VIII Environmental Issues in Real Estate Transactions

LibraryIllinois Environmental Law for Non-Environmental Lawyers (2017 Ed.)
VIII. Environmental Issues in Real Estate Transactions
Eugene P. Schmittgens, Jr.
St. Louis, MO

A. Introduction

Environmental issues touch virtually every real estate transaction. Even transactions involving residential property may require investigation and disclosure of potential environmental hazards such as radon, asbestos, lead paint and mold. Residential real estate developments are often more sensitive commercial transactions because the expected residential use of the property involves more stringent environmental standards. Certainly, environmental issues also have a significant impact on transactions involving the sale or acquisition of real estate for business purposes associated with significant financial liability.

Typically, at least at sites with a long standing commercial or industrial operation, a real estate transaction will involve three distinct considerations. Two are legal in nature, and one involves technical issues. The legal issues involve general real estate questions as well as liability questions that arise out of the environmental condition of the property. The environmental conditions at the property lead to the technical considerations addressing the questions of how serious the contamination may be and how much it will cost to correct it. This article will address general environmental issues that may arise in a commercial real estate transaction.

B. Basis of Liability

Environmental liability in a real estate transaction emanates from federal, state, local and common law. This discussion is limited to federal environmental law, with a general reference to Voluntary Cleanup Programs (VCPs) in various states. Illinois has a statutory liability regimen similar to federal law, and Illinois' VCP is known as the Site Remediation Program (SRP) administered by Illinois EPA.

The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA or Superfund),1 including its amendments such as the Superfund Amendments and Reauthorization Act of 1986 (SARA), pose the greatest risk of liability to the parties in a business transaction. Therefore, this discussion will be centered there.2

CERCLA3 is a reactive statute. In other words, it is designed to remedy abandoned sites, although CERCLA liability can, and does, attach to active operations. CERCLA also addresses current releases of reportable quantities (RQ) of certain hazardous materials. With respect to certain hazardous sites, CERCLA is said to impose strict, joint and several liability upon a broad group of persons referred to as potentially responsible parties (PRPs). For those newly initiated into the world of CERCLA, perhaps the most frustrating aspect of the CERCLA liability regimen is that traditional notions of fault, burden of proof and liability are significantly modified. For example, a person sending only one shipment of a small quantity of hazardous materials to a site may be potentially liable for the entire cost of clean-up as if (s)he is the only viable person with materials at the site. No showing of negligence, causation or intent is required.

Specifically, CERCLA Section 1074 imposes liability on four classes of persons:

1. current owners/operators of the site;
2. owners/operators of the site at the time hazardous materials were placed there;
3. the person or persons who arranged for generators' hazardous substances to be at the site (usually the generator); and
4. under certain circumstances, transporters.

Moreover, CERCLA offers limited defenses. These defenses, which are generally unsuccessful, include acts of God, acts of war, and or acts of third persons not in a contractual relationship with a liable party. As originally drafted, the latter defense generally applies to the midnight dumper -- and not, to the predecessor in title - making the defense somewhat illusory. In essence, the party seeking to present the defense had to prove the existence of someone it did not know who performed an unlawful act at an unknown time.

In 1986, CERCLA was re-authorized by the Superfund Amendments and Re-Authorization Act (SARA) and the third party defense was expanded to include "innocent purchasers."5 In proper instances, the purchaser could avoid cleanup liability so long as the purchaser had performed an all appropriate inquiry and discovered no reason to know of the presence of any hazardous substances that may create statutory environmental cleanup liability under CERCLA. This innocent purchaser defense changed the focus of real estate transfers in business settings and established a cottage industry known as Phase I Environmental Site Assessments associated with due diligence.

To qualify as an innocent purchaser, new landowners must demonstrate that they had "no reason to know" of the existence of contamination at the time they purchased a property. To prove they had "no reason to know," landowners must demonstrate that they inquired into the environmental condition of the property, before purchasing it, in an effort to minimize their liability. The statute specifies that a prospective purchaser must have undertaken an "all appropriate inquiry" into the history of the property in order to qualify as an innocent purchaser.

However, the 1986 amendments did not define what inquiry would be considered "an all appropriate inquiry." Courts have struggled to determine the scope of an all appropriate inquiry -- one court even held that no inquiry was necessary under the circumstances presented in that case. Whether a purchaser qualifies as "innocent" depends on the facts. Because the sale of property involves a contract, the purchaser cannot claim the third party defense in the original form of the statute, and the innocent landowner defense was created by Congress to address the situation where current landowner is liable as a current owner for a purely historic problem.

Subsequently, in January 2002, CERCLA was amended again by the Small Business Liability Relief and Brownfields Revitalization Act (Amendment). The Amendment clarifies liability issues with respect to the acquisition of real estate. Among other things, it created two new categories of exempt current owners (the bona fide prospective purchaser (BFPP) and contiguous property owners), and clarified issues with respect to the innocent landowner defense.

In order to qualify as an innocent purchaser, the purchaser was to have performed an all...

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