New Environmental Laws Offer Hope for Real Estate Lending

By Kellman, Mark A. | Journal of Property Management, May/June 1992 | Go to article overview

New Environmental Laws Offer Hope for Real Estate Lending


Kellman, Mark A., Journal of Property Management


In the darkening gloom of these recessionary times, new federal and state laws regarding a lender's role in hazardous waste contamination/cleanup cases may help to tunnel much-needed energy back into the real estate community.

Boiled down, these laws are more realistic than earlier regulations in spelling out lender-liability remedies. They provide wary lenders, driven to skittishness by environmental concerns, with the incentive to return to the business of lending.

The most important by far is a proposed rule interpretation by the Environmental Protection Agency of the "Superfund" law, a measure aimed at fairly limiting lender liability for the costs associated with the cleanup of contaminated real estate.

CHANGES TO THE SUPERFUND

The proposed rule, now in a third draft, is expected to gain approval in substantially the same form when a final rule is published (it is due by the end of May). The proposed rule removes much of the uncertainty facing lenders by interpreting the scope of the secured creditor exemption to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly known as the Superfund law.

CERCLA enables state and federal governments and private parties to recover costs incurred in response to a release or threatened release of hazardous substances from the "owner and operator" of contaminated property.

The definition of owner and operator excludes any person who, the EPA says, "without participating in the management of the...facility holds indicia of ownership primarily to protect his security interest in the...facility." This definition is commonly referred to as the secured creditor exemption. Under CERCLA, such secured creditors are insulated from liability for cleanup of contaminated property.

The need for this interpretation was triggered, in part, by the now infamous Fleet Factors decision made by a United States appellate court in 1990, a ruling widely criticized for being too broad.

In the case, the court found that the participation of a lender in the financial management of a facility "to the degree indicating a capacity to influence the corporation's treatment of hazardous material" could cause the lender to lose its secured creditor exemption. Under this ruling, virtually any lender could effect that type of influence simply through the power of the purse.

The EPAs proposed rule attempts to resolve these uncertainties by interpreting the scope of the secured creditor exemption. The activities specified in the rule are not required for a lender to qualify for the exemption. Rather, the EPA says, the purpose of the rule "is to specify, by illustration and example, the activities that a security holder may undertake without losing the exemption."

For example, the proposed rule requires the security holder to undertake an environmental inspection of the facility securing the loan but guarantees that this action will not endanger the lender's secured creditor exemption.

Depending on the results of the inspection, the lender may refuse to extend credit, determine that the risk of default is sufficiently slight to take a security interest in the contaminated property, or require the borrower to clean up the facility as a condition of the making of the loan. In addition, under the proposed rule, the fact that a lender knowingly takes a security interest in a contaminated facility will not subject it to CERCLA liability.

As for activities permitted during the loan term, the proposed rule makes clear that only by exercising control over the borrower's actual compliance with environmental issues its decision making will the lender lose its secured creditor protection. Such actions are defined as those in which the lender has assumed responsibility for the borrower's waste-disposal or hazardous-substance-handling practices that result in a release or threatened release of environmental contaminants. …

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New Environmental Laws Offer Hope for Real Estate Lending
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