Articles

Representing the Buyer of Environmentally Contaminated Commercial Property

by James A. Bradley

I. Relevant Statutes

A. Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). 42 U.S.C. § 9601 et seq.

1. Elements of Liability: (1) Hazardous substances within the meaning of CERCLA were disposed at a facility, which is defined as anyplace where hazardous substances have come to be located; (2) there has been a release or threatened release of a hazardous substance into the environment; (3) response costs have been incurred as a result of the release or threat of the release; and (4) the defendant is within one of four classes of potentially responsible parties ("PRPs"). A PRP is responsible for response costs incurred by the United States or State in responding to the release or threat of the release of a hazardous substance into the environment and any resulting natural resource damages, including costs associated with assessing the extent of the natural resource damages. 42 U.S.C. § 9607(a).

2. Hazardous substances are broadly defined by CERCLA but specifically exclude petroleum.

3. Liability is strict (United States v. Monsanto Co., 858 F.2d 160, cert den. 490 U.S. 1106, 109 S. Ct. 3156, 104 L. Ed. 2d 1019[1989]) and joint and several (United States v. Ottatti and Goss, Inc., 630 F. Supp. 1361 D.N.H. [1985] aff'd in part, vacated in part and remanded. 900 F.2d 429 (1st Cir. N.H. 1990); United States v. South Carolina Recycling and Disposal, Inc., 653 F. Supp. 984 [D.S.C. 1984] aff'd. in part sub nom. United States v. Monsanto Co., 858 F.2d 160, cert den. 490 U.S. 1106, 109 S. Ct. 3156, 104 L. Ed. 2d 1019[1989]).

4. Current Owner's Liability: The current owner of a facility is liable even if he did not engage in active conduct or polluting. 42 U.S.C. § 9607(a).

a. Defenses to CERCLA liability are limited to acts of God, war and acts or omissions of a third party. 42 U.S.C. § 9607(b).

b. Innocent Purchaser Defense: This is available only to a current owner who satisfies requirements of Section 101(35) of CERCLA: The facility was acquired by the current owner after the disposal or placement of the hazardous substance on, in, or at the facility, and at the time the current owner acquired the facility, he or she did not know and had no reason to know that any hazardous substance had been disposed of, on, in, or at the facility. 42 U.S.C. § 9601(35)A.

c. To establish this defense, the owner must have undertaken at the time of acquisition, all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice in an effort to minimize liability. 42 U.S.C. § 9601(35)(B).

d. Determination of "innocent purchaser" defense takes into account any specialized knowledge or experience on the part of the defendant, the relationship of the purchase price to the value of the property if uncontaminated, commonly known or reasonably ascertainable information about the property, the obviousness of the presence or likely presence of contamination at the property, and the ability to detect such contamination by appropriate inspection.

e. Due Diligence Assessment and Phase I Assessment: Identify recognized environmental conditions.

5. Liability of Former Owner.

a. Former owner is liable if he owned property at the time of disposal of any hazardous substance. Thus, former owner will try to avoid liability on the grounds that it owned the facility before but not during the disposal or owned the facility after and not during the disposal. See, New York v. Shore Realty Corp., 759 F. 2d 1032 (2d Cir. 1985).

6. Current Tenant: Operator Liability. 42 U.S.C. § 9607(1).

7. Former Tenant: May be liable for post-closing remediation of pre-closing contamination of a site. But see, Commander Oil Corp. v. Barlo Equipment Corp., 215 F. 3d 321 (2d Cir. 2000) holding that lessee was not strictly liable under CERCLA because it did not possess sufficient attributes of ownership over parcel that it subleased to operator and lacked most of the bundle of rights that came with ownership of property.

B. New York State Environmental Conservation Law. ECL Title 13 (State Superfund Law.)

1. Corresponds to CERCLA list of responsible parties and liability, except does not include innocent purchaser defense.

C. Navigation Law, Article 12: Principal state authority regarding liability and clean-up for petroleum spills on land and water in New York State.

1. Prohibits unpermitted discharge or petroleum unless in compliance with conditions of federal or state permit.

2. Strict liability.

3. Discharge includes all intentional and unintentional releasing, spilling, leaking of petroleum into waters of the State or onto waters from which it might flow or drain into waters of the state. "Waters" include all lakes, springs, streams and bodies of surface or ground water. Includes discharges of petroleum on the land that might flow or drain into ground water.

4. Who is a discharger: Navigation Law does not define "discharger," Courts have held that persons can be dischargers based on their ownership or control of the source of the petroleum discharge (e.g., a tank or piping). White v. Regan, 171 A.D.2d 197, 575 N.Y.S.2d 375 (3d Dep't 1991) aff'd and modified sub nom.. White v. Long, 85 N.Y.2d 564, 626 N.Y.S.2d 989, 650 N.E.2d 836 (1995) . See also, Leone v. Leewood Service Station, Inc., 212 A.D.2d 669, 624 N.Y.S.2d 620 (2d Dep't 1995).

5. Is ownership of property on which a petroleum discharge occurs, standing alone, sufficient to make the owner a discharger? Contrast White v. Regan, 171 A.D.2d 197, 575 N.Y.S.2d 375 (3d Dep't 1991), holding that ownership is sufficient to establish discharger status, with Drouin v. Ridge Lumber, Inc., 209 A.D.2d 957, 619 N.Y.S.2d 433 (4th Dep't 1994), holding that liability as discharger is based upon conduct, not status.

6. Available Damages: All clean-up and removal costs and all direct and/or indirect damages, no matter by whom sustained.

7. Liability is retroactive. Navigation Law § 190-a.

8. Defenses are limited to act or omission solely cause by war, sabotage or governmental negligence. Navigation Law § 181(4).

