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The Environmental Liability of Preservation Groups: Managing Environmental Rights 

12-09-2015 17:35

Preservation organizations today increasingly function as nonprofit entrepreneurs engaged in a variety of real estate activities: owning, developing, and managing property; holding easements; and lending funds for property acquisition and rehabilitation. All of these activities have the potential, under federal and state laws, to subject a preservation organization to liability (meaning financial responsibility) for environmental problems or to otherwise adversely affect its activities. This article is intended to familiarize the reader with these issues and to present practical suggestions for assessing and managing environmental risks. It does not purport to provide legal advice, which should be obtained from counsel familiar with applicable federal and state laws. It may seem unlikely that hazardous substances would be found on historic properties. There have been cases, however, in which such substances have been found. Open-space property on farms or large estates are particularly at risk because of the possibility of dumping in previous years. In some cases, PCBs from leaking transformers have been found on older commercial properties. Underground gas and oil tanks have also been found on historic properties.

The chances that asbestos is present in a building that a preservation organization owns or occupies are high because asbestos was used extensively in the past in construction--for example, in siding, shingles, floor tiles, and wrapping insulation used for pipes. Since lead was used in paints in the United States until the late 1970s, it is very likely that a property owned by a preservation organization will contain lead paint.

THE LAWS

The laws discussed here were enacted primarily to protect the environment and to protect workers from unsafe working conditions. Accordingly, they operate either by assigning liability for cleanup problems or by directing the handling of hazardous substances. Most of these laws have been enacted in the last decade, and because they are so new, the manner in which they are to be interpreted and administered is still evolving. The laws described in this article are those most likely to be of concern to preservation organizations; they are not, however, the only federal statutes imposing liability for environmental problems.

CERCLA:
The Comprehensive Environmental Response, Compensation, and Liability Act is better known as CERCLA or the Superfund Law.1 CERCLA authorizes the federal government to clean up sites containing hazardous substances using money from a superfund established by the act and to recover the costs of removal or remedial action from liable parties in order to replenish the superfund.

Hazardous substances, as defined by CERCLA, include most chemicals that can be harmful to the environment or humans, but exclude petroleum, oil, and natural gas, which are regulated under other laws. CERCLA also does not apply to asbestos and lead paint because these substances are not "released" into the environment.

CERCLA has earned its intimidating reputation because of its broad reach, which even extends to a party who is not necessarily negligent. Thus potentially liable parties include not only persons who created and disposed of the hazardous substance, but also the current owner or operator of contaminated property and the party that owned or operated the property at the time toxins were distributed. Any one (or any combination) of these parties may be held liable for the entire cleanup cost regardless of whether the party was negligent, contributed only some of the hazardous substance to the site, complied with laws in effect at the time of disposal, or did not contribute to the contamination but owns or operates the property.

As an owner or operator of real property, an organization is placed directly at risk by CERCLA. As a lender of funds secured by real property, the organization is primarily at risk because it could lose its collateral on a loan if the borrower is liable for cleanup costs. Because the typical borrower of preservation-related funds is unlikely to be able to pay for cleanup costs, the possibility of default on a lender`s loan becomes very real once hazardous substances are found. Foreclosure may no longer be the most prudent option. In cases in which an organization has already foreclosed on a property-- and thus has stepped in as the owner--the organization could be held directly liable.

The most important defenses to liability under CERCLA are the "innocent-purchaser defense" and the "security-interest exception." The steps outlined later in this article are in part designed to position an organization to avail itself of these protections in the event the federal government sues it under CERCLA.

The "innocent-purchaser defense" protects a property owner who can demonstrate that (1) he or she acquired the property after the placement of hazardous substances and (2) at the time of acquisition such party did not know and had no reason to know that any hazardous substance was disposed of at the facility. A lender organization would assert this defense only after acquiring title to the property, presumably through foreclosure. To qualify as an innocent purchaser, "due care" must be exercised prior to property acquisition. It is clear that due care requires a reasonable inquiry into prior use and ownership. Some guidance as to what constitutes due care and reasonable inquiry will be provided below.

The "security-interest exception" protects a lender holding indicia of ownership primarily to protect a security interest in the property. The exception is defeated when the lender exercises enough control over the borrower, or assumes a sufficiently managerial role in the borrower`s operations, to become effectively the owner or operator itself. "Management" is not defined in CERCLA, and it is necessary to look to federal court decisions for guidance. Unfortunately, these decisions have been inconsistent. Many commentators believe that the courts have increased lender exposure for hazardous waste cleanups beyond what was intended when CERCLA was drafted.2

The Resource Conservation and Recover Act:
Another federal law of concern to preservation organizations is the Resource Conservation and Recovery Act (RCRA), which regulates the treatment, storage, and disposal of hazardous wastes.3 RCRA imposes complex and costly requirements for management and disposal on anyone who in any way treats, stores, or disposes of hazardous wastes.

