Saying it would “encourage the cleanup and redevelopment of old industrial properties,” President George Bush signed the “Small Business Liability Relief and Brownfields Revitalization Act” early last year. The President noted that state voluntary cleanup programs had been hindered by the lack of liability protection in the Environmental Protection Agency’s (EPA) Superfund and said the new law would provide increased protection to prospective purchasers, owners of properties next to contaminated sites and landowners not responsible for contamination of their property.

More Protection But New Responsibilities

“The changes to the act should definitely help developers and property owners shield themselves from the more onerous liability consequences of Superfund,” says Kendy Hess of Chicago-based Altheimer & Gray’s environmental practice, “but they must follow a whole new set of rules to ensure that they take full advantage of the changes and we don’t even know what all those rules are going to be.”

How This All Started

Superfund was passed to encourage private companies to pay for environmental cleanups, particularly at abandoned or “orphaned” sites. The reach of the law is broad and potentially includes real estate owners and buyers. Liable parties could be sued by the government for cleaning up contaminated property regardless of fault. Superfund liability is strict, joint and several. It applies to the parties identified in the law whether or not they contributed to the problem, and all liability can accrue to a single party if other parties cannot be found or don’t have assets. These parties could theoretically avoid this liability by demonstrating that they were “innocent” purchasers, that they had examined the property before it was acquired and found no problems. The protection applied even if contamination were discovered later on.

Phase I Assessments are Basis of Liability Protection

This so-called “innocent landowner defense” became the basis for the system of environmental due diligence that has been conducted ever since for commercial real estate transactions. While the statute did not create a standard for this defense, the term has come to be defined as a Phase I Environmental Assessment under standards established by the American Society for Testing and Materials.

Despite the innocent purchaser provision, concern for exposure to legal liability continued to bedevil real estate transactions. To relieve some of the pressure, federal and state governments have taken a number of steps to soften the impact of the liability standard while not changing the standard itself. The new changes are the latest in this trend. They retain the innocent landowner defense but add two new definitions.

Three Safe Harbors

Under the new law, there are now three safe harbors where Superfund liability cannot anchor if certain precautions are taken. They are:

• Innocent landowners — existing property owners who “did not know and had no reason to know” that their property was contaminated;

• Bona fide prospective purchasers — buyers who know the property is contaminated but can show that it took place under prior owners; and

• Contiguous property owners — existing property owners who can show they haven’t caused or contributed to contamination from adjacent sites that impact their property.

What Does A Property Owner Do?

In order to take advantage of these defenses, buyers and owners must take certain steps that are spelled out in the law. These steps are virtually the same for each category and include the following measures:

• Conduct a Phase I site assessment. Make sure it complies with ASTM Standard E 1500-97 (there is a new standard being written by the EPA due by 2004).

• If the property is contaminated, take steps to prevent it from getting worse.

• If the government steps in, cooperate with its consultants and contractors.

• If a No Further Remediation Letter is in place, comply with its requirements (e.g., deed restrictions relating to residential or commercial use or engineered barriers such as parking lots).

• If notice of the contamination is legally required, follow the law.

Watch Your Tenants!

Perhaps the biggest wrinkle in these new changes relates to the on-going obligation to maintain engineered barriers and to avoid actions that could make existing contamination worse. Owners and managers are already faced with cleanup exposures when tenants leave a mess behind. “Owners may not only face a big cleanup bill under these circumstances, they also jeopardize their liability protection under the new law,” according to Margaret Karoyli, who heads up Carlson Environmental’s environmental preparedness program for property owners and managers.

How Do I Get It Done?

You will need some help sorting through these issues if you want to establish a credible defense. Request help from an experienced environmental attorney and a consultant to build the best case and use it as a template for future transactions.

As Altheimer & Gray’s Hess notes, “Property owners need to be aware of these new provisions because they aren’t just defenses to potential litigation. In a sense they actually impose affirmative burdens on property owners to exercise ‘due care’ when contamination is present. This can be tricky, especially when it comes to tenants.”

Richard Carlson is president of Chicago-based Carlson Environmental, Inc.


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