Caveat Emptor: The Impact of Superfund and Related Laws on Real Estate Transactions

Samuel A. Bleicher and Benjamin G. Stonelake, Jr.

Editors' Summary: Environmental law has invaded the world of real estate transactions. When federal or state governments come to collect the costs of cleaning up unsafe hazardous waste sites, as statutory and common law authorize them to do, they may well stop at the door of the current landowner. The desire to avoid hidden liabilities has made hazardous waste law required reading for prospective purchasers and security holders of commercial real estate. The authors, environmental lawyers who have counseled clients buying and selling real estate containing hazardous waste, outline the sources of landowner liability for hazardous waste pollution and suggest steps that will help commercial real estate purchasers avoid hazardous waste liability. They conclude that the emergence of new statutory and common law governing liability for toxic waste pollution has not made landowners more likely to be liabile, but has greatly magnified the scope of the potential liability. Some states have tried to address the problem with statutes requiring registration of hazardous waste sites on deeds, but the authors counsel prospective purchasers to take additional protective steps, ranging from consulting environmental counsel to considering alternatives to outright purchase of the land.

Messrs. Bleicher and Stonelake are environmental attorneys with the law firm of Blank, Rome, Comisky & McCauley in the firm's Washington, D.C. and Philadelphia, Pennsylvania offices, respectively. The authors wish to thank Ms. K. Shanahan for her assistance in the development of this Article.

[14 ELR 10017]

Today's prospective purchasers of raw land and commercial or industrial real estate face a new risk — buying exposure to millions of dollars in liability for hazardous wastes hidden on the property. Rapidly evolving state and federal law governing liability for cleanup of, and damages for, toxic chemical pollution could make current landowners subject to claims even though they were not involved in the waste disposal and did not know the hazardous substances were buried on their land. As a result, sophisticated purchasers are turning increasingly to environmental lawyers to help them avoid this risk. Several practical steps can be taken to promote this objective.

In the three years since Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund)¹ the statute has become a household word for environmental lawyers and those in the chemical industry who have been called upon to contribute substantial sums to the cleanup of hazardous waste sites. The Environmental Protection Agency (EPA) has identified 406 priority sites² from among the more than 14,000 sites that have been reported to it under the statute. Additional sites continue to be reported, and the number of unreported sites is a matter of speculation. The major federal effort to clean up these sites has been a subject of headlines and controversy from its inception.³

Only more recently, however, has the Superfund tempest become a matter of concern to a broader range of lawyers and business people in the real estate and real estate financing community. Their awareness of this law often has come suddenly, sometimes in the midst of what was thought to be a routine real estate transaction. The consequences of discovering the existence of a hazardous waste problem on property one has purchased or is about to purchase may be substantial. Very often the costs of cleaning up even a modest hazardous waste site can substantially exceed the value of the real estate and improvements at the site. The prospect of incurring such costs in the context of a highly leveraged transaction can be drastic for all concerned. While the practical impact on the buyer's planned use for the premises may not be adverse, his potential liability to adjoining landowners and other third parties, his potential responsibility to the government for cleanup, and the diminished potential value of the property at resale may amount to a substantial loss.

The enactment of Superfund and other recent federal and state statutes addressing hazardous waste has not dramatically changed the substance of the law of landowners' responsibility. What has changed is the likelihood that real monetary losses will be incurred by the owner of land on which hazardous wastes are found. The material that follows explores briefly the preexisting law governing landowner liability, the current statutory framework, and some steps that real estate buyers and lenders can take to avoid exposure and to protect themselves from liability.The focus of this article is on the impact of potential third-party liability, rather than the relationships between the buyer and seller as such. We do not assert or assume that all successor landowners will necessarily be liable for cleanup costs or other claims. Indeed, there are compelling arguments to exempt them from liability under certain circumstances. The purpose of this article is simply to alert prospective buyers and lenders to potential claims that may be asserted and costs that may result if hazardous materials are discovered on the newly purchased premises.

[14 ELR 10018]

The Common Law Before Superfund and Related Statutes

The critical first question is the scope of liability of a successor landowner when hazardous wastes are found on a property. The RESTATEMENT (SECOND) OF TORTS states that current owners are liable for damages caused by conditions created by prior owners in appropriate circumstances:

§ 839. Possessor Who Fails to Abate Artificial Condition.

A possessor of land is subject to liability for a nuisance caused while he is in possesson by an abatable artificial condition on the land, if the nuisance is otherwise actionable, and

(a) the possessor knows or should know of the condition and the nuisance or unreasonable risk of nuisance involved, and

(b) he knows or should know that it exists without the consent of those affected by it, and

(c) he has failed after a reasonable opportunity to take reasonable steps to abate the condition or to protect the affected persons against it.⁴

The comments make explicit that "a vendee of land … upon which a harmful physical condition exists may be liable … for failing to abate it after he takes possession, even though … he had no part in its creation."⁵ The responsibility of the party in possession is to use reasonable diligence to ascertain the existence or nonexistence of relevant facts, but the scope of his duty is "merely a duty to do what is practical and reasonable under the circumstances."⁶

Relatively little recent case law based entirely on tort principles exists on the subject.⁷ In State Department of Environmental Protection v. Ventron Corp., the New Jersey Superior Court, Appellate Division, affirmed the dismissal of the state's claim for recovery of cleanup costs from successor landowners who did not create or continue mercury disposal but installed a containment system to minimize future pollution.⁸ Interestingly, the court endorsed the trial court's finding that any mercury pollution that occurred during their ownership and before they installed the containment system was de minimis, holding that it was not a substantial factor in causing the dangerous condition.

