June 01, 2016 Feature

So Your Client Wants to Sell Contaminated Property

Rebecca Wright Pritchett

Buying and selling property can be stressful events for clients under the best of circumstances. When the property is or might be contaminated, clients’ anxiety levels tend to skyrocket. These stress-inducing properties are referred to as “brownfields.” They may be abandoned, contaminated industrial sites or downtown properties with outdated commercial buildings and little or no contamination. According to the U.S. Environmental Protection Agency (EPA), a brownfield is any property where expansion, redevelopment, or reuse is complicated by the presence or potential presence of environmental contamination.

Our system of environmental laws addressing the responsibility for contamination can make owning a brownfield a scary proposition for many clients. Although this system of federal and state laws is complex, the general principles are easy to grasp. The current property owner usually can be held liable by the government for cleaning up existing contamination or for repaying the government for cleaning it up, even if the current owner had nothing to do with causing the contamination. Prior owners who held title when the contamination took place and others who contributed to the contamination usually can be held liable as well. In most cases, liability is joint and several, meaning that any liable party can be forced to pay for the entire cleanup. Current owners can’t avoid liability simply by selling the property. There are a small number of exceptions to these basic principles. The most comprehensive of the laws imposing liability is the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, also known as the Superfund program), but other laws also can impose liability at brownfield sites.

In recent years, federal and state governments have adopted brownfield redevelopment programs aimed at creating incentives for redevelopment, helping purchasers minimize the potential risks and putting these brownfield sites back to work. Many of these programs provide financial incentives and liability protection to those who assess and clean up brownfield sites.

A brownfield owner who intends to sell the property has a number of options for timing the sale or redevelopment. The owner can attempt to sell the property in its present condition, without resolving any uncertainties about environmental issues, and risk exposing both the purchaser and the seller to substantial legal liability for any contamination. The owner also can address all environmental issues before the sale, reducing uncertainty, exposing the purchaser to little or no liability, and significantly minimizing the seller’s potential future liability. Your job as legal counsel is to help your client evaluate the advantages and disadvantages of these options, as well as other alternatives that fall somewhere between these two extremes.

If you represent the seller of a brownfield site, your client first must evaluate whether and when to assess the environmental condition of the property. One option is for the owner to sell the property “as is,” without doing any further investigation. Another option is to assess the property prior to the sale; based on the results of this assessment, the owner can allocate any liability for contamination in a contract with the purchaser and can arrange to clean up the contamination either before or after the sale.

Selling “As Is” Without Assessment

Assuming he or she can find a prospective purchaser willing to buy the site in its present condition with little or no reliable information about its environmental state, the owner might consider an “as-is” sale—one where the seller transfers the property without assessing it or conducting any cleanup, disclaiming any warranties. This approach may be useful when the seller does not have the funds necessary to pay for any assessment or cleanup. This approach avoids any reporting requirements that might derail a sale or lead to a government agency ordering the owner to clean up the property. (Some states require owners to report the discovery of certain kinds of serious contamination. Reporting to the federal government may also be necessary in some instances.)

However, in this scenario, the seller may be unable to negotiate a price for the property that reflects its actual value because the purchaser will be accepting the majority of the risk of future environmental costs, resulting in a discounted purchase price. If the environmental expenses turn out to be less than expected, the purchaser gets the advantage of the cost savings, and the seller receives less than the property’s actual worth. Frequently, however, the purchaser will want to conduct its own environmental investigation prior to closing, and an as-is sale will not be considered.

If your client wants to pursue an as-is sale, you should consider negotiating to include some additional clauses in the purchase agreement that will supplement the as-is clause. For example, you might include a disclaimer of express or implied warranties; an acknowledgement by the purchaser that it is not relying on any statements or disclosures by the seller or its agents; and a merger clause providing that all agreements between the parties are merged into and do not survive delivery of the executed deed. Other provisions to consider are a specific release of claims for environmental contamination, including any statutorily granted contribution or cost recovery rights, and a specific indemnity provision requiring the purchaser to reimburse the seller for any expenses related to environmental claims by third parties.

