December 1, 2013

Buying Real Estate with Legacy Environmental Contamination — Yes, You Can


By Christopher Reive

Winter 2013

Common wisdom has long been that acquiring real property with possible legacy environmental contaminants introduces business risks best avoided, particularly during periods of economic uncertainty. Purchase and development of vacant land has been preferred over redevelopment of established properties even though they enjoy better access, existing infrastructure, and proximity to the existing markets and workforce. Valuable industrial properties have been orphaned as a result.

Brownfields Success Stories

In spite of such perceived risk, however, many former industrial properties can be safely and profitably purchased and redeveloped. Local entities like the Portland Development Commission and the Port of Portland have demonstrated this, often of necessity. Some highly visible examples are much of the successful redevelopment of Portland's South Waterfront and Port-developed facilities at Portland International Airport. Another example is the University of Portland's acquisition of former industrial lands located within the Portland Harbor Superfund Site as a key component of its campus expansion, facilitated by a bargain with the Environmental Protection Agency ("EPA") that documented the University's immunity from liability for past contamination.

Similar private investments also have been successful. For example, MJB Associate's purchase of the former CHJ Lilly (Lilly-Miller) packaging facility in Northeast Portland was completed with transactional immunity similar to that given to the University of Portland. MJB's completed deal remediated and placed an orphaned and contaminated industrial facility back into productive service, while allowing a business expansion that meant jobs and renewed vigor to that area.

The lagging economy has, of course, been a drag on such private and public transactions. Real estate development related to business expansion of all kinds has taken a back seat to more imminent concerns. But, evolution of the tools available to facilitate Brownfields transactions have not lagged with the economic doldrums.

Brownfields Transaction Tools Evolve

Standardized protocols for conducting pre-purchase due diligence have been adopted. Also, two very recent court decisions illustrating both good and bad practices are placing flesh on the bones of environmental statutes that have needed such clarity. The result is an emerging confidence in the protections such diligence affords and less perceived risk when deciding whether to acquire and improve an existing facility.

The "innocent landowner defense" has existed since the mid-1980s. It is a safe harbor for buyers who acquire contaminated property without notice of existing contamination after a diligent investigation of the condition of the premises before the purchase. However, reliable guidance on how to establish such a defense was missing. That has begun to change.

On January 11, 2002, the Brownfields Revitalization and Environmental Restoration Act of 2001 required the EPA to describe what constitutes an "all appropriate inquiry" to the real estate investment and development community. Congress gave EPA until January 2004 to propose and adopt such regulations. While EPA didn't quite make the deadline, it did finally adopt its AAI Rule on November 1, 2006.

All Appropriate Inquiry ("AAI") Protocols

The AAI Rule (ASTM E 1527-05) now describes "all the appropriate inquiries" a buyer mustundertake to establish a pre-closing record in support of its claim to environmental immunity when buying commercial property. Using the services of trained technical consultants ("Environmental Professionals"), the buyer's goal is for the Environmental Professional to conclude that the "inspection and title search reveals no basis for further investigation."

If, however, the Environmental Professional concludes that further investigation is required to evaluate "the presence or likely presence of a substance," then more inquiry may be required. ASTM E 1903-11 now provides a recognized protocol for implementing a defensible Phase II Environmental Site Assessment.

The AAI Rule also assumes post-purchase obligations. So, ASTM E 2790-11, Standard Guide for Identifying and Complying with Continuing Obligations, was issued on June 30, 2011, to specify and describe those requirements. A four-step protocol assists the new owner in identifying and implementing whatever continuing obligation is appropriate to its situation. Each step is iterative and, depending on the result, may halt an owner's "continuing obligation" at an early step based on the professional judgment of the Environmental Professional.

Recent Caselaw Refining "Appropriate Inquiry"

In addition to emerging standard protocols, two recent cases provide real-life examples of what to do, and to avoid, to protect against purchasing an environmental liability. In Ashley II of Charleston, LLC v. PC Nitrogen, Inc., Slip Op. No. 2:05-cv-2782-MBS (D.S.C. Sept. 30, 2010), the purchaser lost its immunity at least in part because it failed to take protective measures to address the threat of an ongoing release from known pre-existing contaminants. In contrast, the trial court in 3000 Imperial, LLC v. Robertshaw Controls, Inc.,CV-08-3985 PA, 2010 U.S. Dist. Lexis 138661 (C.D. Cal. Dec. 29, 2010) decided that the purchaser exercised "appropriate care" after its post-closing discovery and excavation of hazardous wastes. Ashley II, now on appeal and recently argued before the Fourth Circuit Court of Appeals, is being closely watched for the guidance that appellate court is expected to provide.

Negotiated Responsibility

Of course, parties to any transaction are still free to bargain to assign between them the responsibility for pre-existing conditions, and this is always a factor that impacts price. Certain transactions may also qualify for documented immunity from the regulators. The AAI protocols are available regardless to inform and protect purchasers of industrial and commercial properties.

Closing Thoughts

The benefit to encouraging Brownfields transactions goes beyond the deal at hand. Oregon has long led the nation in recognizing the value of protecting open space and agricultural lands. Finding economic ways to redevelop property already removed from such inventory is only one of many side benefits of recovering, reusing, and remediating current and former commercial and industrial sites.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

Back to Top