea: The shorter the term of the lease (2), the less likely it is that the parties cоntemplated the allocation of a relatively expensive burden on the tenant. The same idea courses through the relation between the benefit to the tenant and benefit to the landlord (3), the structural or nonstructural nature of the curative action (4), and degree of interference with the tenant’s enjoyment of the premises (5). The harsher the burden on the tenant in relation to what it receives from the lease, the less likely the parties intended that the curative action be visited on the tenant.
The sixth Brown and Hadian factor—the contemplation of the specific application of the particular law—is especially relevant. If there is a drumbeat theme in this toxic substances clause here, it is reference to existing еnvironmental laws and assurance of compliance with those laws. The enumerated environmental statutes were very much in the mind of the parties in entering into the lease agreement. Again, as we have noted above, the strong implication from the continual reference to compliance with applicable environmental statutes is that the actual application of such laws would serve as the trigger for the tenant’s cleanup duties.
V
We must now confront the problem of the energumenical lengths to which the definition of “hazardous substance” under the federal environmental law known as CERCLA
20
has been taken. It is true that as a matter of liability under CERCLA, some federal courts have held there is no “threshold concentrаtion requirement.”
(U.S.
v.
Alcan Aluminum Corp.
(3d Cir.
We are merely a state intermediate appellate court charged, in this appeal, with interpreting terms in a lease of real property under state contract law, and so the issue of how CERCLA should be interpreted is not before us. If federal courts have insisted on reading a federal law without any rеference to reason or common sense, that is their business. However, our conclusion is not necessarily inconsistent with those federal decisions. There is a significant difference between liability in a CERCLA action and a private cleanup duty pursuant to a lease.
U.S.
v.
Alcan Aluminum Corp., supra,
The Third Circuit held that the trial court was correct on the definition of hazardous substance. (See
U.S.
v.
Alcan Aluminum Corp., supra,
964 F.2d at pp. 261-264.) But the court was not totally oblivious to the obvious implications of its position. The company had pointed out that “virtually
The
reason
the
Alcan Aluminum
court then rejected the point about the absurdity of defining hazardous substances without regard to quantity was the possible
cumulative effect
of small amounts of waste to a larger whole by many contributors. Essentially, the court, perhaps not realizing it, borrowed the rationale of
Wickard
v.
Filburn
(1942)
We need not comment on the degree to which the
Wickard
v.
Filburn
rationale actually made sense in the context
of the
facts in
Alcan Aluminum,
because that rationale has no application beyond, as the
Alcan Aluminum
court itself put it, the “multi-generator context.” (
VI
We now come, if we may be forgiven the pun, to the real nitty gritty of the case. SDC is clearly afraid of any potential liability under CERCLA, and argues that the lease clause in the present case should be read in an absolute
SDC’s fear is nоt wholly unreasonable. If a landowner wants to read something really scary, he or she might want to consider this passage from
Templeton Coal Co., Inc.
v.
Shalala
(S.D.Ind. 1995)
But while SDC’s fears are not wholly unfounded, they are answered by the difference between actual CERCLA liability and speculative CERCLA liability. Using an absolutist definition of hazardous substance, there probably isn’t a рerson in the United States—at least over age 10—who could not in theory be tagged for some sort of cleanup cost somewhere. Anyone who has ever painted anything, who ever put on or took off fingernail polish, who ever used an insecticide, drove a car, changed its oil or had oil changed, smoked a cigarette or changed the toner in a photocopy machine, or who has so much as thrown away a small battery into the trash, could be theoretically held liable for expensive cleanup costs. Yet to base an interpretation of a contract on such theoretical liability is self-evidently absurd. It would reify an unreasonable fear into an actuality.
An analogous area of law is the fеderal doctrine of standing which denies litigants the ability to challenge as facially unconstitutional certain statutes when the application of those statutes
to them
is only speculative. One of the best known examples of that doctrine may be found in the famous Supreme Court case of
Bowers
v.
Hardwick
(1986)
Most law students are familiar with the
Bowers
decision, which upheld the legality of Georgia’s criminal antisodomy statute as against a challenge brought by a man who was, as the Supreme Court described him, “a practicing homosexual.”
(Bowers
v.
