Environmental Contamination Brings Changes to Real Estate

Article excerpt

Environmental contamination of property is a factor that is impacting real estate transactions and is responsible for a change in the way contracts for commercial real estate are being written.

"Not that many years ago, before closing on a real estate transaction, you had to make sure the zoning was proper and the financing was in order," said Jim Austin, vice president and resident manager for Coldwell Banker Commercial Real Estate Services.

"Now, there is one more contingency that must be dealt with on every sale. I cannot imagine a commercial property changing hands without an environmental review."

Contamination of property can result in devaluation of property and poses potential liability for lenders and owners, said Mark Schwartz, attorney at law.

In the future, there will continue to be a heightened amount of scrutiny by all parties involved, said Michael Laird, a director of the law firm of Crowe & Dunlevy. In many cases, environmental issues can be the most critical financial issues involved in a mortgage lending transaction.

"The overall impact is that the cost of doing business in real estate is going to go up," said Laird. "The not-so-hidden carrying cost of cleaning up environmentally hazardous contamination will affect everybody who works in commercial real estate. The cost of operations increases and the asset value can decrease because of this contamination.

Contracts for the purchase or sale of real estate are changing as sophisticated buyers are inserting provisions that make the buyer's obligations to perform contingent upon there being no contamination found in an environmental impact study that is often paid for by the seller, said Laird.

The two extremes in the types of contracts are that the seller provides an environmental report that is acceptable and shows no contamination or the buyer purchases the property as is, regardless of any environmental problems that may be out there. The second example is pretty rare with the sophisticated purchaser, he said.

"Obviously, the safest position is not to get involved in real property at all," said Laird. "It is amazing the extent of the reach of the environmental tentacles. The problems have been ignored too long and now everyone is being brought to the table to pay the piper."

Awareness of the problem has increased dramatically over the past five to 10 years with the enactment of recent federal and state legislation, said Laird. There is a heightened awareness of the problem among people who deal in commercial real estate including lenders, owners and developers.

The number of people liable for cleanup varies depending on the type and extent of the hazard. Parties in the chain of title are usually the prime focus of liability under applicable laws, although others may also be liable if they are the source of the contamination.

"We have noticed a lot of changes in contracts for commercial real estate regarding environmental studies and, if things are found that are detrimental, it could be a reason for canceling the contract," said Eric Offen, executive vice president of operations for Lawyers Title.

"We have not seen any change in the residential contract form because we give coverage to the lenders on residential transactions.

"Another thing we have noticed is that many of the testing companies that do environmental studies come into our office and review abstracts to determine the prior owners. Oklahoma is way ahead of other states because we have abstracts."

The brokers and real estate people who put these deals together are affected more than title companies by the environmental problems, he said. Once it gets to the contract stage, those issues have normally been addressed and resolved.

There are numerous types of environmental contaminants that affect real property including sludge pits, polychlorinated biphenyls (PCBs) and disposal of toxic waste or chemicals that can result ground water contamination, said Schwartz. …