Environmental Law Related to Real Estate

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The major environmental law related to real estate business is Comprehensive Environmental Response, Compensation and Liability Act (called CERCLA).  CERCLA was passed in 1980, amended later once, and supplemented by other statutes, such as the Small Business Liability Relief and Brownsfields Revitalization Act (Brown-fields Amendments), to deal with environment issues in the real estate context.

CERCLA is different from most other environmental laws in that it is not a “command and control” statute, and it is not a forward looking program.  CERCLA is a backward looking and remedial program.  Under CERCLA, Environmental Protection Agent (EPA) has four basic options for responding to contamination problems:

  1. It may investigate or clean up a site by itself and then seek reimbursement from any potentially responsible parties(PRP),
  2. It may seek to compel an PRP to conduct any necessary investigations or cleanup activities by initiating a court action,
  3. It may issue one or more PRPs a unilateral order requiring them to conduct such activities,
  4. It may negotiate a settlement with some or all of the PRPs under which they agree to undertake any necessary actions.

The basis elements of a CERCLA action are

  1. a release or substantial threat of a release;
  2. of a hazardous substance;
  3. from a facility.

The most important element is “hazardous substance.”  CERCLA has defined this term and allowed EPA to designate any substance as a hazardous substance.

Who are liable?

CERCLA §107(a) imposes liability on four classes of “persons.”  They are

  1. the present owner and operator of the site,
  2. anyone who owned or operated the site at the time when hazardous substances were disposed of there,
  3. anyone who “arranged for disposal or treatment”, and
  4. any transporters who selected the site.

Therefore, CERCLA imposes liability on both the current owner of the site and anyone who owned it during any periods of prior disposal, without regard to causation.  Because CERCLA liability is a strict liability, it is extremely important for real estate investors/prospective purchasers to conduct due diligence to detect any environmental problem in a given site/property.

In addition to imposing liability on owners, CERCLA also imposes liability on both the current operator and anyone operated the site at the time of disposal.  In many cases, these operators will be obviously lessees.

Under CERCLA, lender usually will not face direct liability, because Congress, by passing Asset Conservation, Lender Liability, and Deposit Insurance Protection Act in 1996, gave real estate lenders a break on CERCLA liability.

Not only CERCLA imposes both strict and retroactive liability, the courts have further determined that the liability is joint and several, though it does not mandate its imposition in all cases.

There are 3 narrow defenses which are allowed under CERCLA, the third-party defense, the innocent landowner defense, and the prospective purchaser exclusion.  The third-party defense applies if a party, not in contractual privity with the defendant, was the sole cause of the release.  Such party must not be an employee or an agent of the defendant.  In addition, defendant must establish that (a) he exercised care and (b) he took precautions against foreseeable acts or omissions of any such third party.  Examples of such third party action: contamination was caused by a vandal, or other “midnight dumper.”

The innocent landowner defense applies, if purchasers, before acquiring title, diligently investigate the potential existence of contamination and find none, and after having purchased the property, they act appropriately if and when they become aware of the preexisting contamination.

The million dollar question in the innocent landowner defense involves the degree of investigation that purchasers must have undertaken before they bought the property.  The defendant must show that he did not know and had no reason to know the contamination, by demonstrating that he made all appropriate inquiries into the prior ownership and uses, which were consistent with good commercial real estate practice.  In most commercial or industrial property transactions, this means investors must conduct an analysis known as “phase 1” site assessment.  If this inquiry raises any “red flags,” “phase 2” or more assessment is needed.

Prospective purchaser exclusion is very limited.  It only applies to those who acquired their interest in the relevant facility/site after the date of the Brownfields Amendments (January 11, 2002).  Additionally, it requires the owner to establish an array of elements.  If they can establish all these conditions, the relevant owner will bear no liability under CERCLA, but CERCLA still allows EPA to impose a lien on the property to cover any un-recovered costs if its cleanup increased the value of the property.

As one can see, real estate investment involves complicated issues and variety of risks, but competent attorneys can guide investors away from minefield and ensure successful investments.

Lei Jiang Law Firm provides legal service on environmental laws and its application in the real estate context.  For more detailed information, tailored analyses, and legal opinions, please contact us.

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