EPs: Environmental Liability Risk and Your Clients -Debunking Common Myths

Authored by: Tom Mounteer

The Phase I environmental site assessment industry grew out of the need for identifying any potential environmental conditions at a target property prior to purchase to protect the buyer from environmental liability risk. Yet, today, decades later, clients who are buying a property, selling a property or extending credit to a borrower making a property purchase frequently misperceive environmental liability risk in acquisitions and financings. These misperceptions make it difficult to identify, quantify and apportion environmental risk appropriately between parties to a transaction. The purpose of this Technical Brief is to define — and, more importantly, debunk — five common myths about environmental liability that frequently arise in today’s business transactions.

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MYTH 1: The buyer of a contaminated site is always liable.

A purchaser of a site with known contamination has an avenue for avoiding cleanup liability under CERCLA—thanks to the bona fide prospective purchaser defense. This defense requires the buyer to first rely on a qualified environmental professional to satisfy the requirements of the U.S. EPA’s “all appropriate inquiry” rule (40 CFR Part 312). Then, after purchase, the property owner must also exercise “appropriate care” with respect to the property’s environmental condition. To satisfy this component of the defense, the purchaser must “take reasonable steps” to stop any continuing releases; prevent any threatened future release; and prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance. (Note that the U.S. EPA’s view of “reasonable steps” does not include the same types of contaminated soil or groundwater cleanup that a liable party would have to perform.)

Many states have comparable defenses under their state Superfund statutes, but the requirements can vary. For example, Michigan requires that purchasers collect, analyze, and report the results of the analysis of subsurface samples in order to take advantage of the defense. Georgia has a program that does not exonerate purchasers from liability but instead limits their liability to implementing an agreed-upon cleanup plan. Once the purchaser completes the cleanup plan, it is shielded from further cleanup obligations with some qualifications.

MYTH 2: Leasing a property eliminates the risk of liability.

Lessees can become statutorily liable for contamination that predates their tenancy in two ways. First, under Superfund, “current operators” of facilities are liable for contamination that predates their occupancy. Second, lessees with sufficient control over the leasehold can be deemed “current owners” of the facility, and “current owners” are also generally liable. The Superfund statute is unforgiving with respect to the liability of current owner/operators. Courts have rejected arguments that there has to be a nexus between a party’s “operation” on a site and the conduct that caused the release of hazardous substances. Liability exists regardless of when the disposal occurred. Lessees that exercise a degree of control over the property can be held liable as owners. Courts look at the duration of the lease term, whether the landlord has control over the use of the site, lease termination rights, the lessee’s right to sublet without consent of the landlord, and whether the lessee is responsible for taxes, repairs, and assessments.

MYTH 3: Hazardous substance releases are the greatest liability.

Substantial environmental liability can arise from facility compliance issues, such as obtaining air emission and wastewater discharge permits, operating within the permit limits, and installing needed pollution control equipment. Depending on the nature of the business, the scope of facility compliance obligations can be substantial.

A facility that burns fossil fuels to generate power may confront substantial future capital expenditures to control air emissions. Even non-industrial, non-chemical intensive operations confront compliance obligations. For example, office buildings may have backup generators with fuel storage and air emission control obligations. Future development of a shopping center may be affected by storm water management and wetlands protection rules.

MYTH 4: Asbestos always adds up to high removal costs.

There is no absolute obligation to remove building materials that contain asbestos. It is frequently possible to maintain asbestos-containing material that is in good shape so as to avoid its fibers becoming airborne and causing health hazards. Asbestos was used abundantly in buildings until the 1970s, when certain asbestos-containing building materials were banned by the EPA. In non-friable form, asbestos does not pose much threat to humans. When asbestos is friable, the fibers are easily inhaled and can cause serious human health risk. Renovation and demolition activities may cause asbestos to become friable. Worker protection rules require employers and building owners to notify those who might be exposed to asbestos of the risk. If renovations and demolition are undertaken, specific rules apply to the removal and disposal of the material.

MYTH 5: A No Further Action letter rules out any future risk.

A state environmental agency determination that “no further remedial action” is required at a property may not rule out all potential risk. First, such determinations are typically qualified to allow the issuing agency to “re-open” the matter. Second, state agency determinations that a cleanup is complete are often conditioned on site use; commercial or industrial site purposes can have a higher level of residual contamination than residential sites. State agencies often impose institutional controls to prevent human exposure to the residue.

A common situation that affects acquisitions or financing is the risk of vapor intrusion into buildings on the target site. The potential for vapors from subsurface contamination to intrude into buildings atop the site is a newly identified health risk. This health risk was frequently not evaluated when environmental regulators issued older, no-further-cleanup determinations. Now that they are aware of it, regulators may “reopen” their determinations with respect to properties previously deemed “clean.”
Making clients who are purchasing properties—or lending capital for property purchases—aware of these common myths upfront will help facilitate an efficient environmental due diligence process that not only assesses a property’s potential environmental risk, but also helps identify the potential implications of risk and, ultimately, informs better risk management decisions.

NOTE TO SUBSCRIBERS:

EDR Insight is grateful to attorney Tom Mounteer for contributing this Technical Brief, which is the result of his 25 years of experience helping clients with their transactions and financings. Mr. Mounteer, an Environmental Partner at Paul Hastings, is based in the firm’s Washington, D.C., office. He advises clients in all areas of environmental law. Chambers has ranked Mr. Mounteer among the leading environmental practitioners in Washington. His practice has particular emphases in the energy sector, financial disclosure of environmental liabilities, and the treatment of environmental liabilities in bankruptcy.
Mr. Mounteer routinely helps buyers and sellers, lenders and borrowers, and landlords and tenants identify, quantify, and apportion environmental liabilities that arise in business and real estate transactions. He oversees the investigation of site conditions, helps clients avail themselves of statutory defenses to liability, assists in quantifying potential liabilities, and negotiates and drafts contract terms relating to the sales and purchases, leases, and financings.