Environmental Matters

Commercial Real Estate Toolkit

There is almost no way to avoid it; the laws and regulations at the local and national level in the United States impose liability for environmental remediation on current and prior landowners. Anyone in the chain of title can be forced to pay all of the cleanup costs. The only way to potentially avoid such liability is to fall within the “innocent landowner” safe harbor of applicable environmental laws and regulations by meeting certain standards at the time of purchasing the property and to meet continuing obligations while owning the property. An “innocent landowner” cannot be held liable under these laws for past contamination existing at the time of purchase and can only be held liable for new contamination occurring after the purchase. The innocent landowner defense applies to purchasers who acquire property without knowledge of contamination and who have no reason to know about the contamination after making the appropriate inquiry.

Generally, to benefit from the innocent landowner defense, the purchaser must obtain a Phase I Environmental Site Assessment meeting current requirements certified to the purchaser prior to acquiring the property. It is not sufficient to receive and review a Phase I obtained by the seller when the seller purchased the property. A Phase I provides a historical review and superficial evaluation of the property to identify whether there are any recognized environmental conditions. No tests are performed. A recognized environmental condition is the likely presence of hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release into structures or into the ground, ground water, or surface water of the property. A Phase I includes a review of public records, a tour of the property and personal interviews and can only be performed by a qualified environmental consultant. 

If the Phase I concludes that there is a recognized environmental condition, the consultant will recommend performing a Phase II Environmental Site Assessment with a subsurface investigation. During the Phase II, the consultant may take soil samples outside and inside the building, which may require drilling through the floor in locations where hazardous substances or petroleum products were used or stored. The samples are observed for visual and olfactory signs of contamination and then sent to a lab for further testing to determine whether there is contamination. As a Phase II is expensive, the purchaser is often justified in requesting that the seller pay for some or all of cost to complete the report.

If the Phase II determines that there is no contamination or that the contamination does not exceed legal limits, the purchaser can proceed to purchase the property and benefit from the “innocent landowner” defense. If the Phase II determines that there is contamination in the soil, ground water or surface water above the legal limits, additional sampling, testing and investigation may be necessary to determine the source and extent of the contamination. Depending on the nature and extent of the contamination, applicable law may require removal of contaminated soil and disposal of the soil at a special treatment facility, installation of engineered barriers to prevent the spread of existing contamination, restrictions on use of ground water, and restrictions on use of the property for anything other than commercial or industrial uses.

Ultimately, the owner of a property with contamination above legal limits should seek to obtain a No Further Remediation Letter from the state environmental protection agency. Obtaining a No Further Remediation Letter takes considerable time and is costly regardless of whether actual remediation is required. If the environmental consultant recommends that the owner obtain a No Further Remediation Letter, the purchaser can still close but it should require the seller to escrow funds sufficient to cover all costs of performing the remediation, sampling, testing and governmental reporting necessary to obtain the No Further Remediation Letter.                         

Environmental matters can be complicated which is why it is critical to have an experienced commercial real estate attorney draft your purchase and sale agreement and assist you with ordering and reviewing your environmental reports.

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