Magazine article Journal of Property Management

Toxic-Cleanup Laws and Real Estate Transactions

Magazine article Journal of Property Management

Toxic-Cleanup Laws and Real Estate Transactions

Article excerpt

Toxic-cleanup laws and real estate transactions

The real estate industry is entering a new era of state and federal toxic-cleanup laws that cover a tremendously broad scope. Recent federal and California legislation has significantly expanded the potential liability of all participants in real estate transactions with the real possibility of serious financial penalties and, in some circumstances, criminal sanctions.

The breadth of the new laws seems virtually unlimited. "Potentially responsible parties" can include persons who are faultness in the traditional sense. They could cover present or past owners, lenders who foreclose, individual corporate officers, and even inactive partners or joint venturers.

In every real estate transaction, there are multiple parties. Here are some protections which prudent participants in commercial transactions should consider.

The seller

The seller will want to know of any potential toxic or hazardous substances on the property in order to determine what types of representations, warranties, conditions, and indemnification provisions to include in the sales contract. Ordinarily, the fewer representations and warranties about the condition of the property the seller can make, the less the potential liability will be. Almost all sellers would prefer to sell property in an "as is" condition with no affirmative representations or warranties, provided the sales price is not adversely affected.

However, even with an "as is" provision, a sales contract cannot preclude a claim of fraud against the seller if the seller conceals known defects, such as toxic problems. Going beyond traditional concepts of fraud, a recently enacted California statute mandates written disclosure of hazardous substances by a seller if the seller merely has "reasonable cause to believe" that such hazardous substances exist on the property. Other states are passing similar laws.

In sum, the Latin phrase caveat emptor (let the buyer beware) is no longer applicable to protect the seller. To avoid the risk of rescission and/or damages in most transactions, a seller should conduct a toxic investigation to identify and disclose the existence of any hazardous substance risks. The careful seller must rely on the negotiation process to attempt allocation of the cleanup risks to the buyer without reducing the purchase price. The seller must also limit any preclosing buyer rights relating to hazardous substances to contract termination without damages.

The buyer

To minimize risks, the buyer, even more than the seller, should be sure the property will not be a toxic problem. The buyer should make a preliminary site investigation to identify any obvious signs of toxics, such as underground storage tanks, metal containers for chemical storage, discoloration of soil or floors, and so forth.

The buyer should investigate current and previous uses to determine the likelihood of present or past hazardous-substance use. Adjacent areas should be evaluated for potential hazardous-substance usages which might have migrated to the parcel.

The buyer should check with all local, state, and federal agencies which may have issued environmental permits to determine whether or not the parcel or neighboring property has been subject to any environmental enforcement investigations or actions.

Most importantly, a "due diligence" investigation of solid and ground water contamination on the site should be conducted to accomplish two purposes: first, to evaluate the contamination risks attaching to the property and, second, even if no contamination is found, to satisfy the "innocent landowner" defense under certain toxic cleanup laws if contamination is subsequently discovered and cleanup liability asserted against the buyer.

The cost of an in-depth toxic investigation can be quite substantial. Unless this cost is already reflected in a lower purchase price, the buyer should attempt to negotiate some type of reimbursement with the seller. …

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