Environmental Concerns for Real Estate Purchase and Sales - Part 1

by Martin T Jones on Jul. 19, 2018

Real Estate Real Estate Other Environmental Law  Environmental Law Other 

Summary: A discussion of the environmental due diligence process in real estate transactions, why it is necessary, and issues to be concerned about. Part 1 addresses the impact of Environmental regulations on land use.

NATIONAL BUSINESS INSTITUTE

Altoona, Wisconsin

October 20, 2015

ENVIRONMENTAL LAW FROM START TO FINISH

Environmental Concerns for Real Estate Purchases and Sales

by

Martin T. Jones

The information contained herein is for reference purposes only and is not intended to provide legal advice or substitute for legal counsel under any circumstances.  If you have questions concerning environmental issues, please consult your attorney or other environmental professional.

I.                   INTRODUCTION

The 1960s ushered in a new era of environmental awareness in the United States and, ultimately, environmental regulation in our country. Rachel Carson’s famous book Silent Spring was published in 1962 and for the first time focused the country’s attention on pollution issues. The Clean Air Act (the “CAA”) was first adopted in 1963, followed by the Air Quality Act in 1967. On January 1, 1970, Congress enacted the National Environmental Policy Act (“NEPA”). That year also saw the establishment of the federal agency that would be responsible for administering all of the new federal laws, the United States Environmental Protection Agency (“EPA”). The Endangered Species Act (“ESA”) became law in December 1973, the Resource Conservation and Recovery Act (“RCRA”) became law in 1976, and the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”; aka the “Federal Superfund Act”), became law in 1980.

Many of those laws have direct impacts on land use and development. This paper will provide some background on several of those laws, including CERCLA, the Clean Water Act (“CWA”), the Clean Air Act, and the Endangered Species Act, and try to alert you to some of the potential impact each of those laws can have on land use and development.

 II.                THE IMPACT OF ENVIRONMENTAL REGULATIONS ON LAND USE

 There is a tendency for those engaged in property ownership or real estate development to overlook environmental concerns, partly because the issues are often not obvious and do not get a lot of media attention, partly because it is a complicated area of the law that people do not understand, and partly because there is expense involved in doing thorough environmental due diligence, an expense that some feel they can safely avoid. That is a very dangerous attitude. For the prospective land owner or developer, a basic concept that needs to be understood, even if s/he does not understand the details, is that environmental regulations trump all other land use regulations. The property owner can successfully change the Comprehensive Plan, rezone the property to allow the intended use, obtain approval for his subdivision, and still be denied building permits or certificates of occupancy because of environmental issues impacting the property.

In some cases, the property owner may spend substantial sums buying or developing the property and then not be permitted to use it. I recently had a client who purchased an office building in Colorado, only to later discover that the building had a problem with radiation being emitted from some of the building materials used in the original construction. The Colorado Department of Health refused to allow him to lease the office space until the radiation problem was remediated, at a cost of about $350,000.

In the worst cases, the property owner can be liable for millions of dollars in environmental cleanups for contamination s/he did not cause and perhaps was not even aware existed.  This can happen years, even decades, after the property owner has divested himself of any interest in the property.  A recent example of this type of liability can be found in the case of United States v. Honeywell, 542 F. Supp 2d 1188 (E.D. Cal. 2008). 

In the Honeywell case, an historic mining operation spread tailings on the Mesa de Oro property in central California in the early 1900s. Arsenic from the tailings dump-site migrated to the adjacent parcel. Beginning in 1960 grass and weeds grew over the tailings and by the late 1970s no one thought of the tailings dump as anything but a grass-covered hill.

In 1978 the property adjacent to the former tailings dump was purchased by Mr. Bruner.  He was not aware of an environmental problem with the property, but did not conduct any environmental due diligence prior to purchase, at least in part because CERCLA[1] had not yet been adopted and, therefore, no one was conscious of the need to preserve CERCLA defenses.

Mr. Bruner hired subcontractors to perform grading, trenching, etc., on the property adjacent to the former tailings dump in order to develop a residential subdivision known as Vista Ray.  He finished 12 lots and built houses on 4 of them. Mr. Bruner sold the property in 1982.

In 1995 EPA tested the soils of the Vista Ray subdivision and found severe arsenic contamination.  EPA remediated the residential properties by excavating, removing, and replacing soil and landscaping from all residential lots in the Vista Ray subdivision. EPA then sued Honeywell International, Alpheus Kaplan, and Nehemiah Development Company (the successors in interest to the owners of the mine). EPA’s suit sought recovery for all costs of soil sampling and testing, air quality monitoring, and project management reports on the removal actions conducted on the lots in Vista Ray. In addition, costs for health assessments of persons living in homes in Vista Ray, as well as costs for labor and materials of EPA’s removal action, were included in the claim.

The defendants filed third-party claims against Mr. Bruner and 36 other third-party defendants seeking contribution under 42 U.S.C. § 9613(f). The original defendants ultimately settled with EPA for $721,000 ($121,000 of that amount coming from settlements with third-party defendants). Mr. Bruner refused to settle, claiming he had nothing to do with the contamination of the property. The matter went to trial with third-party plaintiffs alleging that Mr. Bruner owed them $160,000 as his share of the cleanup costs.

