Acquiring and Disposing of Environmentally Contaminated Property

• Jurisdiction: United States,Federal
• Citation: Vol. 34 No. 3 Pg. 11
• Pages: 11
• Publication year: 2005

34 Colo.Law. 11 Colorado Bar Journal 2005.

2005, March, Pg. 11. Acquiring and Disposing of Environmentally Contaminated Property

---

11

Vol. 34, No. 3, Pg. 11

The Colorado Lawyer
March 2005
Vol. 34, No. 3 [Page 11]

Articles

Acquiring and Disposing of Environmentally Contaminated Property
by Steven M. Sommers, Michelle C. Kales

This article summarizes the complex federal and state laws designed to promote redevelopment of urban environmentally distressed properties. It also discusses the contractual allocation of cleanup costs and environmental liability issues that arise in such transactions

Steven M. Sommers, Denver, is a shareholder in the Brownstein, Hyatt & Farber, P.C. ("BHF") Real Estate Group. Sommers provides legal counsel in a wide range of real estate, corporate, and banking transactions and specifically in brownfields redevelopment transactions Michelle C. Kales is an associate in BHF's Environmental and Natural Resources Group. Her practice focuses on environmental litigation and compliance and land use. The authors can be reached at (303) 223-1100

Notwithstanding the continued urban sprawl being experienced by most of our population centers, cities (particularly land-locked cities such as Denver) have experienced an increase in real estate investment in the urban core. Proximity to work, urban amenities, and the growth of nontraditional families have resulted in higher economic value of city center locations. Development of these locations inevitably requires the recycling of the land from a prior use. Many of these are contaminated with hazardous waste and are commonly referred to as "brownfields" sites.1

It is vitally important to communities to recycle contaminated old-use properties into new development. The societal benefits are enormous, such as reduced urban blight, increased tax rolls, and a cleaner environment. However, the acquisition and development of a brownfields site is a complicated effort, involving a host of specialists, including environmental scientists, insurance underwriters, government regulators, and urban planners.

At the core, brownfields acquisition and development efforts involve real estate transactions. Real estate, environmental, and business law practitioners must be able to facilitate and process such transactions in an intelligent and prudent fashion for the economic benefit of their clients, as well as for the good of the community and the environment.

Real estate development is driven by economics. To this end, the environmental contamination of a property should be viewed in economic terms - that is, as a liability. As with any liability, it must be quantified, allocated to the purchaser or the seller, and ultimately, the liability must be satisfied.

This article summarizes the complex federal and state laws designed to promote redevelopment of environmentally distressed properties. It further discusses the contractual allocation of cleanup costs and environmental liabilities necessary to facilitate such transactions.

ENVIRONMENTAL LIABILITY AND BROWNFIELDS
REDEVELOPMENT

This section provides an overview of the primary federal law dealing with owner liability for contamination, the recent amendments to that law, and third-party contribution claims under that law. It also discusses state cleanup laws and third-party tort claims.

Overview of CERCLA

Historically, the federal Comprehensive Environmental Response and Liability Act ("CERCLA") imposed liability for hazardous substances on the current owner or operator of contaminated property, regardless of whether the owner contributed to the contamination of the property.2 Although well intended, the effect of this portion of CERCLA created a chill on brownfields investment. Potential purchasers were faced with the enormous challenge of assuming huge liabilities with uncertain costs.

"Prospective purchaser agreements" are one solution. With these agreements, the federal government provides the purchaser of a contaminated site with a covenant not to sue, as long as the purchaser takes steps to ensure it does not exacerbate contamination on the property. Such agreements ensure that the federal government will not take enforcement action under CERCLA against a new purchaser for cleanup of a contaminated site. Prospective purchaser agreements, however, are difficult to obtain, requiring extensive site characterization and a fairly lengthy application process.

In response to a recognized need to promote brownfields redevelopment, Congress enacted the Small Business Liability Relief and Brownfields Revitalization Act of 2001 ("Federal Brownfields Amendments").3 In essence, these Federal Brownfields Amendments modified CERCLA to promote brownfields redevelopment by providing federal liability relief to a purchaser of a contaminated site who qualifies as a bona fide prospective purchaser ("BFPP").4 This is significant because liability under CERCLA is strict; negligence or even causation are not elements of liability.5

The protection provided by the Federal Brownfields Amendments extends to protection from government enforcement actions under CERCLA and also appears to preclude third-party claims for contribution under CERCLA.6 The Federal Brownfields Amendments, however, would not shield the purchaser from tort claims, such as trespass or nuisance, brought by private parties seeking compensation for property damage or bodily injury from off-site migration of contamination. The Amendments also may not protect the purchaser from a state enforcement action brought under other laws such as the Resource Conservation and Recovery Act ("RCRA")7 or state water quality laws.8 A purchaser may desire to enter into a prospective purchaser agreement with the involved state to shield itself from other state enforcement actions, thus limiting its potential liability to third-party state tort claims for offsite contamination.

Federal Brownfields Amendments

The Federal Brownfields Amendments protect a BFPP from CERCLA liability as long as certain conditions are met. In general, to qualify for these liability protections, prospective purchasers must conduct "all appropriate inquiries" into the prior uses of commercial or industrial property.9 The inquiry must be made prior to purchasing the property to identify conditions that would indicate releases and threatened releases of hazardous substances affecting that property. Specifically, to qualify as a BFPP, the purchaser must:

1) purchase property after January 1, 2002;

2) make "all appropriate inquires" into previous uses and environmental issues associated with the property;

3) provide all legally required notices with respect to hazardous substances on the property (that is, if something presents an imminent hazard to public health or the environment, the purchaser must notify the appropriate agency);

4) exercise "appropriate care" with respect to hazardous substances at the facility by taking "reasonable steps" to stop any continuing releases; prevent any threatened future releases; or prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substances;

5) provide cooperation and allow access to property by federal/state agencies;

6) comply with any land use restrictions and any institutional controls on property;

7) comply with requests for information from federal/state agencies; and

8) not be a potentially responsible party by virtue of a corporate or family relationship with another person who would be liable.10

The two most significant, and ill-defined, BFPP criteria are "all appropriate inquiries" and "reasonable care," the second and fourth requirements.

All Appropriate Inquiries
Requirement

U.S. Environmental Protection Agency ("EPA") rules do not currently provide a framework for defining the "all appropriate inquiries" requirement and provide little guidance on properly conducting environmental assessments (commonly referred to as "environmental due diligence" or "Phase 1's"). EPA recently issued a proposed rule on August 26, 2004 to better define "all appropriate inquiries."11 The proposed rule, which EPA has indicated will likely be finalized early in 2005, would establish specific regulatory requirements and standards for conducting all appropriate inquiries into the previous ownership, uses, and environmental conditions of a property.12

Currently, for properties purchased after May 31, 1997, to demonstrate that a landowner conducted all appropriate inquiries prior to purchasing a property, the landowner must comply with the procedures of the American Society for Testing and Materials ("ASTM").13 Prospective purchasers must continue to use the ASTM standard until the proposed rule is finalized.

Reasonable Care Requirement

Like the all appropriate inquiries criteria, the reasonable care requirement also is not well defined. The BFPP is required to exercise reasonable care to abate offsite migration of contamination, prevent further contamination and protect against harm to the public and the environment. According to EPA internal documents, this criterion does not necessarily require the BFPP to conduct a full-blown CERCLA response action on the site.14 What constitutes reasonable care is a site-specific...