Although these clauses will help avoid some liability for environmental conditions, they do not absolve the seller of all liability. In most states, sellers have no affirmative duty to disclose environmental conditions on the property prior to its sale. However, there are exceptions, so check your jurisdiction before advising your client. Even in states with no mandatory disclosure rules, the seller still may be liable in cases of fraud. When advising your client about selling property with known contamination, counsel that disclosure is generally the best policy.

An as-is sale also does not protect the seller from enforcement actions by federal or state authorities seeking to force the seller to clean up the property or reimburse the government for the cost of cleanup. And if the purchaser doesn’t have the money to cover any indemnity obligations imposed by the contract, the seller is still liable.

Assessing First

A better option for most sellers is to assess the property for environmental contamination prior to closing. Then the seller can make an informed decision whether to conduct any necessary cleanup itself and sell the property “clean” or to discount the price and let the purchaser conduct any required cleanup. The seller can do the assessment prior to offering the site for sale, or either party can conduct the assessment after a purchaser is identified.

Assessments should be tailored to answer questions about the specific property being sold based on the information that is available at the time. The goal is to move from knowing general information about the site that simply identifies risks to knowing specific information about site conditions. An environmental assessment can consist of several phases.

A Phase I assessment is designed to identify and review all relevant, existing data that might provide insights into potential contamination on the property. The specific requirements of a Phase I assessment are defined in regulations adopted by EPA and in standards adopted by the American Society for Testing and Materials (ASTM). In this phase, a qualified consultant will review existing documentation, regulatory records, historical photographs, etc.; interview the purchaser, current owner, and prior users of the property; perform a visual inspection of the property; and present conclusions regarding the property.

If the Phase I assessment gives reason to believe that the property might be contaminated, a Phase II assessment may be warranted. If so, the environmental consultant will develop a plan to collect samples of soil, groundwater, and any other areas that might be contaminated, as well as any wastes stored on the property, based on the Phase I findings. A limited Phase II assessment will identify whether contamination exists in the areas that are tested, but additional Phase II testing may be required if the parties want to define the full extent of any contamination found.

If the property is assessed prior to sale, the assessment should be done by an experienced environmental consultant. When hiring consultants, check their contract for reasonable limitations on liability and adequate insurance coverage to backstop any errors and omissions risks.

Doing the assessment will allow the seller to determine whether a price adjustment or investment in cleanup will be required and how long any resulting cleanup might take. Although it is nearly impossible to predict accurately the final costs of any cleanup, a good assessment should result in a significantly smaller contingency for cleanup cost uncertainties in the final price negotiations. This kind of assessment can be done by the seller before offering the property for sale, but waiting until a potential purchaser is identified may be a better option. Most sophisticated purchasers will insist on having their own consultant perform an assessment so they can structure it around their needs and their intended use of the property.

To Clean Up or Not to Clean Up

If the property is assessed prior to sale, the seller will need to decide whether to clean up the property before closing or to sell it as is. Both options have advantages and disadvantages.

Pre-closing cleanup. Conducting the cleanup prior to sale allows the seller to control the cleanup process, to ensure that the cleanup is done correctly (minimizing future liability), and to get the full value of the clean property. It also requires the seller to assume all the environmental costs prior to sale. The seller will have to assume the risk that the costs may be higher than estimated—possibly so high that it is impossible to make a profit on the sale of the property. This approach also delays the payment of proceeds from the sale to the seller, frequently for a significant period of time.

