Source: http://finance-commerce.com, January 17, 2012
By: Dan Heilman
Property owners can avoid being saddled with cleanup if they do their homework
Two of the most discussed pieces of property in the Twin Cities in recent months have been the former Arden Hills munitions site as a potential spot for a new Vikings stadium and the old St. Paul Ford plant that closed in December.
What the sites have in common is that they’re the subject of a lot of redevelopment talk, and both would be subject to environmental remediation before any redevelopment can occur.
Those high-profile properties, however, are only two examples of an issue that potentially affects every real estate transaction: environmental liability. Under state and federal law, an owner of real property can be held liable for the cost of removing and cleaning up hazardous waste contamination even if the contamination existed before the purchase.
That’s why it’s important for purchasers of any property, but especially commercial property, to do their homework before signing on the dotted line.
“The federal and state liability laws create problems for property owners who haven’t done due diligence prior to purchase,” said Joe Maternowski, an attorney with Hessian & McKasy in Minneapolis. “The federal Superfund laws, as well as laws related to underground storage tanks, create liabilities for owners.”
Owners should hire an environmental consultant to help complete a “Phase I” environmental site assessment and any appropriate follow-up work so that environmental conditions are identified and addressed before the purchase. A Phase I assessment will identify potential or existing environmental contamination issues on a piece of property, letting the buyer know before purchase exactly what might need cleaning up.
“A lot of the effort is gathering the information about a property and knowing what to do with it,” said Paul S. Moe, a partner with Faegre Baker Daniels in Minneapolis.
Moe said that the federal Superfund Act contains a blanket defense, known as the Bona Fide Prospective Purchaser Defense, which kicks in if a Phase I environmental site assessment is done within six months of the acquisition of the property.
“Even if the Phase I shows the property is contaminated, generally speaking, as long as you’re not making the contamination worse and you’re taking steps to deal with the issues, you don’t have to do a full clean-up and you’re protected against liability for those pre-existing conditions,” said Moe.
To qualify as a bona fide prospective purchaser, you must: not contribute to the contamination at any time; not have any affiliation with persons potentially liable for response costs at the property; comply with any environmental land use controls imposed by the state; take reasonable steps regarding the contamination and cooperate with all cleanup efforts.
Minnesota a leader in avoiding liability
Purchasers should also keep in mind that environmental liability can be a result not just of contamination, but also the presence of wetlands on a property.
“Knowledgeable purchasers will build into the due diligence period a way to ask whether the seller has a wetland delineation for the property and whether there are known wetlands on the property,” said Linda H. Fisher, an attorney at Fredrikson & Byron in Minneapolis. “An environmental consultant can go to the property and do a wetland delineation as part of the Phase I site assessment.”
The presence or absence of wetlands can affect the price of a property and even whether a prospective owner wants to buy in the first place. Most purchase agreements contain an environmental due diligence period that can include both contamination and wetlands, according to Fisher.
“There isn’t a comprehensive state list or map showing all wetlands,” she said. “Commercial developers are becoming more familiar with that program, so they build that into their due diligence.”
There are numerous ways for buyers to protect themselves from environmental liability. One that’s growing in popularity is environmental insurance, which, as the name suggests, provides another layer of risk management for buyers.
“I wouldn’t say insurance is necessary in every instance, but in cases where environmental impact has been documented, and state or federal agencies like the EPA or the Minnesota Pollution Control Agency (MPCA) have gotten involved, insurance may be a good idea,” said Maternowski.
And as it happens, Minnesota is one of the most favorable areas in the United States when it comes to avoiding environmental liability. Not only does the state not have a great deal of industries that tend to contaminate land, but it has the presence of the MPCA, which offers buyers what’s called a liability assurance letter, which essentially lets buyers off the hook for cleanup as long as they know any contamination won’t be exacerbated. Minnesota was among the first states to offer property buyers such an assurance.
“You can send the MPCA information about the property from your Phase I assessment, and they’ll send back a liability assurance letter confirming either that the contamination isn’t bad enough that it requires cleanup, or else saying it does need cleanup but you’re not responsible to do the cleanup because your use of the property won’t make the contamination any worse,” said Moe.
Still, buyers are encouraged to hire both an environmental consultant and an attorney, and to protect themselves from liability through a thorough, professional inspection of any property that interests them.
“As any developed area does, we do have past uses that resulted in releases of hazardous substance that could generate liability,” said Maternowski. “You don’t need heavy industry to have a big issue. A small release of dry-cleaning chemicals in an underground drain can cause problems.”