When buying real estate, there are some ways you can save money on your due diligence. You may think you can save a few bucks but you are risking a magnitude of more money. Yet, there is one third party report I would not skip. In my previous article titled Important Due Diligence Documents, I mentioned the importance of requesting a Phase I Environmental (Phase I EV) report to avoid joint, several and strict liability under CERCLA (otherwise known as the Superfund).
Most lenders will require an environmental test to be run, but if you are running a real estate syndication, performing a 1031 exchange or purchasing in cash you have the option to skip many due diligence items as your lender or advisor may not prompt you to get them.
To explain the seemingly “unfair” liability associated with the Superfund I believe the best way is to give you a basic history of why CERCLA was passed, what’s its purpose and what does it mean to have joint & several, strict liability?
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) was passed in 1980 as a legislative response to environmental disasters in the US. One example of such a disaster was the Love Canal disaster1 in which 16 acres, which was developed over a chemical dump site, was sold to a school district (and seller did give prior disclosure) and the future residents got severely sick. CERCLA’s purpose was to create a Superfund by taxing chemical and petroleum industries which would enable the government to pay for cleanups of environmental disasters. CERCLA also established a set of rules for abandoned hazardous waste sites and liability for those that release these toxins.
- Strict liability is defined as the legal responsibility for damages, or injury, even if the person found strictly liable was not at fault or negligent.2
- Joint and several liability is defined as two or more parties who are jointly and severally liable for a tortious act, each party is independently liable for the full extent of the injuries stemming from the tortious act… it reduces plaintiffs’ risk that one or more defendants are judgment-proof by shifting that risk onto the other defendants.3
When combined this means that the government can hold the buyer liable (or anyone that had any interest in the property) and doesn’t care if the buyer caused the environmental issue, because in strict liability the buyer can be held responsible for the seller. Anyone in the past chain of title can be held liable—and that’s not all, unknowing tenants and lenders can also be held liable!
The government doesn’t mess around when it comes to health. They need money to clean it up and they will not hesitate to charge you the bill. That’s why they made it joint and several, they can go after one (or all) of the parties who had any interest in the property (even if they didn’t cause the issue). Even an easement owner can be held responsible for cleanup reimbursements! They will typically go after the people with the deepest pockets.
Yes, this is scary. However, a defense to this is to get a Phase I EV which can show that the purchaser took reasonable steps to afford them the bona fide prospective purchaser defense.
Bona Fide Prospective Purchaser (BFPP) Defense4 – One of the ways to qualify as a BFPP is to satisfy the obligations on being an Innocent Landowner (ILO)5. This assumes you are a purchaser who has acquired a property without knowledge of contamination on the property. One of those obligations necessary to qualify as an ILO is taking “reasonable steps” with respect to hazardous substances affecting a landowner’s property. In other words, people who want to qualify as an ILO must make all appropriate inquiries prior to purchase and again, cannot previously know of contamination to have a viable defense as an ILO. One reasonable step can be conducting environmental tests on your property before purchase. This defense should protect you from the joint/several/strict liability noted above as you have demonstrated with a clear paper trail that you have taken reasonable steps.
A typical Phase I EV may cost around $3,000.
The report may come back clear, in which case, you have covered your bases and are that much more certain on your prospective purchase’s due diligence. However, if the report comes back recommending a Phase II & III, you then have a choice to either abandon your purchase, because of the test’s results contamination you weren’t aware of, or proceed with continued tests which can rise in scope and cost.
- Phase I EVA (noninvasive) – includes air and water samples, historical property records and site inspection.6 – I’ve seen these anywhere from $2,000 to $4,000
- Phase II EVA includes more invasive tests to confirm indications from Phase I.6 – I’ve seen these anywhere from $5,000 to $50,000
- Phase III EVA includes complete assessment of extent of the problem, determination of remediation needs, estimation of remediation cost and prescriptions for future prevention.6 – I’ve seen these anywhere from $10,000 and up and giving this an upper range would be a disservice to you because I’m not sure there is one.
I personally think this law was needed. It makes buyers and sellers environmentally conscience and demonstrates how we are all interconnected when it comes to business and the environment. We need to look out for each other’s health and this is a way to hold all of us responsible and accountable.
Ironically, many moons ago my bank required me to get a Phase I EV for an apartment building purchase and I remember complaining about the price, thinking that it was silly expense. However, based on the information I now know about CERCLA/Superfund joint/several & strict liability I believe it was money well spent as I do not want to be responsible for the previous owner’s environmental indiscretions—and I don’t think you would want to be either, so please do your due diligence.
If you have any questions, maybe I can help. However, I am no attorney and I cannot give legal advice on these issues. This is an editorial on what I believe to be the case in my own research and understanding.
Here for you in success.
6 Chapter 4 – Ling Archer Real Estate Law