Important to exercise due diligence on environmental matters
Michael j quinn
People who buy commercial property understand the importance of conducting a Phase I Environmental Site Assessment (ESA) before closure. While a properly performed SEA in the fence binder can provide substantial benefits if the new owner of the property were ever to invoke a landowner liability defense, as a recent case clearly indicates, a bad driving can result in millions of dollars in liability. Below is an example of what can happen if ESA is not performed correctly.
As a backdrop, the Superfund law imposes strict liability (strict liability) on the owner of contaminated property. A defense may be available if a landowner can demonstrate that a contaminated property was acquired after proper investigation and with no knowledge of the contamination (such as the Defense of a Potential Good Faith Buyer (BFPP), of an adjoining owner. (CPO) or an innocent landowner (ILO)). These defenses require the owner to establish that at the time of acquisition “all appropriate inquiries” into the property and past uses of the property have been undertaken, so that the new owner has taken title to the property. without knowledge or reason to know, pre-existing contamination.
ASTM International has developed standard practices for conducting SEA specifically designed to meet these requirements. Today, ASTM-compliant SEAs are routinely performed for transactions involving real estate.
A potential buyer (or lawyer) should have a working understanding of the ASTM requirements and definitions in order to preserve the benefits of landowner liability defenses. The ESA includes many defined terms that are essential for the buyer and the board. Section 3.3 of the standard defines over 25 acronyms – CER, CREC, HREC, PRP, NPL, etc. which all need to be understood.
Sometimes overlooked in the rush to shutdown is who the ESA identifies as its authorized “user”. “User” is defined as “a potential buyer of real estate, a potential tenant of real estate, a real estate owner, a lender or a property manager”. To be eligible for a landowner liability defense, it is essential that the party asserting the defense be identified in the SEA as a “user”.
A potential problem arises when a buyer / borrower relies on their lender to commission the ESA. Although paid by the buyer as closing costs, it is possible that only the lender is identified as the “user”. When this happens, the borrower / owner has no contractual relationship with the environmental consultant and will not be able to assert the defense of an innocent landowner and is therefore, at least potentially, strictly responsible for all costs. remediation as the current owner of the contaminated property. . In other words, the defenses will be completely unavailable.
This is the situation the borrower / homeowner faced in a federal case in New York. In this case, the lending bank contracted with a consultant to perform an SEA on the borrower’s property, but only the lender was the defined “user”. The bank’s customer was neither a party to the contract nor identified as a “user”.
After the closure, the owner claimed that an environmental condition that should have been documented in the SEA had not been met. The court describes radioactive contamination dating back to World War II that was not addressed in the ESA. As noted, the contamination could amount to $ 30 million in remediation liability. The buyer brought an action against the consultant, but his claim was denied because he was not a party to the contract.
Furthermore, failure to be properly identified as an authorized “user” means that the borrower / owner loses the ability to successfully assert a landowner defense against liability under the Superfund on the basis of “l ‘proper investigation’, therefore facing potential strict liability in government enforcement. action. Thus, the borrower could be liable for $ 30 million in study and remediation costs resulting from distant historical activities in which he had no involvement. The correct way to handle the transaction would have been for the borrower to obtain a letter of confidence from the consultant explicitly identifying the borrower as a “user” of the SEA. Letters of trust are usually given in this situation, but they should be requested.
The lesson is never to treat ESA like a commodity and just another checkbox on the closing list. This is not just a technical enterprise outsourced to environmental consultants, but a potentially very important legal document that may not become evident for years to come.
Michael Quinn is Managing Director of McLane Middleton’s Portsmouth office and a member of the firm’s administrative law and litigation departments. He can be reached at (603) 334-6925 or [email protected]