Legislation within the past 35 years has generated a significant amount of environmental regulations that are directly applicable to real estate development, particularly the purchase and sale of commercial property. Because environmental laws appear intimidating, and as risks are often unknown, many would-be buyers run from property that is potentially or actively contaminated, regardless of the nature of the contamination or the intended property use.
Often, buyers shrink from any sign of contamination because, generally, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), an unsuspecting buyer acquiring property containing hazardous substances may be responsible for very expensive clean-up of contamination, even if that contamination occurred many years prior to their acquiring the property and without their knowledge or involvement. CERCLA generally imposes strict liability on the current owner of contaminated property regardless of whether that owner caused or contributed to cause the contamination. The law has been applied to prevent a buyer from walking away from the property or transferring it to an unsuspecting third party. Moreover, CERCLA may impose liability on officers, directors, shareholders and employees of a business entity that owns contaminated property if they would be considered "operators" under that statute.
Even though you, as a buyer, should be concerned about contamination of property, it doesn’t necessarily mean that the property should be avoided. With sufficient investigation and appropriate contracts, you can define the scope of liability from contamination and significantly limit exposure for future clean up costs. You should consult with environmental specialists and attorneys to determine the best approach to identify and limit liability from purchasing contaminated property.
You can limit liability for future clean-up costs and third-party claims by undertaking precautionary measures, such as establishing an "innocent purchaser defense". This defense gives you incentive to undertake a due diligence inspection of the property for the determination of environmental contamination.
In determining whether you are entitled to the "innocent purchaser defense," courts will evaluate whether due diligence was undertaken at the time of acquisition of your property. The best method of establishing appropriate due diligence precautions is to obtain a "Phase I" Environmental Assessments. Congress has specifically provided that preparation of a Phase I in accordance with the American Society for Testing and Materials (ASTM) Standard E1527 is appropriate due diligence. The Phase I, typically conducted by an environmental professional, is a general overview of the prior uses of the property to identify possible contamination. If the Phase I indicates the possibility of environmental contamination, a Phase II may be beneficial as an undertaking of monitoring and testing of suspected contaminated areas. A Phase II should disclose the presence, nature and quantity of contamination. The determination of the need for clean-up or remediation can then be made. In some instances, a Phase III or clean-up phase may be economically feasible, which supports you in undertaking the risk of purchasing the property without assuming unknown liabilities.
At this time, conducting an environmental assessment certainly helps you establish the "innocent purchaser defense" in the event of later discovered environmental contamination. However, if you later learn of contamination and then transfer the property without disclosing that information, you may lose the protection of the innocent purchaser defense.
Another exception to liability came about with the passage of the "Small Business Liability Protection Act" (SBLPA), which exempts small contributors (households, small business and nonprofit generators of municipal solid waste of hazardous substances) from liability for Superfund response costs at National Priority List sites. Additionally, this law clearly establishes new exemptions from liability that may lend comfort to buyers of commercial real estate.
Under SBLPA, a Bona Fide Prospective purchaser defense is established when the owner ascertains that all disposal took place before the date of purchase, an appropriate inquiry was made and appropriate care has been taken with regard to any release. The purchaser must also agree to cooperate with any response actions, comply with rules and regulations and provide notice of the releases of hazardous substances. These exceptions may disappear if the purchaser is affiliated with any other person potentially liable. The primary difference from the "Innocent Purchaser" defense is that a Bona Fide Prospective Purchaser may buy a known contaminated site, even a federal Superfund site and avoid liabilities for clean up. The key to both defenses is an ASTM Phase I.
Keep in mind that it is not only the government that has an interest in environmental problems. If a contaminant migrates to adjoining properties, those property owners may have the right to initiate legal action against you to recover costs for damage to their property, to force you to clean up the contamination or a combination of both. Assume that the contaminant continues to migrate to a nearby river used by the public for swimming, fishing and canoeing. You are now potentially liable to the public and a citizen group may sue you for causing impairment to the river. Obviously, the cost of remediating the environmental harm will be significant. An appropriate environmental assessment likely would have chilled your desire to purchase the property, established an "innocent purchaser defense" or at least would have identified issues so that remediation cost could be taken into consideration for negotiation.
When shopping for commercial real estate, you should be aware that properties may be contaminated regardless of whether located next to an oil refinery or in the middle of a wilderness. Due diligence will allow you to enter a deal with eyes wide open and a firm grasp on the extent of their future liability for any environmental contamination. Once the presence and extent of contamination is quantified, you can then negotiate the deal and allocate responsibility for the contamination. Because liability can be limited through environmental assessments, investigations, contract negotiations and a fair measure of caution, you can, and should, consider environmentally contaminated property as an investment opportunity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.