Environmental Liabilities Imposed on Landowners, Tenants, and Lenders -- How Far Can and Should They Extend?: A. An Overview of Issues of Landowner and Lender Liabilities

Environmental Liabilities Imposed on Landowners, Tenants, and Lenders — How Far Can and Should They Extend?: A. An Overview of Issues of Landowner and Lender Liabilities

Roger D. Schwenke

Editors' Summary: Although NEPA requires the preparation of an EIS for every major federal action significantly affecting the environment, federal agencies often decide in particular cases that compliance with NEPA is satisfied by preparation of EAs. The decision not to prepare an EIS is usually based on a finding of no significant impact. When an agency's threshold NEPA decision is challenged in court, what is the appropriate standard of review? The federal courts of appeals answer this question in at least two different ways: some circuits use the "arbitrary and capricious" standard, while others inquire into the "reasonableness" of the agency's decision. Several courts have expressed doubt that there is any genuine distinction between the rival standards, and the Supreme Court has so far declined to settle the issue. The author of this Article surveys the federal case law on this question, exploring the approach of each circuit and taking issue with those who maintain that the difference between the standards is illusory. The vital difference, the author argues, is that courts using the reasonableness standard are more likely to substitute their own judgment for that of the agency, while courts adopting the arbitrary and capricious standard tend not to second-guess an agency's decision. Because he sees an important difference between these two approaches, the author urges the Supreme Court to grant certiorari to resolve the circuit split.

Roger D. Schwenke is a member of the American Bar Association's Standing Committee on Environmental Law and an attorney with Carlton, Fields, Ward, Emmanuel, Smith, Cutler and Kent, P.A., in Tampa, Florida.

[18 ELR 10361]

Let me turn to the subject of the environmental liabilities imposed on landowners, tenants, and lenders, and the question of how far those can, and should, extend.

I would like to begin with the concept that the environmental laws, and particularly the hazardous waste laws, are designed and intended primarily to impose liability on those that have profited from, or were involved in the creation of, the condition that is now the basis for liability. Clearly the rationale that the "polluter must pay" was evident in the original Superfund/CERCLA¹ provisions. The Fund as created was largely subsidized by pollution "excise taxes" levied on the chemical and petroleum industries. In economic terms, this may have represented an effort, at least in part, [18 ELR 10362] to internalize the costs of hazardous waste by taxing those thought to be the principal producers.

The liability provision of the original CERCLA legislation followed this practice, imposing "responsible party" liability on those whose relationship to the hazardous substance, or to the place where disposal occurred, was thought to allow such parties an opportunity to profit from their handling of such substances.

I recognize that it could be argued that SARA,² in the broadening of the Fund tax base, may have represented some change in policy. Certainly the Senate Finance Committee report, in support of a broadening of the tax base through general fund subsidies, recognized that cleanup of abandoned hazardous waste sites was a "broad societal problem" extending beyond chemical and petroleum industries. The conference committee report seems to recognize this same possibility that the philosophy of recovery has now changed, from strict adherence to the concept that the source or benefited party must pay, to a recognition that costs of cleanup must now be apportioned over a broader range of parties.

Only time will tell whether this spirit of a broader-based apportionment of societal costs really is philosophically the reason why landowners and lenders seem, after SARA, to have even greater liability and investigation obligations imposed on them.

In considering liability at a waste site, the primary federal statute with which one must deal is CERCLA, and its successor, SARA. Environmental liabilities are also imposed on landowners, tenants, lenders, realtors and brokers, and on others dealing with land, through state laws. In fact, laws such as those which require the assessment of a site before it may lawfully be transferred, or which require that a deed disclosure be recorded in the case of any property which contains hazardous substances, in practice may have even greater impact on the interplay between environmental law, real estate law, and business and corporate law. Time does not allow me an opportunity to consider such state requirements, although I understand they will be addressed during a later portion of this program.

