Minimizing Environmental Risk In Real Estate Transactions
 
April 1, 2000
 

Caveat emptor. Although the harsh effect of this common law mantra is typically handled through complex real estate conveyance contracts, a purchaser of commercial real estate should remain wary of potential environmental pitfalls. Contracts are designed to allocate risk. In dealing with environmental laws such as CERCLA (commonly known as "Superfund") and its state counterparts, however, the governmental agencies enforcing such laws will look first and ultimately to the property owner. Under the liability scheme of CERCLA, owners of contaminated properties are deemed liable for the cleanup costs, regardless of fault. A property owner then bears the burden of proving nonliability under the statute.

Prospective purchasers, lenders and fiduciaries can protect against such liability by requiring a careful assessment of the environmental condition of commercial or industrial property before the purchase is consummated. While petroleum contamination is not governed by CERCLA, it falls within the realm of most state Superfund statutes as well as other federal laws and regulations, and is a common pollutant on industrial properties.

The ASTM (American Society for Testing and Materials) standards are well recognized guidelines for evaluating the environmental condition of commercial real estate. These requirements are designed primarily to satisfy the requirements of CERCLA in establishing an "innocent landowner" defense. In order to avail oneself of the defense, one must conduct "all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice." In its standards, ASTM attempts to define what constitutes "all appropriate inquiry" by setting forth requirements for a Phase I environmental site assessment, commonly called a "Phase I" or "ESA."

A Phase I has four basic components: (1) a review of public and private records relating to the property; (2) a site visit; (3) interviews with the property’s current owners and operators; and (4) compilation of this information into a written report. ASTM has recently revised the standard to require the environmental professional conducting the Phase I to state his opinion in the report as to why known or suspected contamination is not of concern to the purchaser. This beefed-up documentation will provide an additional level of protection to the purchaser in showing that the purchaser conducted due diligence in evaluating any taints on the property. This opinion, of course, is only valuable when coming from a credible source, and ASTM can help here as well: the revised standards provide guidelines for selecting a properly qualified, trained environmental professional to conduct the ESA.

The recent modifications to the Phase I guidance are designed to get the owner/prospective purchaser/lender and the environmental professional talking about the former’s objectives for the Phase I. In conducting a Phase I, purchasers often look beyond CERCLA to protect against additional business risks associated with buying contaminated property. For example, the planned uses of the property could be thwarted by deed restrictions and other institutional controls which limit the use of the property.

Modifications to the Phase I guidance also designate issues that the purchaser is responsible to identify, such as land use restrictions on the site, which are not the consultant’s responsibility under the guidance as currently drafted. The changes further clarify how corrected environmental conditions should be described in the report (historical RECs).

An alternative process developed by ASTM to satisfy the "all appropriate inquiry" standard is called the Transaction Screen Process. This process allows for a person other than an environmental professional to evaluate the property by asking the current property owner and any other users of the property a series of questions designed to ferret out potential environmental problems. Information regarding the use and history of the property is also gathered from a site visit and review of governmental records. While it is possible and tempting for a purchaser to conduct the transaction screen review him- or herself, and thus save the costs of hiring a consultant to do so, it may be deemed self-serving and somewhat less credible by a court reviewing a party’s due diligence.

In the past, lenders, trustees and other fiduciaries have been held liable for cleanup costs under CERCLA. Finally, in 1996, the Asset Conservation, Lender Liability and Deposit Insurance Act was passed into law. This Act was designed to protect lenders and fiduciaries from incurring liability under CERCLA and the federally regulated underground storage tank program. The protection may be lost, however, when a lender/fiduciary becomes involved with decision-making in regard to the facility’s environmental compliance.

Problems unveiled during a Phase I need not necessarily prevent the transfer of property, but should be the subject of negotiation between the parties in terms of who bears the risks and costs. Considering the high costs of correcting environmental conditions, not to mention potential limitations on developing property, a properly conducted Phase I is well worth the effort.

Ms. Banner is an attorney in our West Palm Beach office. Her practice focuses on the areas of environmental and land use law. Ms. Banner may be reached at 561-650-8304 or nbanner@hklaw.com.