Lender Liability: When Financing, A Phase I Environmental Site Assessment Should Be Considered
Lenders involved with financing or refinancing commercial or industrial property should be concerned about the environmental condition of the property. Under federal and state Superfund laws, owners and operators of property where there has been a release of hazardous substances may be liable for response costs which include investigation and remedial or removal actions. Transporters and companies that generated hazardous substances that were disposed at such a facility may also face cleanup liability.
Federal Superfund laws were drafted to address serious environmental conditions associated with large site where massive quantities of drums of waste chemicals were dumped. In the decades before Superfund was enacted there were no regulations that prohibited such dumping. Sites such as Love Canal and Valley of the Drums spurred Congress to enact the Comprehensive Environmental Response and Compensation Act (CERCLA) also known as Superfund. Many states, including Minnesota, followed suit and adopted their own Superfund laws.
In Minnesota, the Minnesota Environmental Response and Liability Act (MERLA) was enacted. Under MERLA, the Minnesota Pollution Control Agency (MPCA) is charged with identifying sites with release of hazardous substances, pollutants and contaminants and directing investigation and cleanup of those sites. Minnesota has a list of sites where investigation and cleanup is underway.
Federal and state Superfund laws impose joint and several liability. Owners, operators, transporters and generators can all be found to be potentially responsible parties (PRPs). A release of any quantity of hazardous substances can trigger Superfund liability. For that reason, parties involved with the purchase or sale of commercial or industrial property are well advised to carefully study the environmental condition of property prior to purchase. A Phase I Environmental Site Assessment performed according to the current ASTM Standard Practice E1527-13 is designed to protect a purchaser. As discussed below, lenders benefit from these protections as well. When “all appropriate inquiries” are conducted, the purchaser can maintain “innocent owner” status and avoid Superfund’s harsh liability scheme.
Although a lender may not be liable under federal and state environmental laws for merely holding a financial interest in a property, a lender should, nonetheless, be concerned about potential environmental concerns associated with the property. If a property is contaminated and the owner or borrower does not have the financial resources to deal with issues that are discovered to be a concern, the bank may find itself exposed to liability. If foreclosure on the property is necessary, the bank may be forced to deal with the underlying conditions of concern.
For certain properties, some banks perform a transaction screen, which is designed to identify or raise a “red flag” for obvious environmental issues. Some banks use the transaction screen for all properties under a certain value. However, because a transaction screen is only a cursory review, more serious issues that could be discovered at some future date may be missed. Lenders that conduct the more extensive Phase I review of property, the standard practice for environmental due diligence, will have a more thorough and comprehensive report that they may rely upon.
Any property in urban or developed areas has the potential to have been impacted by a release. The latest version of the ASTM Standard Practice E1527-13 outlines standardized procedures for environmental consultants to use when they are assessing environmental conditions. A Phase I has various components including a review of regulatory records, past and current site history and operations, interviews with the current owner, a site visit, title records, and review and consideration of conditions on neighboring properties that may be of concern. The ASTM Standard Practice was recently revised to require screening and assessment for potential vapor encroachment conditions.
Liability under federal and state Superfund laws is retroactive, joint and several. Liability applies to any site (regardless of the property’s size or value) where there has been a release of hazardous substances (regardless of the size of the release.) By conducting a pre-purchase or pre-financing Phase I, an owner or, in this case a lender, is completing “all appropriate inquiries” as required under applicable law. It is critical to select a competent and experienced environmental consultant so that the Phase I report is of the highest quality and meets the appropriate standard of care.
If “recognized environmental conditions” (RECs) are identified in a Phase I, further assessment of soil or groundwater conditions, referred to as Phase II, may be required. In addition, where groundwater contamination is present, it may be appropriate to assess the site for soil vapor gas. Soil vapors are a recent area of concern. Because soil vapors may accumulate under building slabs, vapors may enter occupied spaces. This potential danger has caught the attention of regulators and they are requiring more testing and, when appropriate, corrective measures.
To limit future liability, it is prudent for a purchaser, owner or lender to investigate issues and determine what steps should be taken to mitigate any concerns. Often state or federal agencies may determine that an investigation is adequate and that an owner or lender is not associated with an identified issue. With a completed site assessment in hand and, if issues are discovered and then addressed by a government agency sign off, the transaction may proceed.
The lawyers at the Hessian & McKasy’s Environmental Law Practice Group regularly advise clients involved with the purchase, sale and financing of all types of property including commercial and industrial property. We provide lenders with opinions. We also consult with business and real estate attorneys involved with transactions. We make recommendations as to the retention of environmental consultants, ordering and review Phase I reports and assess whether follow-up Phase II testing may be required. We analyze liability concerns and provide opinions which include risk assessments. When appropriate, we seek liability assurances on behalf of our clients from state or federal authorities.
Please see the disclaimer at the top of this page that relates to limitations on this blog and to legal advice. For information on limiting Superfund liability please contact:
Joseph G. Maternowski
Hessian & McKasy, PA