Environmental Liability Protection for Tenants
How Owners of Contaminated Property Can Limit Liability Incurred By Previous Owners
By Jonathan W. Redding and Greggory C. Brandt
[Originally published in Area Development, Februrary/March 2007. View PDF.]
In 2002, Congress passed the Small Business Liability Relief and Brownfields Revitalization Act, a series of amendments to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). One of the primary purposes was to provide landowner liability protections (LLPs) for a purchaser who, among other things, conducted "all appropriate inquiries" to discover the environmental conditions on the property and who, after acquisition, took reasonable steps and cooperated with the parties responsible for contamination cleanup. By following these guidelines, a new owner of property can limit his or her liability for a previous owner's environmental contamination. For decades, due diligence has been performed by environmental professionals (EPs) through the issuance of an environmental site assessment report called a Phase I report. No subsurface testing is conducted as part of a Phase I report; rather, the EP focuses on site reconnaissance of the target property and all adjacent properties through site inspections, aerial photograph reviews, interviews with current and past site owners or other knowledgeable persons, review of public records and commercial databases, and records of any releases or threatened releases for the target sites and adjacent properties. The goal is to determine if there are recognized environmental conditions that might impact the value of the property. For purchasers of property, a full Phase I report, compliant with American Society for Testing and Materials (ASTM) standards, provides a degree of protection from CERCLA liability. For tenants, however, there are no similar protections. What, then, is an appropriate level of environmental due diligence for lessees evaluating new locations for their operations?
What Phase I Covers
Almost equally important to understanding what a Phase I report contains is understanding what it does not contain. Most notably, Phase I reports do not cover information about the presence of wetlands, asbestos, radon gas, lead paint, mold and water intrusion problems, indoor air quality, and several other issues. Given the exclusion of key environmental site assessment issues from Phase I reports, it is important for a prospective lessee to customize due diligence to risk tolerance and unique needs. If you are in a leasing situation, it often makes the most sense to obtain an abbreviated and tailored Phase I report and to use your monetary savings for collection of soil, soil vapor, and/or groundwater samples at the target site. Obtaining actual data is especially valuable in assessing risks if you plan to excavate or you know of nearby groundwater contamination, which increases the risk of vapor intrusion. Vapor intrusion is the next big environmental issue of concern to regulators, because the regulators have learned that, contrary to prior beliefs, even slight groundwater contamination from solvents can create vapor intrusion problems in a building. Groundwater contamination from a nearby source, such as a dry cleaner, can pose an indoor health issue, particularly if the plume extends beneath your site. Furthermore, vapor intrusion should be a developer's concern if the development will include sensitive receptors (e.g., residential projects or child care or managed care facilities) or if there are perceptions or risks associated with the development type, such as buildings that contain educational facilities, health facilities and health clubs, green business, or "green" buildings.
Potential Liability for Tenants
Why, and when, should potential tenants consider performing site testing as part of their due diligence, in addition to whatever level of Phase I report they decide to acquire? Typically, a tenant that does not handle hazardous materials will not be liable for costs to clean up pre-existing soil or groundwater contamination at the leased site.Nevertheless, a tenant still might be dragged into a lawsuit related to contamination at the property and be required to spend a significant amount of money in legal fees and other expenses before proving that it is not responsible for pre-existing contamination. f the tenant actually handles hazardous materials at its facility, it may be difficult and expensive for the tenant to establish that it is not the source unless it has done good baseline testing before occupying the site. Although a tenant may not be liable for pre-existing conditions at a new site, it may encounter increased costs or delays in development or require modifications to the site if it uncovers significant contamination during site development. A tenant also might have some responsibility for health and safety issues arising from pre-existing contamination that impacts the tenant's employees or customers. For example, hazardous vapor intrusion from contamination existing in the soil or groundwater beneath the site might seep up through the slab or floor; a tenant may become exposed to toxic tort lawsuits from employees or customers if it locates on top of solvent plume and has not taken steps to mitigate indoor vapor intrusion. Therefore, understanding the environmental condition of an existing property, even as a lessee, is necessary before entering into a lease or other equivalent agreement. A tenant who plans to perform any excavation at the leased site for facility construction or potential improvements should, at a minimum, determine whether there are any existing environmental conditions at the site that will impact the costs or the time to complete the improvements. The prior existence of underground storage tanks, manufacturing or dry cleaning operations, or other activities that might have contaminated the soil or groundwater at the site need to be determined up front. This should also include a review of the historical operations of adjacent and nearby facilities.
