Think you know everything about your potential liability in a property transaction? Misconceptions abound when it comes to who’s responsible for cleaning up a contaminated property. With so much at stake, it’s no surprise that buyers, sellers and lenders are often confused about environmental liability risk. Let’s debunk the 10 most common myths:
Myth #1: The new owner is always responsible for cleaning up a contaminated property.
Nope. Not always.
Buyers can sometimes avoid liability under the Federal Superfund statute if they satisfy the bona fide prospective purchaser defense, which requires that they carefully investigate the property and make appropriate inquiries about its condition. In other words, you have to do your due diligence.
The EPA requires that a qualified environmental professional do the sleuthing, and you’ll need a formal report (commonly referred to as a Phase 1 environmental assessment) outlining the pro’s opinion regarding the possibility of contamination.
So do the due diligence, then exercise “appropriate care” by taking reasonable steps to contain or prevent any issues. For best results, rely on the advice of a professional environmental consultant.
MYTH #2: You can dodge liability for past contamination by leasing – not buying – a property.
If you’re using it without owning it, you’re still on the hook. (Kind of like common law marriage, right?)
The courts will look at how long you’ve been using the property, the landlord’s current level of involvement in the property’s use, and the scale and extent of your operations on the land. So you’ve got risk even without your name on the deed — and even if you don’t pay the taxes on the property.
MYTH #3: Lenders are liable for cleanup if they take a contaminated property as collateral.
Not anymore. Congress gave lenders a hand in the late 1990s by creating a safe harbor for lenders, as the threat of liability was crippling the commercial lending industry in some sectors.
Lenders can reduce or avoid liability by not managing properties or the businesses that operate on them and by taking various financial oversight measures to prevent defaults.
MYTH #4: If a state agency has signed off on a site clean-up, there’s no future risk to the owner.
Maybe yes, maybe no.
A state environmental agency can state post-clean up that “no further remedial action” is required on a property, but new evidence of prior contamination could surface later — or the controls put in place to prevent an issue could fail.
If human health or the environment are at risk, it has to be addressed – so don’t rule out future risk even after getting the all-clear signal from the state.
MYTH #5: Hazardous material in the ground is the primary risk in every property deal.
Air emissions, storm water management and fuel storage are just a few examples of issues that can trip up a property owner and potential buyer. On the other hand, sometimes the biggest issues are related to paperwork — like failure to obtain required permits or to operate within a permit, for example.
MYTH #6: Being a corporation, an LLC or an LLP doesn’t provide protection from liability.
Actually it does. For the most part.
Generally speaking, shareholders, partners, parent corporations and other member interest holders are protected from environmental liability unless there are some specific, unusual circumstances that would dictate otherwise.
MYTH #7: The asset purchaser defense to successor liability (as opposed to equity purchases) doesn’t help when it comes to federal liability.
Generally, buyers are protected, though there are exceptions that are ususally a matter of state law and its interpretation. Factors that might make a purchaser more vulnerable include operating the company by the same name; representing the acquired business as the continuation of the prior business, and retaining the same personnel.
MYTH #8: Buying an older building guarantees a big price tag for asbestos removal.
In many cases it’s sufficient to maintain the condition of asbestos-containing materials such that the fibers can’t become airborne and cause a health hazard. A professional environmental consultant is your best source for solutions that are both cost-effective and safe.
MYTH #9: Analyzing indoor air quality is the standard treatment for mold in a building.
No. Analyzing air quality helps identify issues. Treating mold requires eliminating moisture.
If you’ve got moisture and air, there’s a potential for mold. Your environmental consultant can help pinpoint the culprit, such as faulty HVAC systems, plumbing issues or a leaky roof.
Fixing the problem comes first, followed by properly sanitizing or decontaminating a building as part of an appropriate remediation program. An experienced environmental consultant can advise you regarding remediation and can oversee the work of contractors.
MYTH #10: Any business lawyer familiar with indemnity provisions can write one for environmental indemnity.
Find an expert.
Environmental law is as nuanced as any other discipline, with terms and a vocabulary that are unique to it. Don’t increase your risk exposure by having an environmental indemnity provision drafted by someone unfamiliar with the clauses and categories that are specific to environmental law.
FACT: Partnering with a qualified and experienced environmental consultant is the first step in protecting you from environmental liability in a property transaction.
Plano, Texas-based Whitehead Environmental Solutions offers due diligence consulting, Phase I & II environmental assessments, remediation planning and oversight. To protect your investment, contact Whitehead E.S. today at 469-609-8080.