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Poisoned Property

Audit That Land

Until Congress changes the law, entrepreneurs are subject to the same rules on liability for contaminated property as major corporations. Even if the site was contaminated years before by some other owner, government agencies can still force you to pay the entire cost of remediation. As a result, if the land you buy is contaminated, it's important for you to be aware of it so you'll be able to walk away from the deal.

It's not always easy to tell. In some cases, there's an oil slick on a nearby creek or patches on a vacant lot where nothing will grow. People drinking water from a well near the property might become ill and start asking why. Typically, the city or county health department investigates such problems and reports its suspicions to the state EPA, which then orders the property owners to hire consultants and remediation crews. If the case is severe, the agency may hire a crew, then sue the owner for the cost of cleanup. It's often a battle of experts to decide the most suitable remedy.

Under current law, the only way for a property owner to get off the hook is the "innocent landowner defense." CERCLA excuses landowners who obtained the land after it was contaminated, but only if they inherited the land or did not know about or even suspect the contamination. It's not good enough just to have bought blind. In order to prove you didn't know about the problem, you must have undertaken "all appropriate inquiry" into prior owners and prior uses of the property.

That means you need to have an environmental audit before buying any commercial property. A Phase I environmental audit is a preliminary assessment by an environmental engineer or consultant, which involves looking over the property for evidence of contamination and examining the records of previous owners. A consultant who suspects problems would then recommend a Phase II assessment, which involves digging, drilling and testing samples. For a small retail site, a Phase I assessment may cost $1,000 to $2,000. For a factory site, it could run $10,000 or more.

Ask the seller if there's been an environmental audit, and ask to see the report. If not--or if you think you'd better have your own audit--look for a well-qualified consultant or engineer. Check references and ask to be put in touch with an attorney who's worked with the consultant.

Don't assume you can simply put a clause in the purchase contract stating that the seller assumes all responsibility for environmental contamination should it appear. Federal law does not allow buyers to escape liability that way.

If you're the one selling commercial property and you suspect it may be contaminated, don't ignore it. The old rule was "buyer beware," which meant it was the buyer's responsibility to discover any problems. In recent years, however, courts have ruled that sellers have to disclose information about contamination if they knew about it or should have known about it. So investigate and clean it up or at least inform the buyer. It can be difficult to sell property with environmental problems, but hiding them could be worse.

If there's a minor problem on your property, check with your state's EPA to see if there's a fund to help with the cost of cleanup. Most states have one, supported by a fuel shipment tax.

The problem of soil and water contamination will plague our nation for generations. Some major corporations are making inroads by knowingly buying abandoned industrial brownfields and rehabilitating them. Perhaps Congress will create laws to encourage such efforts and protect those who want to make the most of the land. In the meantime, be very careful when you buy property to make sure you don't buy an environmental disaster.

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This article was originally published in the March 2000 print edition of Entrepreneur with the headline: Poisoned Property.

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