Consider Environmental Risks in Real Estate Transactions

By Ron D. Talley, published on April 6, 2011, in Business in Savannah.

The transfer of land in the United States is based primarily on legal principles that have remained the same for many years. When analyzing risks in real estate deals, people acquiring land have always known that there were market risks and economic risks associated with their particular use of real property.

Although those risks and the laws of transferring title to real estate have not changed much, other obligations and liabilities associated with land ownership have changed in modern times largely in response to societal and public concerns. In fact, modern laws regulating environmental conditions have had a dramatic effect on real estate transactions in the United States.

These laws added numerous concerns and costs related to property development and renovation, such as laws regulating discharges to streams and wetlands and laws regulating renovations of structures containing substances such as asbestos and lead-based paint. Therefore, property development and cost of ownership have certainly become more expensive as a result of such laws.

However, an even bigger impact on real estate transactions arises from the liability-shifting aspects of some of the environmental laws and their retroactive application. This impact in the real estate market arises in large part from the Federal law that is often referred to as “CERCLA” (the federal Comprehensive Environmental Response, Compensation and Liability Act).

Enacted and amended in the 1980s, CERLA changed the risk analysis for buyers entering the real estate market. The law was intended to address national concerns about the decades of waste disposal by individuals and companies who in many cases were no longer around to clean up their own mess. The law imposed direct liability on a current owner and future buyers of contaminated property, even for conditions unknown to the owner or buyer and conditions that were created by another party’s waste disposal occurring decades earlier. Unlike most laws, this liability is not based on whether a property owner was at “fault” for creating the illegal conditions.

To make certain that the law resulted in the remediation of as many properties as possible; CERLA allows very few defenses to liability. The most common defense available in real estate transactions is often referred to as the “innocent purchaser defense.” This defense cannot be used unless an owner can show that at the time of purchase, the owner undertook “all appropriate inquiry” into the condition of the property and did not find any problems with the property. This commercially reasonable inquiry into the property condition has been commonly referred to as a “Phase I Environmental Site Assessment.”

Although CERLA has been around for many years and has resulted in tremendously expensive clean-up liability for many unsuspecting owners, it is still not uncommon for parties to acquire property without environmental due diligence or with inadequate investigations in an effort to “save money.”

A buyer must understand that inadequate due diligence related to a real estate purchase will likely mean that they have no defense to liability. For a buyer analyzing potential risk, a $100,000 purchase is not a mere $100,000 risk. In a transaction involving the wrong property, a buyer might believe they are getting a “deal” on the purchase price of a real estate asset but they may find, instead, that they acquired an unlimited liability, with the Government or other parties looking to the buyer to fund an expensive remediation of soil and/or water (either surface water or ground water). This problem may be brought to the buyer’s attention when they sell the property, obtain a loan secured by the property or when a neighboring owner identifies the buyer’s property as the source of a problem such as water contamination.

Prudent buyers in the real estate market understand that seeking the advice of qualified professionals, such as environmental attorneys and consultants, is just another form of insurance in real estate transactions, especially considering that standard liability insurance policies do not provide coverage for liabilities related to environmental conditions.

Discovering a problem does not mean that your deal is doomed, especially considering the laws in place to encourage development of “brownfield” sites. By properly identifying the risks in a transaction, a buyer can try to quantify their potential liability and take steps to minimize such liability at or before the closing. Saving money by avoiding the costs of environmental investigations in your real estate deal may be one of the most costly decisions you can make.
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Ron Talley is a partner at HunterMaclean’s Savannah office who specializes in real estate, environmental and commercial finance law. He can be reached at rtalley@huntermaclean.com or 912.236.0261