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November 2008
R.E.Oh?
Limit your potential environmental liabilities when acquiring title to foreclosed real estate.
1) Will environmental liabilities and obligations be acquired along with the Property by a Lender taking title through foreclosure?
You just acquired property through foreclosure, took a deed in lieu of foreclosure, or repossessed real property with actual or suspected environmental contamination. It’s bad enough that the property isn’t worth the amount of your loan. But what do you to make sure you don’t acquire additional liability for the environmental contamination present?
The short answer is that the lender will be exempt from potential Superfund liability if it holds “indicia of ownership” primarily to protect its security interest but does not “participate in the management of the facility.” This mean you may be able to maintain the status quo at the property but not make or implement decisions about the overall management of the facility or its waste handling or disposal practices.
These protections, however, may not protect a Lender from liability arising out of continuing releases or from claims brought by adjoining owners under common law rather than federal or state law. Demolition, renovations or construction of structures on the property may also require compliance with federal, state or local environmental laws.
For more specifics on how to protect a lender’s interests regarding environmental problems, please follow this link to the full article.
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2) Will a Phase I Environmental Assessment really protect a Lender from liability?
Lenders routinely order Phase I environmental site assessments prior to funding a real estate loan, or prior to foreclosing a lien interest. Are all Phase I ESA reports created equally? Do they all protect a Lender from potential liability?
NO! In order to qualify for Superfund’s liability exemption, an Environmental Professional (EP) must conduct the Phase I ESA in accordance with the ASTM E1527-05 or EPA’s “All Appropriate Inquiries” Rule standard. Generally, the Phase I ESA will examine current and past uses of the property and look for any signs of historic contamination, such as whether an environmental cleanup has occurred or is occurring at or near the site, whether the property is subject to any engineering or land use restrictions or controls, or whether any adjacent properties show signs of contamination.
This information will be collected by searching federal, state and local government databases and records, by interviewing current owners, operators or other persons with knowledge about the parcel, including neighbors or local government officials, and by visually inspecting the property. A Phase I ESA Report must be completed 1 year prior to acquisition, must identify “recognized environmental conditions” and any data gaps, and be must certified by the EP. If any of this information is lacking, incomplete or omitted, you may lose the benefit of the Superfund liability exemption.
Case law has held that EP has a duty to provide an accurate environmental assessment and may commit professional malpractice if he fails to do so. That duty may run not only to the party commissioning the Phase I ESA, but also to any party that could foreseeably rely on it. Your EP should therefore not only meet the EPA or industry standard for performing an adequate Phase I ESA, but should also include any additional information customarily collected by other EPs in the same geographic area or professional community to avoid a claim for misrepresentation of the property’s condition.
What if the lender that buys or sells the property unknowingly relies on a faulty Phase I ESA Report? Is the lender liable?
Not only may the lender lose the Superfund liability exemption for past releases of hazardous substances the EP failed to identify in his Report, it may also be liable for exacerbating the contamination or causing new releases of the historic waste. No matter which party the lender is in the real estate transaction, make sure you hire a reputable EP and have an environmental attorney review the Phase I ESA to ensure it meets all applicable national and local standards. It is the best way to ensure your Superfund liability exemption for historic contamination is not jeopardized and new liability for new releases does not attach to the property.
Engelman Berger, P.C. The focus of Engelman Berger, P.C. is the resolution of legal issues arising in business. A large portion of the firm’s practice is related to resolution of disputes arising in the United States Bankruptcy Court, where the firm regularly appears representing creditors, trustees, debtors, lessors, and those interested in purchasing assets. In addition, the firm has an active commercial litigation practice, water rights practice, and real estate transaction practice. The firm regularly represents lenders in loan documentation and loan workouts, and closely held businesses as general legal counsel, helping business owners resolve a myriad of legal issues. The firm also assists in new business entity formations, and in resolving business related disputes regarding commercial leases, ownership issues, real estate, and other issues. Listening to the client’s goals, spirited representation in legal disputes, and creative resolutions make up the foundation to this firm.
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