State Laws:
Many states have enacted superfund-like statutes that impose liability on landowners for the cleanup of hazardous waste. The more burdensome require sellers to remove contamination before the property is transferred, require notice to be given to purchasers prior to transfer, or even compel forfeiture of the land to the state.

Some states have passed "superlien" laws that enable the state to place a lien against the property, superior to all others (including existing lender-security interests) to secure payment of cleanup costs. These liens can encumber all real property belonging to the borrower. As a result, an organization may not be able to recoup any of its loan money in the event of foreclosure if hazardous substances are found on any property owned by the borrower.

Additionally, some states have, or will likely enact, laws on indoor air pollution. These are usually disclosure or ventilation requirements designed to protect workers in their environs.

Asbestos Laws and Regulations:
The Environmental Protection Agency has determined that asbestos presents a significant risk to human health as a result of air emissions and accordingly, regulates the removal or containment of asbestos in all buildings subject to demolition or renovation--that is, in situations in which the asbestos can become airborne. These regulations are promulgated under the Clean Air Act and are contained in the National Emission Standards for Hazardous Air Pollutants, commonly known as neshap.4 Failure to comply with neshap may subject the property owner or occupier to substantial fines.

Schools are required to comply with the more stringent requirements of the Asbestos Hazard Emergency Response Act of 1986, which requires removal of asbestos even in the absence of demolition or renovation.5

The Occupational Safety and Health Administration (OSHA) has proposed its own regulations to protect individuals who work in buildings containing asbestos that are undergoing construction or that contain friable asbestos--that is, asbestos that can be crumbled with only hand pressure. Many states have laws that are the more stringent counterparts of NESHAP and the proposed OSHA regulations.

Lead Paint Laws and Regulations:
To date no comprehensive national law on lead paint has been enacted. However, the Lead Paint Poisoning Prevention Act of 1971 and accompanying regulations issued by the U.S. Department of Housing and Urban Development (HUD) apply to lead-paint abatement and lead-poisoning prevention in hud-owned and assisted housing.6

Legislation is pending in Congress that would require disclosure in real estate sale transactions of the presence of lead paint.

Some states have enacted laws that require the abatement of lead paint; for example, the Massachusetts Lead Poisoning Prevention and Control Law requires that owners of buildings in which children six years of age or younger reside must remove or render inaccessible to such children paint, plaster, soil, or other matter containing dangerous levels of lead.

SUGGESTIONS FOR PRESERVATION ORGANIZATIONS

The following suggestions should be regarded only as a guide for an organization that is seeking to minimize risks in the various roles it may play. They are in no way intended to substitute for the advice of an attorney familiar with applicable federal and state law. Following these steps should, however, help the organization make informed judgments about what risks it is willing to accept, and they will put the organization in a better legal position if hazardous materials are found on the site at a later date.

The Preservation Organizations as Lender:
The process outlined below will be helpful to the preservation organization in deciding whether to make a loan for the acquisition or rehabilitation of a historic property. Assuming the loan is made, following these steps will also help the organization protect against impairment of the priority of its lien against the property (an impairment that could happen if a superlien is interposed), or the occurrence of any financial catastrophe that could deplete the resources of the borrower to the point at which it could not repay the loan. It will also provide information that could assist in a subsequent decision about whether to foreclose on the collateral. Finally, it will help to minimize the more remote risk of the organization`s being held directly liable for environmental cleanup costs.

Personal Inspection and Research: The importance of a personal inspection cannot be overemphasized. An employee of the preservation organization should personally inspect the entire site when considering a request for a loan. A "property inspection checklist" should be used. The checklist should include, in addition to physical indicia, interviews with personnel at the site and with neighbors, particularly those who have known the site and area for a long time, to determine past and present uses of the site. State and local environmental and planning agencies should be contacted about the history of the site and any past or current violations. A report of the inspection should be retained in the organization`s records.

If possible, a current property survey and aerial photographs should be obtained for study and use as guides in inspecting the property, particularly in the case of large rural sites.

