64 CBJ 409. Transferring Commercial Real Estate Under Connecticut's Environmental Law.

• Author: By Mark Mininberg (fn*)

Connecticut Bar Journal

Volume 64.

64 CBJ 409.

Transferring Commercial Real Estate Under Connecticut's Environmental Law

409 Transferring Commercial Real Estate Under Connecticut's Environmental LawBy Mark Mininberg (fn*)Perhaps the greatest "deal killer" in a real estate transaction is the threat of environmental contamination. As attorneys, we're expected by our clients not only to identify such hazards but also to ensure that the clients can pursue their business plans and remain protected from liability for a hazardous waste cleanup. These responsibilities put a tremendous burden on legal counsel and, naturally, make most of us more than a little nervous. Although Connecticut's environmental law is complex and its standards are often uncertain, there are steps that we can take to provide our clients with sound advice and reduce the risk of our making a mistake.

This article sets forth some basic environmental law principles which the legal practitioner might find useful in identifying environmental hazards and taking appropriate steps to avoid those hazards. Section I outlines briefly the major federal and state environmental laws including the federal Superfund and the Resource Conservation and Recovery Act ("RCRA"), the Connecticut "mini-Superfund," Superlien and Industrial Transfer laws, which would affect the buyer, seller and lender in a purchase of contaminated real property. Section 11 suggests that counsel develop a sufficient familiarity with the property to determine whether it is likely to pose an environmental risk. That section describes the use of site assessments as a means of determining the environmental condition of property and suggests simple methods of interpreting and using the information derived from the site assessment. Section III describes methods of saving a transaction when contamination has been discovered. Section IV stresses the need for drafting contract documents which reflect the parties5 environmental concerns regarding the property to be purchased and outlines the types of clauses which should be included in those documents. The article concludes that environmental hazards are endemic to Connecticut and that real estate counsel should become sufficiently familiar with the environmental law so that such problems are no longer a source

410 and discomfort. The article uses a hypothetical problem to illustrate these points.

Hypothetical:

Buyer is an investor who wishes to purchase and operate a particular car wash located in Connecticut. Seller has owned the car wash since 1986. Seller had purchased the property from a business person who had operated the property as an auto body repair shop since its founding in 1967. Prior to Seller's purchase of the property, the previous owner had used large quantities of industrial solvents, including trichloroethylene, and paint removers, including dichlorobenzene, in its operation. These substances were disposed of by dumping them in the open lot by the shop, spilling them into a floor drain which led to a dry well directly below the shop and pouring them down the drains which led into the city sewer system. There are three storage tanks holding waste solvents and paint stripper located underneath the car wash building. The previous owner had also paid a local trucking company to take barrels of solvents and paint stripper across town to a local landfill. The soil and groundwater beneath both the car wash and the landfill are now contaminated by these substances. The car wash property is also contaminated by polychlorinated biphenyls ("PCBS spilled when a transformer housed in the budding cracked and leaked PCB oil into the dry well. Seller had not been warned prior to purchasing the property of the previous owner's practice of using and disposing of the hazardous substances, but became aware of the contamination of the site prior to Buyer's making an offer for the property. Seller has operated his car wash on the property without the use of any hazardous substances. However, the water used to rime cars picks up oil, grease and solvents as it travels down the floor drains to the sewer system. Buyer and Seller have entered into a contract of sale by which Buyer agrees to take the property "as is," that is, without any warranty as to the condition of the property.

1. Selected Environmental Laws Affecting Property Transfers

   A.CERCLA

   The federal Superfund law, known as the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), is a far reaching cleanup program and gives the federal Environmental Protection Agency ("EPA") the power to clean up or take other necessary action in response to property

   411contaminated by hazardous substances (fn1) Both the EPA and private parties are authorized by CERCLA to recover the costs of cleanup from parties responsible for the contamination. Four categories of persons can be held liable under CERCLA for hazardous substance contamination: 1) present owners and operators of the facility;

   2) past owners or operators of the facility at the time of disposal;

   3) persons who transported or arranged for the transport of hazardous substances to the facility of another; and

   4) persons who accepted hazardous substances for treatment or disposal at the facility. (fn2)

   Most federal courts have interpreted CERCLA liability as strict, joint and several (fn2) Thus, a party responsible for contamination of a facility may be liable under CERCLA without regard to its own negligence in causing the contamination and will be responsible for the entire cost of cleaning up the site even if it only contributed to a part of the contamination. This harsh standard of liability is balanced by a right of contribution among tortfeasors. (fn3) Moreover, CERCLA permits "innocent landowners" an opportunity to avoid liability for cleanup of a contaminated facility.

   1. The Innocent Landowner.

   In many cases, the owner or the operator of a contaminated site is not to blame for the problem. Instead, the contamination may have existed for many years prior to the owner's or operator's taking over the property and have been hidden from view. Or, the problem may have been caused by a neighbor or a trespasser who deposited hazardous substances on the property. To prove that he or she is not liable under CERCLA, the innocent landowner must demonstrate that the contamination was caused solely by:

   1) an act of God;

   2) an act of war;

   3) an act or omission of a third party. (fn4)

   412A landowner or operator will not be considered innocent even if the contamination was caused by a third party where the landowner had a contractual relationship with that third party. This means that if the landowner or operator had a contract with a third party to transport or dispose of hazardous substances and those substances were later found to have contaminated the property, the landowner or operator is responsible for any ensuing cleanup. Furthermore, any agent, employee or independent contractor hired by the landowner or operator will be considered to be acting on behalf of the landowner and the landowner will be responsible for any contamination its agent causes. (fn5) Finally, the landowner will be responsible for any contamination caused by its lessee.(fn6)

   A purchaser may, under certain conditions, avoid CERCLA liability even though it bought the property pursuant to a 11 contractual relationship" with the seller. In order to qualify, the innocent buyer must demonstrate that the property was purchased without knowledge of contamination and that it made an investigation which failed to reveal the problem. Such investigation must include "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." (fn7)

   Another exception to CERCLA liability is provided for any lender who, "without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect [a] security interest in the facility." (fn8) Thus, a lender will not be held liable for cleanup of a borrower's property, as long as the lender does not participate in the management of the borrower's

   413 business. (fn9)

   2. Connecticut "Mini-Superfund"

      Connecticut has enacted "mini-Superfund" legislation which mirrors CERCLA insofar as it permits the State of Connecticut to undertake cleanup of facilities which have been contaminated by hazardous waste and to seek reimbursement for those costs from responsible parties. (fn10) In addition, Connecticut's "mini-Superfund" allows private parties to seek reimbursement for their own costs of cleaning up a hazardous waste site. (fn11) Unlike CERCLA, however, which is limited to releases of particular hazardous substances, Connecticut's law is much more broadly drafted and permits recovery for the cost of remediating a wide variety of contaminants and pollutants. (fn12)

      Application to Hypothetical

      As the owner of the premises, Seller is liable under CERCLA for the cost of cleaning up the industrial solvents, paint removers and other contaminants, including trichloroethylene, dichlorobenzene and PCBs, since these are listed as hazardous substances under CERCLA. Seller may use the "innocent landowner" defense to this liability if it can be demonstrated that the premises were purchased from the previous owner without knowledge of the contamination and that Seller undertook a due diligence investigation which met good...