Get a Phase I before you buy that commercial real estate

I am still amazed that many commercial developers and their attorneys do not understand that the federal law regarding superfund liability has undergone drastic changes. When looking at buying commercial development property I frequently hear them say that they would prefer not to do any testing because if they do, they might find something. This attitude is based on an outdated notion of environmental law and is seriously flawed.

Everyone seems to know that the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA and also known as “Superfund”) (Pub. L. 96-510), 42 U.S.C. 9601 et seq., as amended, establishes broad federal authority to assess, remove, and remediate historically contaminated sites or sites for which there is no solvent responsible party. They also know that under Section 107, CERCLA generally imposes strict liability on past and current owners for clean-up costs. 42 U.S.C. §9607(a)(1)-(4). Strict liability means that liability is imposed in the absence of fault, knowledge, intent, negligence, breach of contract, or any other direct or indirect wrongdoing by the person held responsible. Not only are potentially responsible parties held strictly liable for the damages resulting from the contamination, any one potentially responsible party can be held jointly and severally liable for the entire cost of the clean-up. Note that the purpose of this article is not to get into the detailed exceptions, sister statutes, or defenses. This liability scheme meant that for many years property developers and their lawyers were inclined to avoid any properties that could possibly hide contaminates. Although an innocent landowner defense was added to CERCLA when it was amended in 1986, that defense was only available to property owners with no knowledge of the presence of hazardous substances when they bought the land. Also, the EPA could always argue that even if the owner did not know of the contamination, ignorance was not an excuse if commercially reasonable efforts could have uncovered the contamination. These factors led to the inadvertent creation of barren urban landscapes, called “brownfields,” where no lender or investor would dare to get involved because of the possibility of federal liability. The desire for reform created the need for major amendments to the Superfund law. On January 11, 2002, the Small Business Liability Relief and Brownfields Revitalization Act was signed into law. Title II of that Act amends 107 of CERCLA (42 U.S.C. 9607) by providing immunity from liability for three classes of landowners who could qualify for liability limitations: (1) bona fide prospective purchasers, (2) contiguous property owners, and (3) innocent landowners. In order to qualify, these landowners needed to demonstrate that they had taken all appropriate inquiry regarding the environmental condition of the real estate prior to a purchase.

This article does not address the specific requirements for properties to qualify for the All Appropriate Inquiry Rule, but it can generally be stated that the rule does not apply to properties that are already the subject of many EPA removal or remediation actions. The EPA was charged under the law to establish by rule the “generally accepted good commercial and customary standards and practices” that had to be followed by a party seeking immunity. Those rules went into effect on November 1, 2006. After November 1, 2006, buyers and seller of real estate must comply with the requirements of the Environmental Protection Agency’s “All Appropriate Inquiry Rule,” or follow the standards set forth in the ASTM E1527-05 Phase I Environmental Site Assessment Process, to satisfy the statutory requirements for conducting all appropriate inquiries. All appropriate inquiries must be conducted in compliance with either of these standards to obtain protection from potential liability under CERCLA as an innocent landowner, a contiguous property owner, or a bona fide prospective purchaser. The rule differs from the old Phase I standard in such areas as the definition of environmental professional, certain interviewing requirements, and the documentation of data gaps that may affect an environmental professional’s ability to render an opinion regarding the environmental conditions of a property.

Under the new rules a landowner can now buy real estate that has been contaminated by a past use on that same property and get protection from CERCLA liability. This is important because the purpose of a Phase I investigation has changed from a “Buy or Not Buy” decision-making to “I can buy the real estate even if it is contaminated because I can buy it clear of major CERCLA liability.” Therefore, a commercial property owner may actually end up knowingly buying contaminated property.

Before you purchase real estate for development purposes, please strongly consider getting a Phase I report that complies with the ASTM 1527-05 standard. Also, if your consultant suggests further action consult an environmental attorney and the consultant as to the duties that may ensue following the receipt of additional information. A heavily contaminated site may indeed require that a new owner take steps to avoid additional contamination. Those steps could indeed prove to be too burdensome for the intended use of the property.

About James Pray

Attorney with BrownWinick Law Firm in Des Moines, Iowa.
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