Environmental Assessment: If environmental problems are present or seem likely to be present, the preservation organization should obtain, or require the borrower to obtain, a professionally conducted environmental assessment. A "Phase I Environmental Assessment" generally costs between $3,000 and $7,000. The preservation organization should ascertain whether an environmental assessment of the property was done in the past and, if so, attempt to obtain a copy. Although the old assessment will be helpful, it is unlikely that the preservation organization could recover damages in a lawsuit from the party that produced the assessment for another owner.

If serious problems are uncovered, Phase II and Phase III environmental assessments may be needed.

In superlien states it may be important to inquire as to whether environmental assessments have been done for other properties owned by the borrower.

Local Documents and Requirements: As is the case with any secured loan, a title search should be conducted to identify any existing liens or judgments, and a policy of lender`s title insurance should be supplied. Generally, title insurance will not provide protection against environmental liability. But in states with superlien laws, title insurance should include an ALTA Endorsement 8.1, Environmental Protection Lien, for loans made on land used primarily for residential purposes.

The loan documents should contain assurances from the borrower, which will need to be negotiated on a case by case basis. The borrower should warrant that it has not stored, disposed of, transported, used, or released hazardous substances on the property; that it has no knowledge of such activities during or prior to its ownership; that it has received no notices of litigation, violations, or new regulations; that no past judgments, decrees, or settlements are applicable to the borrower; and that the borrower has all necessary licenses and permits. Additionally, the borrower should covenant that it will use the property in accordance with all applicable environmental laws and regulations, as they now exist or as they may in the future be amended, and will provide the lender with copies of any notices or communications regarding environmental conditions at the property. Indemnification provisions, in which the borrower agrees to reimburse the lender for any costs related to unforeseen hazardous-substance problems, probably will not be realistic in small transactions.

Although the organization may as a general policy require the borrower`s comprehensive general liability insurance to include a mortgagee endorsement in its favor, lenders should be aware that it is very difficult to recover for environmental damage or cleanup costs on such insurance.

Monitoring: Once the loan has been made the preservation organization should establish procedures for monitoring the borrower`s use of the property (thus showing that it exercised due care in the event it subsequently becomes the owner of the property and needs to assert CERCLA`S innocent purchaser defense). These procedures may include restrictions on use, reporting requirements, and periodic inspections. The monitoring must be carefully conducted, however, so that it does not cross the line into "managing" the borrower`s use of the property (which could defeat CERCLA`s security-interest exception or render the lender subject to fines for violations of asbestos laws). In the case of contamination on the property and a loan default the lender may have to weigh whether it is better to take title and be subject to possible liability for cleanup or merely to walk away from the property. Some organizations have established separate land-holding subsidiaries to take title or assert control over the borrower`s operations, but expert legal advice is needed to protect the parent entity.

A prudent lender should also work to see that the borrower complies with regulations governing the handling of hazardous substances on the property. If it does not, the borrower may lose its ability to make loan payments, and a lien for fines may be placed on the property.

The Preservation Organization as a Property Owner:
Many of the steps that should be taken by a preservation organization that is considering a property purchase are similar to those recommended for lenders. The considerations unique to the purchase situation are described below.

Personal Inspection: As in the lending situation, the personal inspection is critical. Ideally, the inspection, and a professional environmental assessment if needed, should be completed prior to the execution of the purchase agreement; the use of an option or contingent purchase agreement is sometimes useful in this regard.

Option/purchase agreement: An option agreement, or a purchase agreement that is conditioned on an environmental investigation, should contain certain protections. It should allow sufficient time for the inspection. It should also bind the seller to cooperate fully with the inspection and expressly hold harmless the potential purchaser for any liability incurred by the seller as a result of the investigation, including dealing with governmental agencies. The standards and procedures for the environmental investigation should be set forth. If environmental hazards including asbestos are discovered, it may be possible to negotiate remedial actions into the transaction by adjusting the purchase price. However, the purchaser should also have the option to terminate the agreement if a hazardous substance problem is found. The seller should be required to provide a statement on the condition and past use of the property to protect the buyer from known and unknown problems. The scope of the seller`s statement can be negotiated based on risks identified in the investigation.

A note on donated land: Acceptance of a donation of real property can subject a preservation organization to liability for cleanup costs. In order to be able to assert the innocent-purchaser defense, the organization must act as if it were a potential purchaser prior to accepting such a gift and follow the steps discussed above.

Insurance: A preservation organization should always carry comprehensive general-liability insurance for each of its properties. However, as noted above, it should not rely on such insurance.

RCRA and regulatory laws: If a preservation organization must treat, store, or dispose of hazardous waste on the site or if there is an underground storage tank on the site, there is only one thing to do seek expert legal and other advice on compliance with the regulatory laws. Failure to comply can result in substantial fines and possibly in loss of the use of the property.

