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Environmental Liability Protection for Tenants

Facility lessees may be held responsible for contaminations that occurred under previous owners or tenants. How can you minimize the legal risk?

Feb/Mar 07
 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. If 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.

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