Many businesses or developers are intimidated about purchasing property former industrial or commercial property that may be contaminated. The fear of the unknown can be the biggest deterrent to considering properties that may be contaminated. Common concerns include:
- Could I be buying a potential mess, which could cost me six to seven figures to cleanup?
- Could I be risking being liable to neighboring property owners if contamination is migrating off-property?
- I don’t like spending upfront money on due diligence that may be lost if I don’t purchase the property; and
- The complexity of environmental risk management is daunting.
These are legitimate concerns. However, with the right approach there could be advantages to developing potentially contaminated property. First, you should likely be able to negotiate a reduced purchase price. I have had multiple deals where the property was purchase for $1. Second, you may be able to leverage brownfield incentives to offset your due diligence or cleanup costs.
I have reviewed hundreds of Phase I and Phase II environmental assessments. I also have managed redevelopment of highly complex brownfield sites as well as smaller sites with moderate contamination. Here are five common mistakes I see by businesses, developers and even attorneys when purchasing potentially contaminated property.
1. The LLC
Many buyers think that if the simply put contaminated property under ownership by a limited liability company (LLC) they will avoid personal liability. While putting such property under separate corporate ownership is still advisable, it will not insulate you from personal liability. There are a number of cases in which members of the LLC have been held personally liable even though they purchase the property with pre-existing contamination. Ohio is particularly aggressive in pursuing members of an LLC personally. Check out the following Ohio cases:
- State ex rel. Petro v. Mercomp, Inc. (2006) 167 Ohio App. 3d 64 – sole shareholder individual liable for corporation’s violations;
- State ex rel. Cordray v. Evergreen Land Development, LTD 2016 WL 5408651- members personally participated in violations, and thus were jointly and severally liable with the LLC;
- State ex rel. Petro v. Pure Tech Sys., Inc., 2015 WL 1959935- evidence sufficient to hold shareholder personally liable for a $6 million dollar penalty;
- State v. Tri-State Group, Inc., 2004 WL 1882567- shareholder found personally liable for permit violations;
- State ex rel. DeWine v. Sugar, 2016 Ohio 884- shareholder personally liable for failure to correctly remove and dispose of asbestos;
- State ex rel. DeWine v. Marietta Industrial Enterprises, Inc., 2016 WL 6875425- overruled lower court and found there were genuine issues of material fact as to whether the president of the company, who was engaged in day-to-day compliance, could be held personally liable
2. The “As Is” Sale
This is more of a mistake on the seller’s side, but it is probably the singled biggest costly mistake I see made in transactions involving contaminated property. The seller includes an “As Is” clause in the sale agreement and believes that the buyer is taking on all liability with regard to pre-existing contamination.
An “As Is” clause is simply a disclaimer of representations with regard to the condition of the property. Unless the seller specifically includes a release of liability in the sale agreement, buyer still can sue seller for pre-existing contamination under a number of environmental statues as well as common law. If you are selling property make sure you include a well-crafted release of environmental causes of action.
3. If I Buy Contaminated Property I Must Perform a Highly Expensive Cleanup
Most transactions involving contaminated property actually do not involve a full-blown cleanup under a particular environmental statute. In Ohio, the brownfield cleanup program is called the Voluntary Action Program (VAP). While the VAP can work well with highly contaminated property it doesn’t fit well with smaller or properties with marginal or moderate contamination.
To promote more redevelopment and reuse of contaminated property, U.S. EPA created the “Bona Fide Purchaser Defense” (BFPD). The BFPD allows a buyer or potential tenant to significantly reduce their potential liability if the perform a certain level of due diligence (Phase I and Phase II property assessments). If those assessment identify contamination, the BFPD requires the buyer to take “reasonable steps” to address contamination. Broadly speaking, reasonable steps means eliminating ongoing releases of contamination and prevent exposure to contamination. In the vast majority of cases, it will not mean full-blown cleanup of contamination. Someone who properly utilizes the BFPD can appropriately manage their environmental risk allowing them to purchase or lease property that other buyers or tenants may avoid.
4. Seller Gave Me a “Clean” Phase I
Often I will here a buyer say they don’t need to worry about environmental contamination because the seller of the property gave them a Phase I environmental assessment that showed no issues (i.e. a “Clean” Phase I). However, overreliance on another party’s Phase I could be very problematic for several reasons:
- A Phase I must be less than a year old and updated after six months to still provide BFPD protections to a buyer;
- In order to use the seller’s Phase I, the buyer must get what is called a reliance letter from the environmental consultant that allows the buyer to rely on the conclusions of the report;
- Low quality Phase I environmental assessment often show no issues. Make sure the Seller used a reputable company and that the Phase I was performed to appropriate standards (i.e. ASTM 1527-13)
- Remember that a Phase I does not involve any actual sampling of the property, therefore, contamination may go missed which is why it important to make sure you, as the buyer, qualify for the BFPD
5. Not Having an Environmental Attorney Review the Purchase Agreement
I know this sounds self-serving, but I cannot tell you how many times in my practice I have seen this issue cause huge issues for both buyers and sellers of potentially contaminated property. A number of times I have been brought in late into a deal and the Client sends me a form purchase agreement that doesn’t address environmental issues. There are very specific environmental provisions in purchase agreements, which need to be carefully reviewed and negotiated. These include:
- Reps and warranties- Is there an “As Is” Clause? Are there other reps being made about the environmental condition of the property? Has the buyer made a rep that they have provided all available environmental reports in their possession?
- Release- Is there a release of environmental liability included in the contract? If so, what is the scope of the release? There are court cases which have heavily analyzed the exact wording of environmental releases in contracts
- Environmental Indemnity- Is either buyer or seller or both providing indemnification for environmental liability? This is often the most challenging environmental provision in a purchase agreement to negotiate.