Potential releases or threatened releases of hazardous substances can subject a landowner to significant environmental liability, so it is crucial to identify potential hazards before investing in commercial real estate. Under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), there is broad discretion as to who can be a responsible party of environmental hazards. Fortunately for real estate investors, the Environmental Protection Agency has identified steps that can be taken to minimize environmental liability.

This blog analyzes defenses against environmental liability under the Brownfields Amendments to CERCLA and discusses steps you can take to minimize your environmental liability.

What is environmental liability?

CERCLA is a body of environmental laws that imposes environmental liability on commercial entities or individuals purchasing property for non-residential use. This means that if there are any hazardous contaminants on the land, the landowner is responsible for the resulting environmental impact. This liability forces landowners to remove contaminants or take other remedial steps to reduce or reverse the contaminants’ impact. These remedial steps can be lengthy and expensive, so it is important for real estate investors to identify existing or potential contaminants as early as possible to minimize their liability.

When am I subject to environmental liability?

Commercial landowners are subject to environmental liability. In 2020, the Supreme Court of the United States issued a ruling that demonstrated the breath of potentially responsible parties in environmental actions. Namely, buyers, sellers, leasers, and financiers of property transactions are subject to liability. This broad distribution of liability demonstrates the importance of performing due diligence through the course of a real estate transaction.

What are defenses against environmental liability?

In 2002, the Brownfields Amendments were added to CERCLA to allow defenses for (1) innocent landowners, (2) contiguous property owners who can prove they did not know of the contamination prior to acquiring the property, and (3) bona fide prospective purchasers who purchase or lease property with knowledge of contamination but meet the regulatory requirements.

On face value, the first two defenses seem ideal to landowners and purchasers, but the Supreme Court decision mentioned above demonstrated that these two defenses are extremely difficult to establish. This decision shows that courts will be very skeptical of whether the landowner knew or should have known of a contamination on their property. This hardline touches on the due diligence requirements that are outlined in CERCLA.

Under CERCLA, there are laws that require purchasers of land to take steps to inspect the property for existing or potential contaminants. If a landowner performs the steps required by CERCLA one-hundred and eighty (180) days prior to acquiring the property, it is unlikely that the contaminants will go undetected. The two main components of these initial steps are collecting information from the property owner and conducting an Environmental Site Assessment. As part of the information collection component, potential purchasers are required by law to conduct all appropriate inquiries outlined by CERCLA.

An extensive list of these inquiries is embedded in the dense body of CERCLA. A key notion of the inquiries is the performance-based standard. This obligates purchases to inquire into past uses and ownerships of the property to identify potential releases or threatened releases of hazardous substances and inspect the property accordingly.

This being said, the best defense to environmental liability is the third option provided by the Brownfields Amendments. As a prospective buyer, if you take the steps to gain knowledge of existing or potential contaminants a property may have, then you benefit by getting deeper insights into your potential investment (which could be used as a bargaining tool) and you begin to develop a defense against environmental liability for existing or future environmental hazards on the property.

How can environmental liability be minimized?

The best way for a land purchaser to avoid environmental liability under the Brownfields Amendments is to collect information from the property owner and conduct an Environmental Site Assessment. An understanding of CERCLA is vital for knowing the information to collect. Additionally, a certified professional is required to perform a sufficient Environmental Site Assessment.

The initial Environmental Site Assessment, known as a Phase I ESA, uses the collected information to seek existing or potential contaminants on the relevant property. The assessor will generate a report that is crucial for potential land purchasers. Namely, the report will identify potential environmental hazards and potentially recommend a Phase II ESA.

If there is any reason to believe a property has contaminants, a Phase II ESA should be performed. This second ESA will shield the potential purchaser from liability as a bona fide prospective purchaser if they take the remedial measures outlined in the ESA report. Alternatively, a Phase II ESA can confirm the lack of contaminants in the event that a Phase I report overstated the potential of contamination.

Conclusion:

The Comprehensive Environmental Response, Compensation, and Liability Act outlines a thorough and specific procedure for buyers, sellers, leasers, and financiers of property transactions. Commercial real estate investors need to be aware of CERCLA’s requirements to help minimize their environmental liability. If you are considering investing in real estate, fill out an interest form today to see if GLO can help you.

GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation, and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.