Making commercial property buyers aware that THEY need to conduct appropriate environmental due diligence can reduce your probability of being party to a complicated legal battle
By Brenda Bray
In recent decades, a worldwide increase in concern over environmental protection has given rise to a broad field of environmental law that encompasses issues such as air quality, water quality, waste management, and the handling of toxic substances. As a result, companies large and small may face environmental challenges arising from their business practices that can, in turn, impact property transactions.
ORRA members recently gained insight into environmental issues surrounding toxic substance controls and waste management in commercial real estate from Rebecca York, director and faculty member with the Dr. P. Phillips Real Estate Institute at UCF. York provided an overview of:
Relevant federal and state laws;
Who bears liability for contaminated sites; and
What investors can do through the transaction.
In 1980, the federal government passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA,) known also as Superfund. The passage of CERCLA served to identify:
Hazardous materials sites;
Authorized short term removal; and
Authorized long term remedial action
For responsible parties, “safe harbor” defenses from liability are narrow and fall within strict guidelines for:
Innocent landowner defense;
Landowner liability protections; and
Contiguous property owners
Therefore, it is important that buyers conduct an environmental due diligence to prevent a sound investment potential from becoming a costly, high-risk game. The purchase of property with hazardous materials contamination may result in the buyer assuming liability for cleanup that can be far greater than the property value or expected return on investment.
York participated in a brief Q&A session with Orlando REALTOR® magazine to sum up important points from her presentation.
IS CERCLA THE ONLY ENVIRONMENTAL LAW OF CONCERN IN PROPERTY INVESTING?
While CERCLA is probably the best known federal regulation regarding environmental damage, buyers and sellers should also be aware of the Resource Conservation and Recovery Act (RCRA). CERCLA powers and responsibilities overlap with RCRA, but differ in important ways. CERCLA is focused on the management and remediation of abandoned, non-operating sites that are contaminated with hazardous substances. RCRA is an approach to manage solid and hazardous waste at facilities that are currently in use and regulates the transport of hazardous waste versus abandoned, non-operational hazardous waste sites.
Florida has additional statutes that are relevant to potentially environmentally damaged sites. Florida has enacted “Little CERCLA” (§ 403.727) and the Pollution Discharge Prevention and Control Act (§376.012.) “Little CERCLA” defines the violations; defenses, penalties and remedies of any waste generator, transporter, facility owner or operator, any person who by contract/agreement or otherwise arranges for transport or disposal of hazardous substances. The Pollution Discharge Prevention and Control Act (§376.012) applies to any responsible party who permits or suffers a prohibited discharge or other polluting condition.
IF AN ENVIRONMENTAL ISSUE(S) IS DISCOVERED AS A RESULT OF CONDUCTING DUE DILIGENCE, MUST IT BE REPORTED?
In most cases, statutory, regulatory, and common law requirements impose reporting obligations only on the owner, operator, or person in charge or control of the facility or property being assessed. However, in some circumstances, however, reporting obligations may be legally or voluntarily imposed upon a broader group, including the Phase II (Environmental) Assessor. Buyers should discuss these obligations with their environmental assessment company to ensure that the buyer understands what and when information may be disclosed.
WHAT ARE ENVIRONMENTAL RED FLAGS FOR WHICH AGENTS AND BUYERS SHOULD WATCH?
• Underground storage tanks;
• Lead-based products; and
• Radon and vapor intrusion.
Add these red flags which will likely be included in new ASTM Standards:
• Former agriculture uses;
• Former golf courses;
• Former industrial uses; and
• Dry cleaners.
OR: WHAT CAN PARTIES DO THROUGH THE TRANSACTION? ARE THERE WAYS TO MITIGATE THE RISK FROM POTENTIAL OR KNOWN ENVIRONMENTAL DAMAGE?
• Assign liability through contractual provisions;
• Negotiate an escrow for cleanup costs;
• Adjust sales price to reflect cleanup costs; and
• Consider additional “specialty” insurance such as:
pollution and/or remediation liability; and
contaminated property development or others specialty insurances.
WHAT SHOULD BUYERS SEEK REGARDING DISCLOSURES, WARRANTIES, AND REPRESENTATIONS?
• Disclosures in the representations and warranties;
• Breach of warranty or representation that the property contains no existing environmental conditions can provide a mechanism by which the buyer can rescind the contract; and
• That no contract clause should interfere with a legal requirement to reports.
The overriding issue for commercial agents is one of professionalism. An unsophisticated buyer could sue an agent for failure to make the buyer aware of conducting due diligence on environmental issues. While there is generally presumption that commercial buyers are knowledgeable about their investments, commercial agents will want to minimize their risk of defending a costly suit and potential reputational damage. Making buyers aware that they need to conduct appropriate environmental due diligence can increase the buyer’s confidence in you and reduce your probability of being party to a complicated legal battle.
Brenda Bray, Charles Rutenberg Realty, is a member of the Orlando Regional Commercial Council. She can be reached at firstname.lastname@example.org.
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