Transactions - Tools for Dealing with Contaminated Properties

Republished here by permission of Texas Lawyer © 2000 - Vol. 15, No. 46

03/12/2000

The word is out. Parties to real estate transactions recognize that Superfund and analogous programs create substantial risks for those who fail to investigate for the potential presence of onsite contamination. The relevant inquiry is no longer how to determine whether contamination is present; the relevant inquiry instead is how to deal with it when you find it?

The specter of strict, retroactive, and joint and several liability has clearly been a deterrent to doing deals involving contaminated properties. This situation was exacerbated by U.S. v. Fleet Factors, a 1990 11th Circuit case that seemed to expand lender liability and dried up loan money for deals involving contaminated property. Congress, in 1996, and the Texas Legislature, in 1997, however, soothed lender fears somewhat with statutory changes giving lenders a road map to minimizing exposure to Superfund and storage tank owner/operator liability.

Although Superfund and related statutes contain beefed-up protections for secured creditors, and affirmative defenses for potentially responsible parties, the legal uncertainties associated with taking advantage of these protections and asserting these defenses have left parties to real estate transactions uneasy.

Recent governmental initiatives, however, especially on the state level, have given these parties significant tools to reduce the risk of environmental liability. These initiatives have involved grants and other financial incentives, as well as risk reduction mechanisms, in particular voluntary cleanup programs (VCPs). The private sector also has developed helpful risk management tools such as competitively priced policies for pollution liability and cap coverage that limits the cost of remediation.

Risk Reduction

Since its inception in September 1995, the Texas VCP administered by the Texas Natural Resource Conservation Commission (TNRCC) has facilitated over 900 cleanups. The incentive for parties to participate in the process has been three-fold: 1. receipt of an objective determination by the TNRCC staff that an implemented remediation program (or the current condition without remediation) is protective of public health and the environment; 2. protection from civil prosecution and waiver of certain permitting requirements during implementation of the remedy; and 3. receipt of a release from liability to the state for future property owners, operators and lenders.

The release from liability becomes effective upon TNRCC’s issuance of a VCP certificate of completion. Although this release applies only to state actions, it has the practical effect of limiting liability to the federal government as well. The Environmental Protection Agency (EPA) supports the VCP through a memorandum of agreement and, so far, the EPA has left VCP sites alone. The TNRCC’s innocent owner/operator program (IOP) provides a release similar to that of the VCP, but only to the existing landowner if he or she can establish that the contamination on his or her property is solely attributable to an offsite source.

Acceptable cleanup levels are found in the TNRCC’s recently promulgated Texas Risk Reduction Program (TRRP), which replaces, among others, the agency’s risk reduction rules and petroleum storage tank site cleanup rules. Under the TRRP, parties remediating sites may choose from three risk-based cleanup levels, ranging from generic to site specific, and from two response actions: permanent removal or decontamination, or exposure prevention, involving physical and institutional controls, as well as decontamination and removal.

The TRRP sets response objectives not only to protect human health and the environment, but also to preserve the active and productive use of land. The TRRP allows for more flexibility than did the former rules, and has provided consistency by replacing multiple rules with one program. Because the program is complex, however, it will require substantial TNRCC guidance in its early stages.

The availability of the VCP and the IOP has enabled parties to real estate transactions to quantify and address the uncertainties associated with contaminated property, at least with regard to government liability. Although neither the VCP nor the IOP protect against third-party claims, certificates issued under these programs should benefit parties who find themselves defendants in such litigation by helping establish that cleanup was completed to levels protective of public health and the environment. The fact that VCP and IOP certificates are relevant to issues in litigation, however, has had the unintended consequence of tying up TNRCC personnel as expert witnesses in these cases.

Although the VCP and IOP programs offer significant benefits to parties to real estate transactions, there are problems with using them. Both programs are understaffed, resulting in delays in TNRCC’s response to reports, and they are also becoming more complex. TNRCC is developing several policy documents and offering public forums for input on those documents.

The risk reduction tools established by the private sector supplement the protection afforded by state programs. Insurance companies are now issuing term policies, on a claims-made basis, that protect parties to real estate transactions involving contaminated properties. This is protection not only from costs of remediation, both known and unknown, but from third-party claims for property damage and toxic tort as well. Policies can be structured to cover not only pre-existing conditions but also new conditions. In recent years, the pricing of these policies has become competitive.

In addition to these types of coverage, insurance companies are issuing so-called cap coverage, protecting insureds against excessive remediation costs. A related option is offered by some environmental consultants in the form of a guaranteed fixed price for remediation. Each of these tools helps parties to real estate transactions quantify environmental liabilities.

Parties to real estate transactions no longer need to avoid a deal with contaminated property. With the VCP, IOP and the availability of the TRRP to establish reasonable cleanup levels, as well as the availability of cost-effective insurance coverage, parties now may delineate and quantify environmental risks, facilitating their ability to do deals.

Republished here by permission of Texas Lawyer (http://www.law.com/tx/) © 2000.  All rights reserved.

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