Under these federal laws, virtually anyone who has had any contact whatsoever with the property in question may be liable. Because of these laws, in 1987, almost no one can qualify as an "innocent landowner" or an "innocent lender," unless and until they have gone through a complete environmental audit or assessment with respect to their property or their loan security.

As most in this room are aware, CERCLA provides only three affirmative defenses to liability: an act of God; an act of war; or an act of omission of a third party, other than someone whose act or omission occurs in connection with a contractual relationship with the defendant.³

Buyers, sellers, lessors, lessees, lenders and most other sophisticated parties dealing with real estate are well aware of the inability to deal with acts of God or acts of war. Conveyancing, leasing, and financing documents are replete with paragraph-after-paragraph, if not page-after-page, providing various remedies and rights should an act of God or an act of war occur. Problems of an unrelated third party are another matter.

Release from liability is available only where a party can establish by a preponderance of evidence that a release or threatened release of a hazardous substance, and any resulting damages, were caused solely by:

"(3) an act of omission of a third party other than an employee or agent of the defendant, or … one whose act or omission occurs in connection with a contractual relationship … with the defendant … if the defendant establishes by a preponderance of the evidence that (a) he exercised due care with respect to the hazardous substance concerned … in light of all relevant facts and circumstances, and (b) he took precautions against foreseeable acts or omissions of any such third party and the consequences that could foreseeably result from such acts or omissions;"⁴

To qualify for this so-called third-party defense, the landowner, user or operator must show not only that the act or omission of a third party was the sole cause of the hazardous substance release and resulting damages, but also that they individually exercised "due care" in light of "all relevant facts and circumstances," and further that they "took precautions against foreseeable acts or omissions" of the third party.

Obviously, there must also have been no "contractual relationship" in order to have the benefit of the defense. Courts have traditionally treated contracts for the sale or lease of land as instruments amounting to a "contractual relationship." Written leases, oral leases, purchase agreements and deeds all have been treated as sufficient contractual relationships between the landowner or user, and the party creating the contamination, in order to bar the use of the defense.

We should recognize that even before the SARA changes, the mere existence of the strict third party defense and its obligation to "exercise due care" may well have given rise to a need for a landowner, tenant, or lender to inspect and investigate the condition of property. In an insightful analysis by Bill Anderson, aptly entitled, "Will the Meek Even Want the Earth?" it was observed that:

"Only by inspection for the presence of hazardous substances can the landowner determine what precautions, if any, are necessary. The foreseeable third-party acts of consequence that a property possessor must guard against depend upon the nature of the hazard. Thus, a property possessor who fails to inspect or ignores signs of potential hazards may be held liable for cleanup costs, even though another created the hazardous situation."⁵

What Bill Anderson recognized, and what I think many overlooked in our rush to analyze the "relief" offered by the new "innocent landowner" provisions of SARA, is the fact that "due care" probably requires an inspection of the land for the presence of hazardous substances. While inspection is not an explicit, affirmative duty under CERCLA, it is an element that may be necessary to establish the affirmative defenses to strict liability found in the statute.

If you want to be even more frightened, I urge you to review the decisions, analyzed in this same article, dealing with the corollary Clean Water Act provisions, which provided the foundation for the CERCLA third-party defense. If [18 ELR 10363] the holding in these cases is broadly applied in a CERCLA context, there can be little doubt that in order to satisfy a "reasonable care" standard, the new owner of a former industrial site must commence some inspection within a few days after purchase. Because of the new SARA innocent landowner provisions, I would not be surprised if this time frame did not, in almost all instances, shift back to a few days before purchase.

Among the SARA amendments to CERCLA is one which has come to be known as the "innocent landowner" provision. Dealing directly with contracts involving land, Congress expanded the third-party defense by redefining the term "contractual relationship" to provide a defense for real property which was acquired by a defendant, after the placement of the hazardous substances, if the defendant can show that at the time it "acquired the facility" it "did not know and had no reason to know" that any hazardous substance, being released or threatened to be released, had been disposed of at that facility.

