How do you go about protecting yourself from acquiring environmental liability? The best answer is to do a Phase I Environmental Site Assessment (ESA). In the process of doing so, let’s say that you uncover something so scary that you’re ready to head for the door (such as your desired property is on an EPA Superfund Site).
The following was my experience when a real estate advisory client that was interested in acquiring a regional shopping center came to me already knowing that there was a Superfund site near the shopping center. They needed to find some options that would convince them and their client that they could safely close the deal.
The details of this Superfund site and the subject property at the time of the transaction (2003) were as follows.
From an earlier Phase I Environmental Site Assessment, it was determined that a prior EPA investigation established that the groundwater below the subject property, which was 150 feet below ground surface, was contaminated by the owners of the nearby Superfund site. However, the shopping center had never been used as a part of the Superfund site and no history of hazardous substances use at the subject property had been identified. Therefore, no contamination of the soils at the shopping center was expected – the only contamination to worry about was in groundwater from the off-site Superfund. Additionally, the EPA had published a fact sheet on the Superfund site which clarified that uncontaminated soils above the groundwater contaminant plume were not part of the Superfund site, with the exception where surface areas were needed for cleanup activities.
The Superfund’s responsible parties had been identified and were large national industrial companies. Remediation had been started. Drinking water was supplied by a site 3-1/2 miles up gradient of the property.
All this information was very positive, but what could be obtained to provide more assurance on the status of the site?
In this scenario, it important to understand a few regulations on environmental liability.
The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is also known as the “Superfund Act.” CERCLA was enacted in 1980 as a result of Love Canal and Times Beach contamination and made property owners liable for hazardous materials found on their properties, even if they purchased the property long after the contamination had occurred. (This law was the basis for creating the Environmental Assessment industry.)
Since CERCLA was enacted, several provisions have been made in the late 1990s and early 2000 to modify the strict liability that is the heart of the law.
Banks that hold mortgages on property as secured lenders are exempt from CERCLA liability, if certain criteria are met. CERCLA Section 101(20) contains a secured creditor exemption that eliminates owner/operator liability for lenders who hold ownership in a CERCLA facility primarily to protect their security interest in that facility provided that they do not “participate in the management of the facility”. “Participation in management” does not include actions such as; property inspections, requiring a response action to be taken to address contamination, providing financial advice, or renegotiating or restructuring the terms of the security interest. In addition, the secured creditor exemption provides that simply foreclosing on a property does not result in liability for a bank, provided the bank takes “reasonable steps” to divest itself of the property “at the earliest practicable, commercially reasonable time, on commercially reasonable terms.”
(Excerpts from US EPA)
Brownfields and Bona Fide Prospective Purchaser
In 2002, Congress passed the “Small Business Liability Relief and Brownfields Revitalization Act”(Brownfields Amendments). Included in the Act, was the creation of a new landowner liability protection from CERCLA for Bona Fide Prospective Purchasers (“BFPP”). Since the enactment of the Brownfields Amendments, prospective landowners could now purchase property with knowledge of contamination and obtain protection from liability, provided they meet certain pre- and post-purchase requirements.
In March of 2003, the EPA published Guidelines for Landowners to be able to be identified as Bona Fide Prospective Purchasers, contiguous property owners or innocent landowners. These were sent in a memorandum to all ten EPA regions.
To qualify as a BFPP, a person must: (1) not be potentially liable for contamination on or at a property; (2) acquire the property after January 11, 2002; (3) establish that all disposal of hazardous substances occurred before the person acquired the facility; (4) make all appropriate inquiries into previous ownership and uses of the property prior to acquiring the property; and (5) not be affiliated with a party responsible for any contamination.
In addition, after purchasing a property, to maintain BFPP status, landowners must comply with “continuing obligations” during their property ownership. These are to: (1) provide all legally required notices with respect to the discovery or release of a hazardous substance; (2) exercise appropriate care with respect to the hazardous substances by taking reasonable steps to stop, or prevent, continuing or threatened future releases and exposures, and prevent or limit human and environmental exposure to previous releases; (3) provide full cooperation, assistance, and access to persons authorized to conduct response actions or natural resource restoration; (4) comply with land use restrictions and not impede the effectiveness of institutional controls; and (5) comply with information requests and subpoenas.
(Excerpts from US EPA)
Back to the Story
I contacted the in-house attorney for the EPA region and he confirmed that the buyer would likely qualify for BFPP status provided that all the conditions were confirmed in writing. My firm provided a statement that our ESA followed “all appropriate inquiry,” as required in CERCLA. The buyer’s attorney received a confirming letter from the EPA. At our client’s request, we also provided a reliance letter to the Lender.
The process took a long time, but because I had started early on to identify the right person at the EPA, everyone was happy.
This was an easy transaction because everyone knew going in what the issue was. However, there are times where a Recognized Environmental Condition (REC) is found during the Phase I ESA process that wasn’t known before. The consultant then needs to explain the options going forward, which might include a Phase II Subsurface Investigation to confirm whether contamination is present – but that is not necessarily the default next step. In the case where the REC is identified for the first time, the client, based on these options, will decided whether or not to proceed. The Brownfields program can, under the right circumstances, provide the buyer with a BFPP qualification or some other protected position.
As an ending note: To see how a BFPP and Innocent Landowner transaction can go wrong because of owners’ mistakes, take a look at this legal case review.