Position yourself for growth in 2017—join us live at the Entrepreneur 360™ Conference in Long Beach, Calif. on Nov. 16. Secure Your Seat »
Toxic waste, heavy metals, Super fund sites . . . these all have to do with old mines and abandoned factories, right? Not necessarily. When you buy property for your business, it's a sure bet that someone else owned it before you, and someone else before that. Maybe it was a dry cleaner who routinely poured used solvent down the drain and out into an underground leaching field. Maybe it was a farmer who disposed of almost--but not quite-- empty pesticide barrels by tossing them into the ravine. Maybe it was a skeet-shooting resort with lead shots peppering the ground and poisoning wild geese. When your property turns out to be contaminated, it's your legal responsibility to pay for the cleanup--even if your business had nothing to do with creating the problem.
That's because of the federal Comprehensive Environmental Response, Compensation and Liability Act, better known as CERCLA, or the Superfund law. This 20-year-old law holds property owners responsible for the cost of cleaning up environmental contamination found on their property. Typically, the state or federal agency discovering the problem seeks to recover the cost of cleanup from the party who's easiest to find: the current owner. Then it's up to that owner to track down whoever was responsible for the contamination and sue for compensation. (Given the thousands of convoluted Superfund lawsuits mired in the courts, it's obvious the ones "cleaning up" are the lawyers.)
The legal principle involved here is "joint and several liability." It means that any one of the parties involved can be held responsible for the entire cost. In the case of contaminated property, that could be the individual or business that created the problem in the first place, the property owner at the time of contamination, the current owner or even the lender who helped finance the purchase of the property. It's convenient for government agencies, but hardly fair to innocent landowners trying to run their businesses.
Why don't property owners just grit their teeth, pay the cost and get on with life? Because environmental cleanup is extremely 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 a major industrial dumpsite is even more costly. Accordingly, while industrial brownfields and toxic-waste sites must be cleaned up for the good of society, nobody wants to be the one who has to pay for it.
Congress is aware of the problems, but it has yet to forge a solution. Since 1992, Congress has been trying to agree on the necessary reforms to the Superfund law. Republicans are looking for major business-friendly revisions, while Democrats are hoping to address the problems by tinkering with the rules and regulations for enforcing the law rather than rewriting the law itself. The result is a stalemate that many expect to continue. If Congress does manage to reform the law, chances are it will provide specific protections for small businesses and local governments, encourage reuse of brownfields and protect recyclers who meet certain requirements.
Steven C. Bahls, Dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.
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.