Asbestos laws and regulations: The trend in the real estate industry is away from the wholesale removal of asbestos in favor of containing existing asbestos to prevent it from falling into a state of disrepair. Property owners should establish a management program to identify (through inspection by a trained individual), assess, and if necessary, treat the asbestos on-site. Removal or abatement must be done in compliance with NESHAP.

Lead paint laws and regulations: If a preservation organization receives funds from HUD, it may wish to contact HUD for advice in complying with the Lead Paint Poisoning Prevention Act. HUD has published a report to Congress on this act.7 Additionally, the National Park Service published a Cultural Resources Management Bulletin article on lead-based paint in historic buildings.8 It should be noted that the recommended forms of abatement in the National Park Service publication are in conflict with the HUD regulations.

The Preservation Organization as a Property Developer/Manager:
If the organization develops or manages a property without taking title or lending funds, it still needs to be concerned about environmental problems. A personal inspection of the property is essential, and if the owner has obtained an environmental assessment, it should be reviewed. Under CERCLA, as noted above, a property developer may be liable as an "operator."

The preservation organization may wish to seek an agreement that will hold the owner liable for any costs related to unforeseen hazardous-substance problems and indemnify the organization in the event it is charged as an "operator." The organization should train personnel to identify potential environmental problems. In particular, the organization should be familiar with asbestos laws and regulations and hire only certified inspectors and contractors.

The preservation Organization as an Easement Holder:
The law has imposed a duty on the holders of such traditional easements as right-of-way easements to maintain the casement in a safe condition so as to prevent injuries, unless the owner of the property subject to the easement has agreed to maintain and control the property. The law has not, however, developed with respect to preservation and conservation easements, and the environmental liability statutes and regulations do not address the liabilities and duties of conservation easement holders.9

It is impossible for the board or staff of a preservation organization to be completely familiar with the laws that concern environmental problems. The best advice is to develop a network of experts who can be used as resources. An attorney conversant with environmental law on the board or otherwise available to the organization can spot potential problems and assist in developing a solution. It is also advisable to develop relationships with the agencies that administer the laws.

Finally, it is important to realize that many of the laws and regulations were formulated without any input from the preservation community about their impact on historic structures. This is a good time to work with regulators and legislators to make sure that preservation concerns are addressed because the interpretation and administration of the laws are still evolving.10

Notes

  1. 42 United States Code {{9601-9675 (1988).
  2. The Environmental Protection Agency recently published a proposed rule that attempts to clarify the scope of lender liability under CERCLA. 56 Federal Register 28798 (to be codified at 40 Code of Federal Regulations Part 300) (proposed June 24,1991). There have also been several congressional attempts to limit lender liability.
  3. 42 United States Code {6901 et seq..
  4. 40 Code of Federal Regulations Part 61; November 20, 1990.
  5. 15 United States Code {2641 et seq..
  6. 42 United States Code {4821 et seq.. Section 302 of the law specifically applies to the HUD housing program.
  7. This report may be obtained from the HUD Office of Research and Development at HUD headquarters in Washington, D.C.
  8. Volume 13. Number 1.
  9. For a good overall discussion of management and monitoring responsibilities of easement holders, see Janet Diehl and Thomas S. Barrett, The Conservation Easement Handbook: Managing Land Conservation and Historic Preservation Easement Programs (San Francisco and Alexandria. Va.: The Trust for Public Land and the Land Trust Exchange, 1988).
  10. In addition to the proposals previously mentioned, the Massachusetts legislature has recently discussed providing monies for the fund intended to provide low-interest loans to property owners for lead-paint abatement. In addition. Legislation is pending In the U.S. Congress that would require disclosure of the presence of lead paint in real estate sale transactions.

The following resources were consulted in preparing this article and will provide more detailed information on the subjects:

  • Dunaway, Baxter. The Law of Distressed Real Estate. New York: Clark Boardman Callaghan, 1985.
  • Environmental Aspects of Real Estate and Corporate Transactions. Chicago: American Bar Association, 1990.
  • Madison, Michael T. and Jeffrey R. Dwyer. Law of Real Estate Financing. Boston: Warran, Gorham and Lamont, Inc., 1981.
  • Moskowitz, Joel S. Environmental Liability and Real Property Transactions. New York: John Wiley and Sons, 1989.


Publication Date: May/June 1992

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Author(s):JoAnna J. Barnes
Volume:6
Issue:3

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