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Lynn Preston's NH Legal Perspectives: What prospective real estate purchasers need to know

August 23. 2014 9:05PM

IN AN EFFORT to clean up contaminated property in the United States, Congress enacted a comprehensive system of laws and regulations requiring investigation and cleanup of property contaminated with hazardous substances, known as Superfund.

As originally written, Superfund imposed potential liability on owners and operators of contaminated property - whether they caused or contributed to the contamination.

Consequently, as a buyer of contaminated property, once you took ownership of the property, you were potentially liable for contamination caused by others and were required to pay for cleaning it up.

Not surprisingly, such environmental liability risks created havoc in the commercial real estate market. After all, who would want to spend or loan money for a piece of property when doing so could mean you would need to spend a heck of a lot more to eliminate the contamination and, possibly, be liable forever?

In 2002, realizing that they actually created an obstacle (rather than a solution) for the redevelopment of contaminated property across the country, Congress stepped in and enacted a defense to Superfund liability for prospective purchasers.

Essentially, under this defense, where the prospective purchaser satisfies specific inquiry into the property before the purchase and continues to meet certain obligations after the purchase, they are basically afforded a "safe harbor" from Superfund liability.

Thus, for many years, as a standard part of the due diligence process and to satisfy a portion of the "safe harbor" requirements, purchasers and lenders, have undertaken environmental site assessments, known as Phase I's, to identify the potential and existing environmental conditions of prospective sites.

And, while the scope of such Phase I's may differ depending on the real estate transaction, Phase I's were consistently performed following certain criteria under established Environmental Protection Agency (EPA) regulations. Status quo, everyone knows the rules and how to follow them.

Fast tract to 2013, the EPA changed the long established standard for performing the Phase I to include additional criteria, such as, a review of agency regulatory files and an express requirement to consider vapor intrusion when conducting the assessment.

As a result of the changes, aside from the likely increase in the cost to the prospective purchaser to perform the Phase I, EPA has also "muddied the waters" for the commercial real estate market by giving prospective purchasers the option of using the old standard or the new standard. What does this mean for Superfund liability protection? Are purchasers still protected if they use the old standard? And, if so, why even use the new standard?

Here's the "rub" - and EPA's answer to the "rub." When the new standard was added to the rule, EPA identified that there may be confusion associated with having two different standards for performing the Phase I and concerns over which standard could and/or should be used to qualify for the "safe harbor" provisions.

As a result, EPA acknowledged future plans to remove the old standard from the regulations in favor of the new standard. In fact, EPA has already published a proposed rule soliciting comments to remove the old standard from the regulation.

However, in the interim, buyers are left with uncertainty as to the protections afforded from Superfund liability if they have just completed or are in the process of completing a Phase I under the old standard.

EPA's current answer to the interim concern seems to be that they will ultimately delay the effective date of the proposed rule which removes the old standard for one year to allow parties the opportunity to finalize ongoing Phase I's and to become familiar with the new standard.

This delay would mean that for those properties acquired after the old standard was implemented and prior to the effective date of the new rule, assuming it is finalized, use of the old standard likely protects the buyer from liability.

In closing, there is no guarantee that there will be a one year "grace period." Since environmental risks and liabilities established under Superfund can be extensive, until all comments on the proposed regulation are taken into account and EPA ultimately finalizes the rule, prospective purchasers should consider performing the Phase I using the new standard sooner rather than later in an effort to ensure Phase I's being performed now will protect them from such liability.

NH Legal Perspective is a bi-weekly column sponsored by Sheehan Phinney Bass + Green PA.   This column does not provide legal advice. We recommend that you consult an attorney for specific guidance on legal questions.

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