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Understanding Environmental Liability

02.24.08 written by

Perhaps one of the most complicated areas in any real estate transaction is the environmental liability. There exist a number of environmental laws and regulations which must be considered when purchasing real estate. The most well-known environmental law is the Comprehensive Environmental Response Compensation Liability Act (CERCLA). CERCLA provides a statutory framework for the government or private parties to hold individuals liable for the clean-up of hazardous substances released into the environment. 

Under CERCLA, there are four categories of parties who may be responsible for clean up costs: (1) current owners and operators of the property; (2) past owners and operators of the property; (3) those who arrange for the disposal of hazardous materials; and (4) the transporters who select the location for disposal of hazardous materials. The potential clean-up costs for hazardous materials can be astronomical, thus conducting the appropriate investigations prior to purchasing property is very important. In some cases, an innocent purchaser may be buying land without any knowledge of the environmental contamination, but nonetheless can still be responsible for the clean-up costs. 

In order to prevent this inequity, certain exceptions to liability have been created. One such exception is known as the “innocent landowner defense.” In order to use the “innocent landowner defense”, a potential purchaser must conduct ‘all appropriate inquiry’ into the property prior to its purchase. The ‘all appropriate inquiry’ standard requires a great deal of due diligence including: inquiry into the past ownership and uses of the property, a review of any environmental liens, interviews with current and former owners, a review of surrounding land uses and a number of other inquiries. Additionally, ‘all appropriate inquiry’ must be conducted under the supervision of an environmental professional. Individuals attempting to utilize the innocent landowner defense typically conduct a Phase I environmental study of the property. Essentially, an environmental professional conducts the Phase I study and determines the existence or extent of any hazardous contamination on the property. 

Environmental considerations are important not just for potential purchasers, but also lenders, tenants, and landlords all of whom can be potentially liable under CERCLA for clean-up costs. Additionally, CERCLA is applicable to both residential and commercial properties. It is always recommended that parties contact their counsel to discuss the environmental aspects of any real estate transaction.


NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.