Hardwick, supra,
What was dispositive for the appellate court in
Hardwick
was the lack of even an allegation that the married couple “faced a serious risk of prosecution.” They had filed nothing to show they faced any “realistic threat” of prosecution. Therefore they had no standing under
Younger
v.
Harris
(1971)
In light of the circumstances under which the lease in the case before us was mаde and the clear contemplation of the parties that the property would continue to be used for aerospace manufacturing, we hold that only real CERCLA liability—or at least a “realistic threat” of it—can reasonably trigger a tenant’s cleanup duty. Anything else merely perpetuates phantasms.
Of course, in the event that a government agency were to require SDC to spend sums to clean up the property, the indemnity clause would still be available to it to recover those sums from Tolo. Our decision here would certainly not be res judicata on the operation of the indemnity clause in the context of real CERCLA liability. Indeed, nothing in this opinion is meant to minimize SDC’s right to recover costs from Tolo in such an eventuality.
VII
The trial judge’s reading of the toxic substance clause was thus correct, and the directed verdict based on that reading was therefore correct as well. Since SDC could not show a breach of the lease, the balance of its causes of action which are predicated on the idea that Tolo polluted the property must fall as well.
The lease was an integrated agreement and thus parol evidence was not available to add to or otherwise vary its terms.
(Masterson
v.
Sine
(1968)
Nor was there any need for parol evidence to explicate an ambiguity in the agreement. As shown above, the text of the agreement was not reasonably
It was also not error to exclude the testimony of SDC’s environmental expert, Anthony F. Severini, to the effect that the three lost buyers were reasonable in not proceeding to buy the property. What we have already said about the difference between speculative and real CERCLA liability addresses that concern. Yes, the buyers may have acted reasonably in being scared away from buying the property. No, that fact was not relevant.
Our determination on the point obviates any need to consider Tolo’s cross-aрpeal, which is based on the idea that Tolo’s president, defendant James Lockshaw, was entitled to a judgment of nonsuit after SDC’s opening statement.
The judgment is affirmed.
Sonenshine, J., and Rylaarsdam, J., concurred.
A petition for a rehearing was denied January 13, 1998.
Notes
Actually, there are three identical lease for three contiguous parcels of property.
For example, ACL Technologies, Inc., which had a leaky underground storage tank problem, is down the road. (See
ACL Technologies, Inc.
v.
Northbrook Property & Casualty Ins. Co.
(1993)
Though someone who ate the dirt at even the cleanest aerospace plant 350 days a year would probably get sick of something other than cancer long before 30 years passed.
Here is the text:
“56. Toxic or Hazardous Substances. Except as provided below, Lessee shall not use, store or permit toxic waste or other toxic or hazardous substancеs or materials on the Premises during the term of this Lease, without prior written notice to Lessor.”
“Lessor” and “lessee” would be a little more exact than “landlord” and “tenant,” but not as readily understandable. As with “insurer” and “insured,” when there are only a few letters which differentiate key terms, it is generally better to use easily differentiated synonyms, e.g., “insurance company” and “policyholder.” Our use of “tenant” is generic.
Here is the text:
“In the event, Lessee desires to use or store toxic or hazardous substances on the Premises (including but not limited to petroleum based fuels), Lessee shall comply with all applicable laws, and shall provide evidence of such compliance reasonably acceptable to Lessor. At the written request of Lessor, Lessеe shall provide a detailed explanation (in writing) of the types of chemicals/substances which Lessee uses, the location and manner of storage of same, and the manner of disposition of such chemicals/substances or by-products or remains thereof.”
Here is the text:
“At the written request of Lessor, Lessee shall provide a detailed explanation (in writing) of the types of chemicals/substances which Lessee uses, the location and manner of storage of same, and the manner of disposition of such chemicals/substances or by-products or remains thereof.”
Here is the text:
“Lessee shall deliver to Lessor at Lessor’s written request, copies of all studies, reports and other information submitted by Lessee to any governmental entity or agency regulating the use of such substances and materials.”
Here is the text:
“In no event shall Lessee store any chemicals/substances in underground tanks.” Tolo did have an underground tank on the premises prior to the 1989 lease, but it is undisputed that the tank was not used after the lease. The tank has since been dug up and found not to have leaked.