Although the "innocent landowner" provisions do not directly change the standard of liability under CERCLA, which remains strict, joint and several, the amendments do appear to impose a negligence standard in the context of this third-party defense. Generally speaking, where a landowner acquires property after a hazardous substance has been placed there, and has no reason to know of any hazardous substances at the facility, then that purchaser will not be liable for cleanup costs or damages resulting from releases of hazardous substances at the facility. The innocent party purchasing contaminated property can escape the otherwise applicable strict, joint and several liability by conducting reasonable testing, survey and investigation of the property to detect the contamination, and by asserting the innocent landowner third-party defense. What such an innocent party must avoid is being "negligent" concerning its inquiry into the previous ownership and uses of the property and into the potential for hazardous substance contamination.

The statute goes on to provide that to establish that a defendant had "no reason to know," the defendant must have undertaken, "at the time of acquisition, all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial and customary practice." The section further provides that a court shall take into account:

"Any specialized knowledge or experience on the part of the defendant, the relationship of the purchase price to the value of the property if uncontaminated, commonly known or reasonably ascertainable information about the property, the obviousness of the presence or likely presence of contamination at the property, and the ability to detect such contamination by appropriate inspection."⁶

Although the extent of inquiry demanded by these requirements is yet to be determined, presumably at a minimum they would require an actual, on-site inspection as well as an inquiry of prior site operators and owners, and a review of all available public or governmental records with respect to any prior reports or threats of contamination at that site. They might require, in many cases, an actual environmental audit.

In their recent analysis of landowner liability, David Berz and Stan Spracker cogently observed the reality of the standard which Congress has created:

"Ironically, availability of this narrow defense from liability will create a substantial incentive to investigate and clean up property prior to initiation of any litigation — rendering the benefits of this provision more illusory than real. Furthermore, the codification of a federal duty of inquiry and duty of care for contaminated property under CERCLA will serve as a standard against which commercial real estate transactions generally will be measured.⁷

I would suggest that, in trying to carve out a true innocent landowner provision, if the intent of Congress in CERCLA and SARA is to provide protection, in fact very little protection is available in the absence of extensive investigation. In establishing protection for the innocent landowner, Congress provides very little guidance as to what is required. The relevant provisions clearly impose on parties to a transaction a duty to inquire into the condition of the property, yet the duty itself is ambiguous. All that is clarified by the legislative history, in my view, is that parties in a commercial setting are under a greater duty than those in a residential setting. What is not clear is whether that duty requires a complete environmental investigation including soil contamination, water contamination, and a full historical analysis, as in state ECRA⁸ statutes.

I understand that representatives of the Justice Department and EPA, who were involved in the legislative evolution of SARA, take the position that the standards imposed under the "innocent landowner" provisions do not materially differ from what those agencies had always expected would be reasonable "due care" before the acquisition of property. In that regard, it has been argued by these people that in every real estate acquisition the purchaser should exercise, and has always been expected to exercise, a minimal degree of inquiry covering the previous ownership and uses of that property, including at least a review and consideration of prior land uses, and the potential for environmental contamination associated with such uses, based on information about who previously has owned the property coupled with some actual investigation of the property to see if there are any visible signs of contamination.

After review of published records of CERCLA and SARA congressional history and intent, perhaps I can conclude that at least some congressional committees and staff members intended that there be this degree of "due care" before someone would be entitled to be treated as an "innocent landowner." As a real estate lawyer, however, I know that, in fact, until very recently virtually no real estate conveyancing or financing transactions incorporated such an assessment, except in certain states such as Massachusetts where it was directly required by state law for various types of commercial transactions. In fact, in many parts of the country it remains difficult, if not impossible, due to the prevalence of title insurance as a part of the conveyancing process, to obtain prompt and thorough abstract and listings [18 ELR 10364] of all prior owners of a parcel in order to allow a determination to be made of the potential for contamination. That is not to say that this cannot, and will not, change. It is merely to observe that the "good commercial or customary practice" contemplated by the new statutory provisions has not, in the past, involved such evaluations.

