Chapter 10 Understanding and Avoiding Environmental Pitfalls

A. General Considerations

This chapter is intended to provide a general overview of environmental issues that can affect real estate and the potential liability of real estate purchasers. The chapter provides a general outline of the primary state and federal laws governing environmental issues that most often arise in commercial real estate transactions and includes several documents that should be valuable for reference in identifying an environmental question. However, these materials are only an introduction and should not be used as a substitute for appropriate advice from qualified "environmental professionals."²

While most commercial real estate transactions provide for some level of due diligence to identify the environmental risks and liabilities associated with the transaction, the actual scope of environmental due diligence will depend upon the nature of the transaction, the type of real estate involved, and the historical and current uses of the real estate. An initial comprehensive Environmental Site Assessment (Phase I ESA) prior to any commercial property acquisition may add to the cost of a purchaser's due diligence, but in the long run, could reduce the risk of costly and unexpected environmental liabilities. Purchasers of real estate environmentally impacted by prior uses should be aware that mere ownership of such property may impose liability on them. The following is a brief summary of the relevant state and federal law and certain strategies that may be available to manage the risks associated with environmental conditions affecting the property to be acquired.

B. CERCLA/Superfund Liability

1. Liability

Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. §§ 9601-9675, also known as Superfund ("CERCLA"), in response to Love Canal and other abandoned hazardous waste sites adversely impacting the environment. CERCLA gives the EPA broad authority to compel "potentially responsible parties," as defined by the Act ("PRPs"), to clean up or pay for the cleanup of the property when there has been a release or a threatened release of a hazardous substance on the property. CERCLA also allows PRPs who conduct cleanup of contaminated property or reimburse the EPA for the cost of cleanup to pursue contribution from other PRPs. Under section 107 of CERCLA, liability extends to four categories of PRPs:

a. the owner and operator of a vessel or a facility;

b. any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of;

c. any person who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances owned or possessed by such person, by any other party or entity, at any facility or incineration vessel owned or operated by another party or entity and containing such hazardous substances; and

d. any person who accepts or accepted any hazardous substances for transport to disposal or treatment facilities, incineration vessels or sites selected by such person, from which there is a release, or a threatened release which causes the incurrence of response costs, of a hazardous substance.

42 U.S.C. § 9607(a) (Section 107). CERCLA liability applies retroactively to pre-1980 releases even if such releases were legal at the time.³ Under the first category, the mere purchase of real property on which a release of hazardous substances has previously occurred subjects the purchaser and its tenant to liability as a PRP. Section 107 provides for the following limited defenses to CERCLA liability if a party is a PRP under one of the four categories:

a. an act of God;

b. an act of war;

c. an act or omission of a third party other than an employee or agent of the defendant, or than one whose act or omission occurs in connection with a contractual relationship, existing directly or indirectly, with the defendant (except where the sole contractual arrangement arises from a published tariff and acceptance for carriage by a common carrier by rail), if the defendant establishes by a preponderance of the evidence that (a) he exercised due care with respect to the hazardous substance concerned, taking into consideration the characteristics of such hazardous substance, in light of all relevant facts and circumstances, and (b) he took precautions against foreseeable acts or omissions of any such third party and the consequences that could foreseeably result from such acts or omissions; or

d. any combination of the foregoing paragraphs.

42 U.S.C. § 9607(b). Generally, a purchaser of contaminated property cannot assert the "third party" defense because that party has a contractual relationship with the seller.

2. Innocent Landowner Defense

In 1996, Congress amended CERCLA to provide an "innocent purchaser" defense if the party acquired the contaminated property by inheritance or bequest or the party "did not know and had no reason to know" about the contamination prior to the acquisition of the property. 42 U.S.C. § 9601(35). To qualify for the innocent landowner defense, (1) the acts or omissions causing the contamination cannot be those of a third party with whom the defendant has a contractual relationship, which is defined as: land contracts, deeds, easements, leases, or other instruments transferring title or possession, unless the real property on which the facility concerned is located was acquired by the defendant after the disposal or placement of the hazardous substance on, in, or at the facility, and (2) one or more of the circumstances described below is also established by the defendant by a preponderance of the evidence:

a. at the time the defendant acquired the property the defendant did not know and had no reason to know that any hazardous substance which is the subject of the release or threatened release was disposed of on, in, or at the property.

(1) To establish that the defendant had no reason to know, the defendant must have undertaken, at the time of acquisition, "all appropriate inquiries" . . . into the previous ownership and uses of the property in accordance with generally accepted good commercial and customary standards and practices in an effort to minimize liability.

b. the defendant is a government entity that acquired the property by escheat, or through any other involuntary transfer or acquisition, or through the exercise of eminent domain authority by purchase or condemnation.

c. the defendant acquired the property by inheritance or bequest.

42 U.S.C. § 9601(35). The defendant must also show that he/she has exercised due care with respect to any existing contamination and provided full cooperation and access to persons conducting response actions to address the contamination on the property. Id. When a prospective purchaser seeking to avoid CERCLA liability under the first category discovers a prior release or threatened release while conducting all appropriate inquiries, the innocent landowner defense is not available. Prior to the amendment of CERCLA in 2002, as discussed below, the only means for a prospective purchaser who identified a prior release or threated release to avoid CERCLA liability for that release or threatened release was to enter into a prospective purchaser agreement ("PPA") with EPA prior to acquisition of the property.

3. Small Business Liability Relief and Brownfields Revitalization Act

On January 11, 2002, President Bush signed the Small Business Liability Relief and Brownfields Revitalization Act ("the Brownfields Amendments") amending CERCLA. In general, the Brownfields Amendments provide funds to assess and clean up brownfields sites; clarify CERCLA liability provisions related to innocent purchasers of contaminated properties; and provide funding to enhance State and Tribal cleanup programs. Subtitle B of the Brownfields Amendments revises some of the provisions of 42 U.S.C. § 9601(35) (Section 101(35)) and limits Superfund liability under Section 107 for bona fide prospective purchasers and contiguous property owners, in addition to clarifying the requirements necessary to establish the innocent landowner defense under CERCLA. The Brownfields Amendments clarified the requirement that parties purchasing potentially contaminated property undertake "all appropriate inquiries" (AAI) into prior ownership and use of property prior to purchasing the property to qualify for protection from CERCLA liability.⁴

a. All Appropriate Inquiries ("AAI") and Categories of Protection

AAI is the process of evaluating a property's environmental conditions and assessing potential liability for any contamination. The AAI rule is a performance-based standard. The objective of the standard is to conduct inquiries into past uses and ownerships of a property and visually inspect the property to identify conditions indicative of releases and threatened releases of hazardous substances on, at, in, or to the subject property.⁵

Under CERCLA, persons may be held strictly liable for cleaning up hazardous substances at properties that they either currently own or operate, or owned or operated in the past. Strict liability under CERCLA means that liability for environmental contamination may be assigned based solely on property ownership.⁶

The Brownfields Amendments amended CERCLA to provide liability protections for certain landowners and potential property owners who did not cause or contribute to contamination at the property and can demonstrate compliance with specific provisions outlined in the statute, including conducting AAI into present and past uses of the project. CERCLA provides protection from liability for certain landowners and prospective purchasers of real property, including:

1. Innocent landowners are persons who can demonstrate,