Environmental risks: paying for someone else's mistakes.

• Author: Robb, Kathryn E.B.

Is your company financially liable for environmental hazards it didn't create? Property buyers and sellers beware, warns one legal expert.

Kathryn E.B. Robb, Esq., Partner

Hunton & Williams

We have all heard the stories of the unfortunate investor who purchases an office building only to discover 10 days after closing that the cost of removing asbestos found in the building is 20 times the worth of the structure. Or the company that buys a piece of property and subsequently finds leaking underground storage tanks from a gas station once located there. Or the bank that learns the property it took as collateral on a now-foreclosed loan contains groundwater contamination requiring a $30 million cleanup.

Despite the recent publicity surrounding such situations, many investors still make unwise investments because they neglect to conduct an early and thorough investigation of a property that may have environmental liabilities.

What the law says

Recent developments in environmental law have modified the adage, caveat emptor: Now, buyer and seller must beware. Both businesses and individuals face significant new risks in property transfers and other business operations.

Federal statutes govern most environmental laws and regulations, although in recent years many states also have taken an active role. In 1980, Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act, referred to as "the Superfund Act," empowering the Environmental Protection Agency (EPA) to enforce cleanup efforts. Since the EPA's fund for this effort now totals over $10 billion and current EPA regulations designate approximately 700 different elements and compounds as "hazardous substances," the possibilities for lawsuits brought by EPA to clean up property is rapidly increasing.

The reimbursement provisions of Superfund create huge potential civil liabilities for businesses because they allow the EPA (and others) to recover response costs (costs incurred in cleaning up a site) and payment for natural resource damages (costs incurred in remedying damage to flora, fauna, and wildlife at a site). This potential liability, which can far exceed the value of the property, in most cases belongs to the current property owner. And a purchaser's or seller's lack of knowledge about the presence of hazardous substances on the property rarely serves as a defense. Response costs at major sites average $25 to $35 million per site, and costs incurred as a result of natural resource damages may prove to be even more expensive. Furthermore, civil penalties for noncompliance with Federal law can run to $25,000 or more per day.

How do these issues affect real estate deals? Under Superfund, liability is far-reaching and affects both buyers and sellers. Consequently, a purchasing company must be able to identify the risks that real estate acquisitions present, and the firm must exercise business judgment in deciding whether those risks are worth taking and whether a deal can be structured to allocate the risks in a manner acceptable to both buyer and seller. For sellers, Superfund changed the rules: Superfund liability now prevents a former owner from ending potential liability simply by selling the property.

The scope of...