Ironically, it might be said that the site investigation before acquisition must be thorough to be "consistent with good commercial or customary practice," but perhaps not so thorough to detect contamination which is not readily apparent. Once the buyer, or lender about to foreclose, discovers hazardous substances, they may have actual knowledge and thereby, by definition, have a contractual relationship with the source of contamination sufficient to deny access to the Section 107(b)(3) third-party defense. Moreover, if the contamination was caused by a predecessor in title other than the seller, discovery of the release or threatened release, if not "disclosed," will render the seller fully liable even if otherwise under CERCLA they would not have been a "responsible party."

The increased exposure to liability is particularly troublesome for lenders and creditors, who are by nature risk-averse entities. They tend to shift risk to the borrowers and other parties to a transaction. It has been suggested that, in the absence of clear regulations to the contrary, the Justice Department will not aggressively impose liability on a lender who forecloses and takes immediate steps to dispose of the property. If this really is the Justice Department's policy, it seems to me to be inconsistent with the literal wording of CERCLA, at least as it has been contrued by the courts. Moreover, they will remain exposed to private party suits and to the right-of-contribution in action by other parties.

As the laws are currently written, parties cannot bargain in private-party real estate either to avoid liability for contamination. Instead what they can do, and will continue to do, is to attempt by documentation and transaction structure to reallocate liability.

What can the government do to clarify private party transactions and reassure lenders that by taking certain steps they can avoid liability? What degree of diligence qualifies one as an innocent landowner? Congress has left EPA with a tremendous array of options in implementing CERCLA and SARA. Surely the Environmental Protection Agency (EPA) could adopt rules clarifying how they will implement the de minimus settlement provisions with respect to ownership. Perhaps it could adopt a policy setting forth standards for asserting the innocent landowner defense. While there would be no guarantee that a court would honor the policy, at least one would know what to expect from the agency.

Congress, however, has not instructed EPA on this matter. They have given EPA many other deadlines and a limited set of resources with which to meet them. Thus, while the agency is presented with a policy option, it may be some time before it is exercised.

It is becoming increasingly evident that our nation's environmental laws are being enforced and interpreted by the courts with the idea that these sites must be cleaned up. While this idea cannot supplant rights of property conveyance, free lending and similar concepts, it does not appear to threaten to do so. Serious constitutional matters are not at stake. As a consequence, the debate ought to shift away from how we can protect "innocent landowners," and toward the recognition that this liability will be encountered unless and until we ensure that all of the properties that have been possibly contaminated are cleaned up. Until Congress or EPA tells us otherwise, it will be a fact of doing business. Our task is to encourage policymakers, whether Congress or EPA, to facilitate the process of conveyancing and financing real property and then leave parties to fulfill their obligations under CERCLA.

1. Comprehensive Environmental Response, Compensation and Liability Act (Superfund), 42 U.S.C. §§ 9601-9657, ELR STAT. 41941.

2. Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, 100 Stat. 1613 (1986).

3. CERCLA § 107(b), 42 U.S.C. § 9607(b).

4. CERCLA § 107(b), 42 U.S.C. § 9607(b)(3).

5. William A. Anderson, II, "Will the Meek Even Want the Earth?", 38 MERCER L. REV. 535, 539-540 (1987).

6. SARA, Pub. L. No. 99-499 § 101(35)(B).

7. D. Berz and S. Spracker, Landowner Liability Under CERCLA: New Obligations for Sellers and Buyers, 1987 CHEM. WASTE LITIGATION REP. 705, 706.

8. Environmental Cleanup Responsibility Act, N.J.S.A. 13:1K6 et seq.