As Florida continues to develop, there will be a fine balance that must continually be met to ensure the state’s environment remains protected. Now more than ever, entering into real estate transactions requires a sophisticated level of due diligence. Property owners should be aware of environmental law and real estate, and how that could affect the way the land is used as well as potential liability issues.
Understanding the Regulatory Framework of Environmental Law
Much of the most relevant environmental legal frameworks we know today were enacted in the 1970s as a response to increasing public awareness and concern caused by high-profile environmental disasters. As a quick civics refresher, the U.S. Congress passes a law, the federal agencies create policies based on that law, and courts interpret the laws and policies. These specific actions create legal frameworks. Some of the major environmental laws include the National Environmental Policy Act (1970), The Clean Water Act of 1970 and 1972, and the Endangered Species Act (1973).
These laws force the United States to clean up air and water, protect endangered species, and contemplate the environmental impact of its actions. The regulations passed by the Environmental Protection Agency (EPA), National Oceanic and Atmospheric Administration (NOAA) and the U.S. Fish and Wildlife Service (FWS), and other agencies charged with enforcing these laws are what make them effective. Moreover, it is these regulations and red tape that draw ire from both sides of the political fence.
Identification of Environmental Risks and Liabilities
Environmental risk is a combination of the probability, or frequency, of the occurrence of a defined hazard and the magnitude of the consequences of the occurrence. Most real estate transactions involve some level of environmental risk, and sometimes the potential environmental liabilities that can be exchanged are enormous. It is important to identify all of the potential risks and collect ample information about them early in the due diligence period. By being proactive when it comes to environmental due diligence, the buyer can determine whether the risks are acceptable in light of the overall transaction. It will also create a strategy for managing the issue during the contract negotiations prior to acquisition as well as after the transaction is complete.
Environmental risks encompass a wide range of environmental issues, both natural and human-induced, including issues such as:
Exposure to hazardous substances
Subsidence and sinkholes
What is CERCLA?
While there are a number of environmental statutes and regulations that may impact real estate transactions, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) is the primary reason to manage and allocate environmental risks effectively. CERCLA not only ensures that removal actions are taken, but also enforces against potentially responsible parties, and ultimately promotes strong accountability, community involvement, and long-term protectiveness.
Steps for Allocating Environmental Liabilities
The allocation of environmental liabilities in a real estate transaction can be critical to the terms of the contract. Any well-drafted commercial real estate agreement is not complete unless it undertakes to allocate environmental liabilities. Liability allocation issues differ for both buyer and seller. They may also differ depending on the structure of the transaction. Because judicial interpretation of contractual environmental provisions is unpredictable, the importance of careful drafting cannot be overstated.
The following are some common environmental risks and tools:
There are two main forms of environmental insurance that can be used for environmental risks; pollution legal liability (PLL) and cost cap. PPL covers potential contamination risks for property damage and bodily injury. Cost cap insurance is generally used for known contamination.
2. Indemnity Provisions
Indemnity provisions allocate risk and usually contain specific language related to existing or future liabilities. Indemnities can include provisions to divide up responsibility.
3 Remediation Options
If contamination is known, the parties can require the seller to remediate to a predetermined level prior to the sale, or for the seller to retain obligations associated with remediation.
4 Agency Programs
In some instances, the parties may wish to mitigate risk using agency documentation and programs such as voluntary cleanup, prospective purchase agreements, audits, and innocent landowner provisions.
5 Other Transactional Mechanisms
There are a number of provisions that can be negotiated to allocate environmental liability, including conditions to closing, asset purchase agreements – seller retained liabilities, price reduction or escrows, “no dig” provisions, etc.
Strategies for Minimizing Environmental Liabilities
There are a number of ways that environmental risks and liabilities can be managed at a site or in connection with transactions or redevelopment, including:
Environmental management systems
Environmental audits and reporting
Remediation and building improvements
Transferring contaminated land liabilities using statutory tests and agreements on liabilities
Contractual mechanisms, such as warranties and indemnities, and contractual arrangements allocating responsibility for environmental matters in corporate and property transactions
Considerations for Compliance with Environmental Law in Real Estate Transactions
Buyers and sellers of real estate properties with known or potential environmental concerns should be aware of obligations and liability posed by federal and state laws. It is critical that a buyer perform environmental due diligence on a property prior to closing and negotiate an appropriate time allowance for the investigation. As a seller, it is important to minimize liability that may survive closing and any post-closing obligations.
I’m Here to Help
I’m Rob Robinson, and I understand how complex environmental due diligence can be during real estate transactions and how important strategic planning can be during contract negotiations. Having someone on your side that knows how to navigate environmental issues through completion can mean the difference between a happy client and unanticipated liabilities and risks.
Even if there is no merit, any mention of an environmental hazard seriously threatens the value of a property. It is important to take swift action to address the situation and preserve the owner’s investment. I draw on more than three decades of legal experience to help my clients handle the various concerns over environmental risks and liabilities. I know how to deal with government officials and private interests to assess environmental matters accurately and identify lasting solutions to protect your real estate investment.
Please contact my office to schedule an initial consultation.