Here is the text:
“The use of such chemicals/substances shall be approved, if necessary, by the local fire department and the exterior of the Premises shall clearly set forth a label as to the chemicals/ substances located within the Premises.”
Here is the text:
“In the event that any such wastes, substances or materials are hereafter found on, under or about the Premises and such are a result of Lessee’s occupancy and/or use of the demised premises, whether during the term of this Lease or any prior occupancy except as expressly allowed under this Lease, or by Lessor, then Lessee shall take all necessary and appropriate actions and shall spend all necessary sums to cause the same to be cleaned up and immediately removed from the Premises, and Lessor shall in no event be liable or responsible for any costs or expenses incurred in so doing.”
Here is the text:
“Lessee shall at all times observe and satisfy the requirements of, and maintain the Premises in compliance with, all federal, state and local environmental protection, occupational, health and safety and similar laws, ordinances, restrictions, licenses and regulations, including but not limited to, the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), Safe Drinking Water Act (42 U.S.C. Section 3000(f) [sic] et seq.), Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), Clean Air Act (42 U.S.C. Section 7401 et seq.), Comprehensive Environmental Response of Compensation and Liability Act [sic] (42 U.S.C. Section 9601 et seq.), California Health and Safety Code (Section 25100 et seq., Section 39000 et seq.), California Water Code (Section 13000 et seq.).”
Here is the text:
“Should Lessee at any time receive any notice of violation of any laws, including those aforementioned, or be given a citation with respect thereto, Lessee shall (i) immediately notify Lessor of such violation or citation, (ii) provide Lessor with a copy of same, (iii) immediately begin to diligently cure the deficiency and continuously pursue such cure to completion and (iv) immediately provide Lessor with proof of the curing of such deficiency or complained of matter.”
Here is the text:
“Should Lessee at any time default in or fail to perform or observe any of its obligations under this Addendum Paragraph 56, Lessor shall have the right, but not the duty, without limitation upon any of the Lessor’s rights pursuant hereto, to perform the same, and Lessee agrees to pay to Lessor on demand, all costs and expenses incurred by Lessor in connection therewith, including without limitation, attorneys’ fees, together with interest from the date of expenditure at the current market rate.”
Here is the text:
“Lessee hereby indemnifies Lessor and agrees to defend with counsel selected by Lessor and hold Lessor harmless for any loss incurred by or liability imposed on Lessor by reason of Lessee’s failure to perform or observe any of its obligations or agreements under this Addendum Paragraph 56, including but not limited to any damage, liability, fine, penalty, punitive damage, cost or expense (including without limitation all clean up and removal costs and expenses) arising from or out of any claim, action, suit or proceeding for personal injury (including sickness, disease or death), tangible or intangible property damage, compensation for lost wages, business income, profits, or other economic loss, damage to the natural resources or the environment, nuisance, pollution, contamination, leak, spill, release or other adverse effect on the environment.”
Here is the text:
“Lessor may enter the Premises at any time, without notice for the purpose of ascertaining compliance by Lessee with the requirements of this Addendum Paragraph 56.”
It is probably impossible for any office to conduct operations without some “use” of toxic materials. This court, for example, uses great amounts of toner in its photocopying machines and computer printers.
SDC’s best evidence was one sample in the open drum storage area which yielded 4,400 parts per billion of 1,1,1 trichloroethane (TCA). While 1,1,1 trichloroethane is a substance which, as we noted in
People
v.
Hale
(1994)
Here, while the parties have not addressed the respective cost of curative action in relation to the total reserved rent, the very fact that disproportionality is an important factor favors Tolo’s reading of the subject clause. And we note the irony, in that regard, that a proposal obtained by SDC proposed to do no more than clean up the soil to 15 parts per billion or less, which is a level of pollution higher than most of the soil samplings at the site anyway.
The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) (42 U.S.C. § 9601 et seq.) was passed by a lame-duck Congress in 1980. As one commentator has noted, courts routinely blame the act’s poor drafting on the haste of the act’s passage. (See Nagle, A Twentieth Amendment Parable (1997) 72 N.Y.U. L.Rev. 470, 490; for a compendium of federal decisions criticizing CERCLA’s drafting, see id. at p. 490, fn. 94.)
Elsewhere it said that the argument had “some force.” (