The Court went to great lengths spelling out that, “The statute…authorizes private parties to institute civil actions to recover the costs involved in the cleanup of hazardous wastes from those responsible for their creation...To do so, private parties ‘must establish that 1) the site on which the hazardous substances are contained is a ‘facility’ under CERCLA’s definition of that term; 2) a ‘release’ or ‘threatened release’ of any ‘hazardous substance’ from the facility has occurred; 3) such ‘release’ or ‘threatened release’ has caused the plaintiff[s] to incur response costs that were ‘necessary’ and ‘consistent with the national contingency plan’; and 4) the defendant is within one of four classes of person subject to the liability provisions of Section 107(a).” Id. at 1197.

The Court found that Vista Ray clearly fell within the above definition because there was ample evidence of the existence of high levels of arsenic throughout the site. The Court then found that there had been a release of the arsenic. “The term [release] is liberally construed. In Lincoln Properties, the Ninth Circuit cited with approval the Fifth Circuit’s holding that ‘developers could be held liable under CERCLA notwithstanding the fact that they did not introduce the hazardous substances into the environment in the first place…but the Ninth Circuit went further in Lincoln Properties stating that ‘[t]he definition of ‘release’ at issue here is even broader…and includes additional terms such as ‘emitting’ and ‘escaping’ that imply no active human participation.’ It is undisputed that Vista Ray subdivision tested positive for arsenic contamination. Therefore, a ‘release’ under the terms of the statute unquestionably occurred.” Id. at 1198.

The Court found that there was no dispute that arsenic is a hazardous substance, so moved on to the issue of whether Mr. Bruner was a Potentially Responsible Party (“PRP”), stating, “…one category of PRP is a person who owned the facility at the time of the disposal of the hazardous substance. ‘CERCLA imposes liability on the past or present owner of a facility at which hazardous wastes were released or disposed of…Mere ownership of the property on which the release took place is sufficient to impose liability under § 107(a), regardless of any control or lack of control over the disposal activities…It is undisputed that [Bruner] was an ‘owner’ of the Vista Ray property during the time of excavation, grading and further development.” Id. at 11998, 1199 (emphasis added). The Court also determined that “by dispersing…contaminated soil throughout a subdivision the developers had disposed of it…” Id.

Finally, the Court addressed Mr. Bruner’s argument that he could not be liable under CERCLA because he was an “innocent landowner.” “In order to successfully raise this defense, Third-Party Defendant must establish by a preponderance of the evidence that a third party who was not Third-Party Defendant’s employee or agent, and with whom Third-Party Defendant had no direct or indirect contractual relationship, was the sole cause of relevant damages. If Third-Party Defendant is able to meet this threshold requirement, he must further prove, also by a preponderance, that he exercised due care with respect to the hazardous substance and that he took precautions against foreseeable acts or omissions by the third party.” (emphasis in original).

Mr. Bruner contended that the mining operation was the sole cause of the contamination. The Court said, “The Ninth Circuit analyzed the phrase ‘caused solely by’ in detail in Lincoln Properties. That court rejected both a fault-based and an acts/omissions approach to interpretation and determined instead that the phrase required a ‘causation’ analysis. The court held that the language, ‘as used in CERCLA, incorporates the concept of proximate or legal cause. If the defendant’s release was not foreseeable, and if the conduct – including acts as well as omissions – was ‘so indirect and insubstantial’ in the chain of events leading to the release, then the defendant’s conduct was not the proximate cause of the release and the third party defense may be available.’

“Any argument that the release of materials is an unforeseeable consequence of the residual development of raw land is simply untenable. To the contrary, it is eminently foreseeable that development of such land would result in a release of whatever substances, hazardous or not, were in the soil.” Id. at 1200.

The Court briefly discussed whether or not Mr. Bruner had reason to know of the contamination, but ultimately found the issue irrelevant. “The parties appear distracted by whether Third-Party Defendant had ‘reason to know’ of the presence of the hazardous substance on the Vista Ray property prior to his purchase of that land. Generally, ‘one who purchases land from a polluting owner or operator cannot present a third-party defense.’ Nevertheless, ‘if the property [was] purchased after disposal or placement, and the purchaser did not know and had no reason to know that hazardous substances were disposed of there,’ the innocent landowner defense applies. However, only ‘[w]holly innocent landowners will not be held liable…To get a release from liability under this section, a landowner must not have himself or herself allowed or permitted any storage, nor have contributed to the release of any substance and, and this is very important, the landowner has the burden of proof to show that this landowner had neither actual nor constructive knowledge at the time of purchase that the property had been used for hazardous waste materials.” Id. at 1201 (emphasis added).

The bottom line in this case was that Mr. Bruner ended up being liable for contamination he did not know about, had no reasonable way of anticipating, and pursuant to a law that did not even exist at the time he bought the property. He was found liable for a portion of the cost of cleaning up the property 26 years after he sold the property.

The Honeywell case discussed above dealt with hazardous materials located on a property, but there are other common environmental issues that may prevent or limit development and/or use of a property.



[1] Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601, et seq.

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