Prospective Tenant's Environmental Checklist
The Bottom Line
Information about the soil and groundwater underlying a leased facility is an important factor in deciding whether to enter into a long-term agreement and how to negotiate the terms of the lease if adverse conditions are found that are capable of being mitigated at a reasonable cost. In some instances, a relatively inexpensive survey of available environmental information can provide a prospective tenant with some useful information that will assist in its due diligence and in negotiations with the landlord. But there are also situations where tenants may need to know more about the property and surrounding sites. In those instances, obtaining environmental samples can provide information that will avoid undue delay in development or unexpected costs. Finally, there may be circumstances in which the additional analysis provided by a compliant Phase I investigation offers certain benefits or in which additional environmental sampling might be required. The prospective tenant needs to balance the cost of obtaining additional information with the risks of entering into a lease if there are significant questions about the condition of the underlying property and its impacts on future site operations. Generally, unless the target site and adjacent and upgradient properties are totally clear of all suspected releases, at least preliminary site testing should be conducted to determine if there is soil, soil gas, or groundwater contamination at the site. Often, some screening level testing can be done at only a minimal incremental cost.
Step 1: Gather some inexpensive information.
While a tenant might think of starting with a Phase I investigation, there are commercial services that, for a few hundred dollars, will gather information from various existing environmental databases to provide an idea of the historical uses of hazardous materials at and around a specific property. Understand that these reports are only as good as the information that was included in the databases, many of which are no longer maintained by the agencies that created them. For example, a manufacturing facility a short distance away with a history of environmental releases might not have any impact on a nearby facility if groundwater flows in the opposite direction from the site. As a result, often times these reports raise more questions than they answer. An EP may be required to do site reconnaissance and to meaningfully interpret the data, but a focused investigation, rather than a Phase I report, may be far more efficient both in terms of time (it can take 4-6 weeks to get a fully compliant Phase I report) and expense.
Using historical information alone is problematic if the target site is located in or adjacent to current or former industrial areas where manufacturing, heavy trucking, or rail activities have occurred since these are areas where releases of chemicals are common. Similarly, in suburban areas where there seems to be a proliferation of small and mid-size shopping centers, it is almost inevitable that a gas station or dry cleaning operation is or was located nearby. To determine if these potential sources are a threat to development, a detailed review of agency files might provide the answer. In most cases, though, site developers will need to take samples to determine if the target site has been impacted by a nearby source. However, even armed only with information from an inexpensive database search, a prospective tenant may be able to negotiate favorable lease provisions, offering some protections in the event contamination is uncovered or agreeing to share the cost of site testing with the landlord.
Step 2: Determine if soil or groundwater sampling is necessary.
If the tenant knows or has a reason to suspect that historical operations could have contaminated the soil or groundwater at the prospective site or adjacent properties, then it might also make sense to obtain access to the property and take soil, soil gas, and groundwater samples. Often, environmental sampling can be combined with soils testing and geotechnical investigations, further reducing the incremental cost. The benefit of obtaining samples even applies if you are only planning to move into a pre-existing facility and do not plan to disturb soil or groundwater; vapor intrusion is even more a threat from groundwater contamination in older structures that may have cracks in the foundation, separation at bearing walls, and pathways such as utility corridors that can facilitate the migration of vapors from the subsurface entering into the building.
Step 3: Determine if further investigation is warranted.
Depending on historical uses of nearby property and the availability (or lack thereof) of actual soil and groundwater data, it may make sense to obtain samples to determine if vapor intrusion is a potential problem. A word of caution: Appropriate sampling for vapor intrusion and corresponding safe levels of contaminants in indoor air are issues being hotly debated at the federal, state, and local levels. So taking samples to determine impacts to indoor air may not provide a definitive answer. Still, there may be circumstances where sampling makes sense to either assist in providing a level of comfort to the prospective tenant or to rule out a prospective location from further consideration. In any event, assistance from EPs with a background and understanding of vapor intrusion issues is strongly recommended.