9. A lien may be filed upon real property for cost incurred by state for clean-up and removal of discharge. Navigation Law § 181-a.

D. Resource Conservation and Recovery Act ("RCRA"). Governs release of hazardous substances, including petroleum spills.

E. Applicable County and local rules and regulations (e.g., Health Codes)

II. Gather necessary information.

A. What questions the buyer must answer

1. Does contamination exist on the property?

2. What is the nature and scope of the contamination?

3. What is the extent and cost of remedial work that may be required and will it exceed the value of the property?

4. What future use of the property will be restricted?

5. What is the likelihood of liability to the government or third parties?

B. Phase I Environmental Site Assessment by reputable environmental consultant applying American Society for Testing and Materials ("ASTM") Phase I standards. When: before contract is signed, during option period, or during negotiations.

1. Confidentiality agreement and independent duty of consultant to report. Include provision for negotiation of whether and when to release information.

2. ASTM may not be sufficient due diligence for innocent purchase defense and third party defense.

3. Based on the Phase I, determine whether a recognized environmental condition potentially exists that warrants a Phase II Environmental Site Assessment.

4. Share cost with seller but control the Phase I.

5. Should buyer do Phase I when Lender may want its own?

C. What information does buyer want from seller?

1. All historical environmental reports (e.g. spills reported, Phase I's and II's, anything reported.)

2. Require full disclosure and access to site for inspection.

3. Important not only to know history but also to know how well the cleanup was done.

4. Confidentiality agreement regarding reports and information disclosed by Seller. Provide caveat that Buyer can disclose if required to do so by law.

III. How to avoid or shift the environmental risk

A. Deal structuring

1. Take only the clean, not the contaminated parcels. Alternatively, lease space and let Seller retain ownership of subsurface and any contaminated areas, including underground storage tanks.

2. Avoid becoming a successor company. Courts have held that CERCLA imposes successor liability. B. F. Goodrich v. Betkowski, 99 F.3d 505 (2d Cir. 1996), petition for rehg. den. 112 F.3d 88 (2d Cir. 1987).

3. Seller remediates in advance. This may not be realistic for complicated contamination problem and, if Buyer believes that property is uniquely desirable, has risk that Seller will refuse to perform.

B. Drafting concerns

1. Price

2. Representations and warranties

a. Seller is generally under no duty to speak, and his silence about contamination is not actionable as a fraud. Venezia v. Coldwell Banker Sammis Realty, 270 A.D.2d 480, 704 N.Y.S.2d 663 (2d Dept. 2000). This does not mean that Seller can misrepresent the condition of the property or engage in concealment or otherwise deceitful conduct designed to prevent the discovery of the contamination.

b. Purpose for Buyer: disclose material facts, create liability for false representations, and focus the Buyer's reliance on the Seller.

c. Subjects of representations and warranties:

i. Site conditions, including use of hazardous materials or hazardous operation on property

ii. Status of compliance with environmental laws and regulations, including required permits and transferability to Buyer

iii. Existence and status of any governmental or third-party claims or liens on property or notice thereof

iv. Specific representations to address specific concerns (e.g., PCBs, asbestos, underground storage tanks)

d. Terms

i. Definitions:

Hazardous Materials

Environmental Laws

Environmental Requirements

Environmental Damages

Material Adverse Effect

Adverse Environmental Condition

ii. Indictment/Best Knowledge

e. Limit the scope of the representations and warranties demanded by Seller (e.g. that Buyer is aware of all conditions existing on the property, had the opportunity to investigate, and will operate the property in compliance with law after closing.)

f. Indemnifications will depend on apportionment of liability (e.g. are they broadly written, do they specify that they apply to liabilities arising before and after the transaction, do they refer to specific contaminants).

i. Statute of limitations

ii. Should all or only particular indemnifications run after closing

iii. Cover officers, directors, employee, parent, affiliate etc. of Buyer.

iv. Define loss and expense as broadly as possible, including reasonable attorneys, consultants and expert witness fees and disbursements.

v. Environmental indemnity should cover the following:

i) The presence in, on or under, or the escape, seepage, leakage, spillage, discharge, emission, disposal or release from, the property of any Hazardous Materials;

ii) Claims asserted or arising under any Environmental Requirement;

iii) Any representation or warranty by Seller being false or untrue in any material respect.

g. Taking property "as is"after inspection.

i. Construction of the clause

ii. Should reflect intelligent decision on risk apportionment

h. Who makes the representations and warranties and gives the indemnifications? Require personal guarantees from principals of the Seller? Duration?

3. Other provisions:

a. Escrow, escrow deposits, purchase money holdbacks.

b. Explicit division of responsibility

c. Contingencies for handling third party claims and governmental orders.

d. Releases require special caution.

4. Regulatory sign-offs

5. Walkaway provisions

a. Option of Seller or Buyer to remediate

b. Return of monies and environmental assessment

c. De minimis cleanup costs

d. Time limit for remediation

e. Apportionment of cost of anticipated environmental problems, if sufficient information is available

f. Confidentiality of assessment costs

6. Cost sharing to limit Seller's obligation

a. Monetary cap

b. Deductible or de minimis amount that Seller is not obligated to pay

c. Share costs of consultants or remediation according to formula

d. Time limit on representations and warranties

e. Agree on type of damages recoverable under the indemnity (limit to remediation cost, attorneys fee, consultant fees)

IV. Lender's requirements: representations and warranties should usually just pass along what you know from Seller.

V. Brownfields agreements with government

A. Advantage: Covenant by government not to sue. Transferable.

B. Disadvantage: Deed or other restrictions on use of property

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