How to manage environmental risk when buying or leasing real estate Featured

9:01pm EDT April 30, 2011
How to manage environmental risk when buying or leasing real estate

Virtually every real property deal carries a risk of environmental liability. Prior to acquiring or leasing a site, the business should consult a competent transactional lawyer to negotiate contractual protections in the contract or lease that minimize the exposure and risk of environmental liability.

These protections may include lengthy due diligence periods, representations and warranties regarding hazardous materials, indemnification provisions, carefully drafted provisions regarding responsibility for clean up, remediation and monitoring, and holdbacks or other security for future performance.

Smart Business sat down with M. Alim Malik and Alene Taber, land use and environmental attorneys with Jackson DeMarco Tidus Peckenpaugh, to obtain an overview of environmental risks that every owner or lessee of real property should evaluate.

What are the risks associated with purchasing or leasing property?

Whenever a business buys or leases a site for its operations, along with the structure and land, the business could inherit a land contamination problem that originates on the purchased site or is migrating onto the site. A purchaser or lessee could be held responsible for the remediation costs even if it did not cause the contamination.

Remediation can be very expensive and time consuming. There are numerous federal, state and local regulations that directly address real property contamination and its eventual abatement. The risks can be reduced by effective audits of the site, by way of a records review or invasive testing. What is sometimes overlooked are the other sources of potential liability, including claims that could be brought by occupants of the building (such as tenants or employees), by visitors to the property (such as vendors), or claims brought by third parties (such as neighbors or citizen groups).

The exposure to a business cannot be properly quantified unless some key issues are fully analyzed: 1) What is the nature, extent and impact of the contaminants?; 2) Are the contaminants being adequately monitored?; 3) What risk does the contamination pose to tenants, employees, visitors and off-site properties?; 4) What is the level, timeframe and cost of the clean-up, remediation and future monitoring requirements?; 5) Who will pay for these costs, now and in the future?; and 6) What public disclosures may be needed concerning the on-site problems?

What is the integrated approach method to evaluation?

Once you have notice of contamination on your site, the modern response is an integrated approach involving the business decision makers, a competent legal team and key environmental consultants. A competent environmental consultant can provide an early indication of a potential scope of work to determine the contamination, a series of options for remediation action plans, a conduit to the regulating authority (typically, the Regional Water Quality Control Board, the Fire Department or the EPA) and, working with the business decision makers and legal team, strategies to ensure remediation is progressing while minimizing risk of third-party claims.

What type of legal liabilities can arise from environmental contamination issues?

The monetary exposure to a business can be extreme. There could be significant costs involved in any response activity by the state (where the state has to intervene to clean up), damages for the full value of injury to or destruction or loss of natural resources, remedial actions or health assessments to protect the public health or environment and costs involved in preventing migration of the contaminant off site, in addition to monitoring, remediation and disposal costs. As learned from the recent Gulf of Mexico spill, there are significant potential liabilities both in the civil and criminal context. The discussion on the criminal issues is well beyond this interview, but it should be a factor every business should be mindful of when dealing with an environmental problem. Areas where there have been criminal charges filed include refineries, foundries and structures undergoing asbestos abatement. Finally, there can be activities by tenants and employees that interfere with remediation activities, and liability to nearby property owners and their occupants.

Are there new strategies on handling environmental costs?

Until quite recently, insurance companies typically included a ‘pollution exclusion’ clause in their policies where they would not cover damages flowing from contamination. However, the modern trend has been to write one of two forms of environmental liability insurance. The one used most often, environmental liability insurance, is designed to protect buyer, seller, or both parties against unknown risk in a transaction such as an unknown contamination, a new or future pollution condition, or third-party claims for bodily injury and property damages. We have successfully obtained insurance coverage for users on a former military base and for the purchaser of a semi-conductor facility.

The second and less common form of insurance is a cost cap or stop loss policy, which puts a ceiling on the actual cleanup cost of the site. However, the premiums on this type of policy tend to be somewhat expensive and environmental liability insurance is typically the preferred option. In addition, the lease or purchase agreement may have extensive provisions for handling known and unknown environmental issues.

How do I respond if a lawsuit is filed?

Immediately upon receipt of a lawsuit, confer with a competent legal counsel, engage a competent environmental consultant and tender to your insurance carrier. This integrated approach should assist the business in dealing with issues arising from any regulators or third parties, minimize off-site risks and also help put into place the necessary protections for any employees or tenants at an affected site. Environmental exposure can typically be managed but, as with all problems, the best results typically come from a business investing its resources at the earliest opportunity to help manage the risk.

M. Alim Malik and Alene Taber are shareholders with Jackson DeMarco Tidus Peckenpaugh. Reach Malik at amalik@jdtplaw.com or (949) 851-7458. Reach Taber at ataber@jdtplaw.com or (949) 851-7492.