From the January 1996 issue of Entrepreneur

Suppose you purchase a cozy old storefront on Main Street, remodel it and proudly open your new flower shop. Your business is just getting on its feet when patrons of the cafe next door start complaining that the water tastes funny. After poking around a bit, investigators discover the cause: contaminated soil radiating from your property. Further examination reveals that a dry cleaner who owned the property for 10 years routinely disposed of excess solvents by pouring them down the drain, which led to an underground leaching field. Restoring the land will be very expensive. But that isn't your problem, right?

Wrong. Under the federal Comprehensive Environmental Response, Compensation and Liability Act, better known as CERCLA (or the Superfund Law), property owners can be held responsible for the cost of cleaning up environmental contamination on their property-even if they had nothing to do with the pollution. Often state or federal agencies extract the cost of cleanup from the property owner who's easiest to find. Likely as not, that's the current owner, who then has to locate whoever's responsible and sue for compensation.

The legal concept involved here is called "joint and several liability." It means that any one of a number of parties can be held legally responsible for the entire cost: the property owner at the time the contamination occurred, the party who actually did the contaminating, the current owner, or even the lender that helped finance the business found responsible. The concept is convenient for government agencies looking for someone to pick up the tab, but it can be a headache for business owners. More and more cases involving cleanup costs are piling up in the courts.

One reason is that environmental cleanup is so expensive. Coping with a contaminated well, for instance, might involve removing all the contaminated soil and paying to dispose of it, which could cost hundreds of thousands of dollars. Dealing with major industrial dump sites is even more costly.

The primary problem is deciding who should pay for it: Property owners? Insurance companies? Petrochemical businesses? Insurance companies? Taxpayers? Congress has attempted to address the question through a bill that would reauthorize the Superfund, the huge fund used to study toxic waste sites and begin cleanup while the Environmental Protection Agency (EPA) uses the courts to pursue those deemed responsible. In 1994, the Clinton administration tried to hammer out a solution acceptable to industry, insurers and environmental groups alike, but Congress failed to come to an agreement before the session ran out. Prospects look equally dim this session. Superfund's taxing authority was scheduled to expire at the end of 1995, but at press time, Congress was still haggling over the details of the re-authorization bill.

The reasons are largely political, but the process of reform is difficult because of the complexity of the issues and the sheer magnitude of the problem. Among the issues: Should companies be required to pay millions of dollars to clean up old sites that were contaminated through actions that were legal at the time? Should the liability of each party be proportional to its involvement in the problem? Should sites be prioritized according to danger to human health or treated equally as potential problems in the future? Don't expect easy answers.


Steven C. Bahls is dean of Capital University Law and Graduate Center in Columbus, Ohio, where he teaches courses in entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

Environmental Audits

In the meantime, small-business owners are subject to the same law as major corporations. Even if the site was contaminated years before you bought it, through no fault of your own, you can be required to pay the entire cost of remediation.

How would you know if your property was contaminated? Someone might notice an oil slick on a nearby creek or patches on a vacant lot where nothing will grow. People drinking water from a nearby well might start getting sick. Often, it's the city or county health department that investigates a problem and reports its suspicions to the state EPA. The agency can then order you, the property owner, to hire consultants and remediation crews. In emergency cases, the agency may hire a crew, then sue you and your business for the cost of cleanup. Often it's a battle of experts to determine what the most appropriate remedy is.

The only way for the property owner to get off the hook is the "innocent landowner defense." CERCLA excuses private property owners who acquire the land after it was contaminated, but only if they inherited the property or if they "did not know or had no reason to know" about the hazardous substance.

Just buying blind, though, isn't good enough. To prove that you did not know about the problem, you must have undertaken "all appropriate inquiry" into previous ownership and uses of the property to minimize your liability. That means having an environmental audit conducted at the time you purchase the property.

Given the risks, many real estate lawyers recommend an environmental audit as a routine part of commercial property sales. A Phase I environmental audit is a preliminary assessment, typically conducted by an environmental consultant or engineer. It includes looking over the site for evidence of contamination and examining the records of previous ownership to see what kinds of businesses operated there in the past. If warranted, the consultant then recommends a Phase II assessment, conducted by an environmental engineer or similar specialist, which involves digging, drilling and testing samples.

A Phase I assessment can cost anywhere from $1,500 for a small retail site to tens of thousands of dollars for a factory. Phase II will likely cost even more. The potential cost of buying blind, though, is much worse.

If you're buying commercial property, ask whether the seller has had an environmental audit done. If he or she has, ask to see the final report before committing yourself to the deal. It may even be wise to have your own audit conducted. Most medium-to-large communities have several environmental consultants and engineers. But because it's a new field-and a lucrative one-not all consultants are well qualified. Check all references carefully. Ask to see samples of the consultant's reports, and ask for the name of an attorney who's worked with the consultant for additional insight.

Some buyers attempt to protect themselves by insisting on a clause in the purchase contract stating that the seller assumes all responsibility for environmental contamination should it appear. Federal law, though, states that buyers can't escape responsibility through such clauses. In any case, the clause would be only as good as the seller's ability to back it. As a result, a competent environmental assessment is still your best protection.

Seller Beware

If you're selling commercial property and have reason to suspect a toxic waste problem on the site, do you have to disclose the problem? That depends on your state since disclosure laws vary widely among states. In times past, the legal principle was caveat emptor, which means "let the buyer beware." It was the buyer's responsibility to inspect the property; if problems surfaced later, courts tended to rule that the buyer should have known better. Now, however, many states require sellers to disclose contamination if they know or should know about it.

If you suspect a problem, don't ignore it. You're better off investigating it and either getting it cleaned up before selling or telling the buyer about it to avoid unpleasant surprises for everyone.

If you discover a minor problem on your property, such as an old leaking fuel tank, check with your state's EPA to see if there's a fund that could help cover the cost of cleanup. Most states charge a small fee for intrastate and interstate shipments of fuel, putting the money into a fund for contaminated soil cleanup.

Toxic waste poses an enormous problem for our country. Some large companies are trying to help by knowingly buying abandoned industrial "brownfields" and committing the resources to rehabilitate them for future development for the good of the community. Until your business has the resources to do that, make sure you don't buy property with environmental problems that could put you out of business.