Minimizing Environmental Risk In Real Estate Transactions

Caveat emptor. Although the harsh effect of this common law mantra is

typically handled through complex real estate conveyance contracts, a purchaser

of commercial real estate should remain wary of potential environmental

pitfalls. Contracts are designed to allocate risk. In dealing with environmental

laws such as CERCLA (commonly known as "Superfund") and its state

counterparts, however, the governmental agencies enforcing such laws will look

first and ultimately to the property owner. Under the liability scheme of CERCLA,

owners of contaminated properties are deemed liable for the cleanup costs,

regardless of fault. A property owner then bears the burden of proving

nonliability under the statute.

Prospective purchasers, lenders and fiduciaries can protect against such

liability by requiring a careful assessment of the environmental condition of

commercial or industrial property before the purchase is consummated. While

petroleum contamination is not governed by CERCLA, it falls within the realm of

most state Superfund statutes as well as other federal laws and regulations, and

is a common pollutant on industrial properties.

The ASTM (American Society for Testing and Materials) standards are well

recognized guidelines for evaluating the environmental condition of commercial

real estate. These requirements are designed primarily to satisfy the

requirements of CERCLA in establishing an "innocent landowner"

defense. In order to avail oneself of the defense, one must conduct "all

appropriate inquiry into the previous ownership and uses of the property

consistent with good commercial or customary practice." In its standards,

ASTM attempts to define what constitutes "all appropriate inquiry" by

setting forth requirements for a Phase I environmental site assessment, commonly

called a "Phase I" or "ESA."

A Phase I has four basic components: (1) a review of public and private

records relating to the property; (2) a site visit; (3) interviews with the

property's current owners and operators; and (4) compilation of this

information into a written report. ASTM has recently revised the standard to

require the environmental professional conducting the Phase I to state his

opinion in the report as to why known or suspected contamination is not of

concern to the purchaser. This beefed-up documentation will provide an

additional level of protection to the purchaser in showing that the purchaser

conducted due diligence in evaluating any taints on the...