A Brave New World: The Converging Worlds of Environmental and Real Estate Law at Environmentally Impaired Sites
 
September 6, 2002
 
Amy L. Edwards- Washington

Lawyers around the country have frequently complained about the fact that “sludge” lawyers and “dirt” lawyers don’t do a very good job of talking to each other.  That unwillingness to understand, and respect, the other’s issues is beginning to change because of the increasing convergence of environmental and real estate law. This convergence is being driven by the Brownfields movement and the need to put contaminated properties back into productive use.  The only way that the Brownfields movement will succeed is if prospective purchasers feel that they have protection against environmental liabilities, and if the “responsible” party is allowed to use risk-based corrective action measures. 

Remediation of Brownfields sites, which is typically a cleanup level other than an “unrestricted use” level, increasingly requires the implementation of land-use restrictions (aka “institutional controls,” “activity and use limitations” or “deed restrictions”).  The critical role of institutional controls at Brownfields sites was explicitly recognized in the Federal Brownfields law, Pub. L. 107-118 (HR 2869, 107th Cong. 1st Sess.), that was signed by President Bush on January 11, 2002. 

In addition, environmental regulators have clarified in recent guidance and workshops that they need to have confidence that the assumptions about risk that have been made in the cleanup process will be embodied in legally enforceable instruments.  They also have emphasized that these instruments must be monitored and enforced as long as any residual risk remains. For the most part, regulators do not have confidence in the instruments that currently exist.  

For all of these reasons, the National Conference of Commissioners on Uniform State Laws (NCCUSL) is in the process of drafting a model environmental covenant law that ultimately could be adopted in all 50 states.  At the same time, the Environmental Protection Agency and state agencies are tightening their requirements and guidance in this area.

What Would the Uniform Environmental Covenant Act Do?

The draft Uniform Environmental Covenant Act (UECA) would eliminate many of the common law impediments that are undermining regulators’ confidence in currently existing instruments. One of the draft Act’s primary goals is to eliminate common law impediments to the implementation and enforcement of restrictive covenants, such as the requirement that there be vertical and horizontal privity; that the benefited real estate “be appurtenant”; and that the restriction “touch and concern” the land.  In addition, the common law has traditionally frowned upon negative restrictions, as well as upon covenants that impose affirmative obligations (spurious easements).  Affirmative obligations are important in the Brownfields context, where the regulatory agency might require the property owner or responsible party to inspect an asphalt cap annually or to operate a ground-water pump-and-treat system.  Finally, under the common law, most restrictive covenants automatically expire after a set period of time, usually 40 to 60 years, unless re-recorded.  The draft UECA would exempt environmental covenants adopted pursuant to the Act from the Marketable Title Act, thereby eliminating this obstacle.  To be exempted, notice of the environmental covenant must be provided by means of visible evidence (i.e., signs or monuments), maps, a land recording system or similar means. 

In addition, any environmental covenant adopted pursuant to the Act could not be extinguished by means of issuance of a tax deed, foreclosure of tax lien, adverse possession, eminent domain, lack of enforcement or similar common law doctrines. The covenants also would be perpetual, unless limited by their terms to a specific duration, or modified or terminated in accordance with the draft Act.

The draft UECA recognizes that environmental covenants would be adopted as part of an overall environmental response project conducted pursuant to federal or state environmental law (e.g., CERCLA, RCRA or a state voluntary cleanup program) under the direction and supervision of the appropriate environmental regulatory agency.  The draft UECA would encourage the environmental agency to communicate and cooperate with local governmental agencies that have authority over zoning and land use. If the environmental covenant needs to impose more stringent requirements than those imposed by local land use law, that can be accomplished under the draft Act. The decisions made pursuant to the draft UECA would not, however, otherwise displace or preempt local zoning or land use law.

How Will UECA Impact Real Estate Transactions?

In this brave new world, the rules affecting environmentally impaired properties are changing.  Environmental and real estate lawyers need to be aware of these changes and to work together to implement environmental covenants that work from both an environmental and a real estate perspective.  Some of the proposed changes of particular note include the following:

•  The holders of all property interests whose interests would be subordinated to the covenant would need to be a signatory to the environmental covenant.  Depending upon the nature of the restriction, these interest holders could include the property owner, lessees, utilities, holders of mineral interests and lenders. 

•  The regulatory agency would be authorized to require each party to a covenant to incorporate the terms of the covenant into all leases, licenses and similar agreements.

•  The regulatory agency must provide copies of the covenant to any affected local governmental agency.

•  The regulatory agency is authorized to require the local governmental agency and the holder of the covenant to notify it of any applications for building permits, proposed changes in land use, or any proposals to excavate, trench, install wells or use ground water.

•  The regulatory agency may require subordination of prior interests in the real estate, e.g., a mortgagee’s interests, so that foreclosure would not extinguish the environmental covenant.

•  The property owner may be required to conduct annual inspections and to certify that the environmental covenant is continuing to work as intended.

•  The environmental agency would be required to maintain a registry containing the complete text of all environmental covenants adopted pursuant to the Act, as well as any modifications or terminations to the Act, and any recorded notices.  This requirement is similar to, but goes beyond the obligation under the recently enacted federal Brownfields law requiring states to maintain a database of all sites that are going through the state’s voluntary cleanup program and to identify which of those sites is relying upon institutional controls as part of the cleanup decision.

•  The parties would be required to record either a notice of covenant, or the complete covenant, in the local land records in order for it to be effective.

•  The current draft of the Act would authorize citizens’ suits to enforce breaches of the covenants.

When Will the UECA Be Approved?

The NCCUSL is currently working on the third draft of the proposed Act.  This draft was presented to the full Commission on an interim basis in July of 2002.  Further drafting sessions are planned for the fall and next spring, with the goal of presenting a final draft to the full Commission for approval next summer.  The model law could then be presented to state legislatures for consideration and potential adoption in early 2004

Conclusion

Improving the public’s confidence in the reliability and enforceability of institutional controls is critical to the future success of the Brownfields movement.  The model environmental covenant that is being developed by NCCUSL is an important tool in establishing that confidence. Both environmental and real estate lawyers must look carefully at the draft legislation to maximize its effectiveness in achieving its intended goals.  

For more information, contact Amy Edwards, toll free at 888-688-8500, or via e-mail at aedwards@hklaw.com.

Amy L. Edwards is a partner in the Washington, D.C. office of Holland & Knight, and heads the firm’s Brownfields Initiative.  She chaired the ASTM Task Group that developed E 2091, Standard Guide for the Use of Activity and Use Limitations, Including Institutional and Engineering Controls, and compiled a book on Institutional Controls to be published by the ABA  in the Fall of 2002.  She is an Official Observer to the  NCCUSL UECA drafting committee.