If your client chooses to pursue this option, it may be beneficial to identify a potential purchaser before proceeding with the cleanup. Frequently, the intended future use of the property is taken into consideration by regulatory agencies when setting site-specific cleanup standards. For example, if a property is going to be used for industrial purposes, the cleanup standards may be less stringent than if it were to be used for a day care because the level of exposure to pollutants will be reduced. Consequently, cleaning up the property without identifying its final use may result in the seller’s assuming that a higher level of cleanup will be necessary and conducting a cleanup that is more thorough—and more costly—than necessary.

Post-closing cleanup. A necessary cleanup sometimes can be postponed until after closing, depending on the circumstances of the transaction. Post-closing cleanups usually are conducted by the purchaser after discounting the purchase price to account for the anticipated cost of cleanup. However, there are other options to consider. For example, the seller can perform the necessary cleanup at its own expense after closing. This kind of arrangement requires a detailed contract between the seller and the purchaser outlining the rights and responsibilities of the parties, time frames, circumstances under which those time frames can be enlarged, insurance requirements, communication between the parties, etc. Most purchasers will insist that all or a portion of the purchase money be set aside in an escrow account to pay for the agreed-upon cleanup.

One advantage of this kind of arrangement for the seller is that the purchase money is available to pay for the cleanup. Another advantage is that the seller retains control of the cleanup process, allowing it to ensure that the cleanup is done correctly, which minimizes potential future liability. The seller also gets the benefit of any cost savings. If the property is being redeveloped by the purchaser, part of the new construction (such as building foundations or paved parking lots) could be used as components of the cleanup. The downside of such an arrangement is that the seller runs the risk of cost overruns and has to stay involved in the cleanup until the terms of its contract with the purchaser are fulfilled.

As stated above, the purchaser usually conducts post-closing cleanups. The purchase price will obviously be discounted, and any cost savings will benefit the purchaser. The seller will lose control over the cleanup, but you can try to negotiate contract provisions on your client’s behalf requiring the purchaser to complete the cleanup and obtain approval from the appropriate regulatory agencies by a certain date. You also can include indemnity provisions benefiting the seller.

Conclusion

Brownfield transactions don’t have to be overly stressful if you help your clients understand their options and limit their liability to the extent possible at each step along the way. These are, after all, just real estate deals—with a twist.

Brownfield Redevelopment Incentives

Federal, state, and some local governments provide incentives for brownfield cleanup and redevelopment. Some of these incentives are provided directly to property owners, while some are limited to communities and local governments. Potentially available incentives include:

  • federal, state, and local tax incentives;
  • grants;
  • low-interest loans;
  • liability protection;
  • waived recording fees;
  • technical assistance;
  • streamlined government oversight of cleanups; and
  • public development of necessary infrastructure (frequently using tax increment financing, or TIFs).

Additional Resources

  • Kathleen Whitby and Andrew Brought authored a terrific article on “Top Ten Tips for Client Counseling on Phase I Environmental Site Assessments,” available in the ABA Section of Environment, Energy, and Resource’s Environmental Transactions and Brownfields Committee Newsletter, August 2015, volume 17, number 3, page 11: tinyurl.com/zqlotta.
  • A wealth of information is available on EPA’s Brownfields Program website: epa.gov/brownfields. EPA also provides an excellent overview of brownfield projects in its “Anatomy of Brownfields Redevelopment”: tinyurl.com/z94pucb.
  • The ABA Section of Environment, Energy, and Resources’ Environmental Transactions and Brownfields Committee’s website generally has a host of helpful resources and timely articles regarding brownfield transactions (including links to state-level brownfield programs in all 50 states and the District of Columbia): tinyurl.com/gkvsx86.
  • For additional information about a seller’s duty to disclose environmental conditions, see “Buyer’s Claims Against Seller Who Fails to Disclose Environmental Condition of Property,” American Jurisprudence Proof of Facts, volume 36, page 471 (2012).

Rebecca Wright Pritchett

Rebecca Wright Pritchett is the principal of Pritchett Environmental & Property Law, LLC, a full-service law firm in Hoover, Alabama, representing businesses and industries in environmental and natural resources law matters.