One commentator has concluded that:

with the possible exception of Superfund, it is generally held that "mere ownership" of a site is not sufficient to establish liability. Thus, the innocent purchaser of an inactive site, who unknowingly acquires buried drums, contaminated soil, or polluted ground water, has been protected from the severe consequences of liability for previous owners' conduct.

Beyond the above boservation, few generalizations can be made, since a variety of facts have resulted in an owner being held liable in the creation of the nuisance.⁹ In light of the RESTATEMENT'S black letter rule, however, this view may be too favorable to the position of the successor landowner.

By hypothesis, the successor landowner will not be the only party on whom liability might be imposed, so the question of approtioning the loss arises. If the successor landowner's liability is based solely upon his possession of the property and failure to abate the nuisance, he might well be found only secondarily liable. He may have claims against the prior landowners and polluters on numerous theories, including breach of warrantly, fraud, private nuisance, public nuisance, strict liability, negligence, contribution, and indemnity.¹⁰ However, the success of these claims is not guaranteed, litigation would be expensive and time consuming, and the other responsible parties might be unavailable or unable to reimburse the successor landowner. As against the injured party, however, the successor landowner may be found responsible for the full amount of the loss on a joint and several liability theory,¹¹ or may be entitled to contribution from the vendor for only a portion of the judgment. Worse yet, if the vendor is without sufficient assets, the successor landowner may be unable to collect whatever reimbursement he is due. The common practice of using separate corporate structures as owners (and vendors) of each piece of real estate makes the probability of an impecunious vendor high. No effort will be made here to restate the law of apportionment, joint and several liability, or contribution. We note simply that the existence of a generator, operator, or prior owner that is more directly responsible may not be enough to relieve the current landowner of any worries about financial loss.

Potential Liability Under Federal Statutes

Aside from claims by injured parties, the federal government may seek to hold landowners liable for abatement of conditions on the land which cause environmental harm. Depending on the harm presented or threatened by an existing condition on the land, the United States may bring an action alleging claims under a number of air and water pollution statutes,¹² as well as the imminent hazard provision (§ 7003) of the Resource Conservation and Recovery Act (RCRA),¹³ and the imminent hazard provision [14 ELR 10019] (§ 106) and the liability provision (§ 107) of Superfund.¹⁴ Of these provisions, the government relies most heavily on the imminent hazard provisions of RCRA and Superfund and the liability provision of Superfund when it seeks to hold landowners liable for hazardous waste pollution.

Section 7003 of RCRA provides, in pertinent part:

[U]pon receipt of evidence that the handling, storage, treatment, transportation or disposal of any solid waste or hazardous waste may present an imminent and substantial endangerment to health or the evironment, the [EPA] Administrator may bring suit on behalf of the United States in the appropriate district court to immediately restrain any person contributing to such handling, storage, treatment, transportation or disposal to stop such handling, storage, treatment, transportation, or disposal or to take such other action as may be necessary …. the Administrator may also, after notice to the affected State, take other action under this section, including, but not limited to issuing such orders as may be necessary to protect public health and the environment.

Any person who willfully violates or fails or refuses to comply with any order issued under this section may be fined up to $5,000 for each day of such violation.

In the alternative, EPA may issue an administrative order or institute a civil action for injunctive relief under § 106 of Superfund to compel responsible parties to take appropriate remedial action. Any person who violates an administrative order may be subject to civil penalties of up to $5,000 per day of violation and claims for reimbursement of government expenses and punitive damages of up to three times the costs incurred by the Superfund.¹⁵

Section 104(a)(1) of CERCLA¹⁶ authorizes EPA to use money from the Superfund to conduct a cleanup action whenever there is a release or a substantial threat of a release of any "hazardous substance" or any other "pollutant or contaminant" that may present an imminent and substantial danger to the public health or welfare. If EPA or a state undertakes a cleanup operation at a site in accordance with the requirements of § 104, EPA or the state, as the case may be, probably will bring an action under § 107 against the owner of the land and any other potentially responsible parties, claiming that each is strictly, jointly, and severally liable for reimbursement of all costs incurred.¹⁷ In addition, the government may seek damages for injury to, destruction of, or loss of natural resources, including the reasonable cost of assessing such injury, destruction, or loss resulting from a release.¹⁸

Section 107(a) of Superfund states that "subject only to the defenses set forth in Subsection (b) of this Section" the owner of a facility shall be liable for cleanup costs and for damages to natural resources. Subsection (b) provides an exemption from liability where any person otherwise liable can establish by a preponderance of the evidence that (1) the release or threat of release of a hazardous substance and the damages resulting therefrom were caused solely by an act of God, an act of war, or an act or omission of a third party that was not employed or otherwise retained by the defendant, either directly or indirectly (except a railroad common carrier) and (2) he exercised due care and took precautions against foreseeable acts or omissions of any such third party and the consequences thereof.¹⁹ A successor landowner that did not deposit any of the offending substances may argue that § 107(b) exempts it from liability under § 107(a). However, EPA can be expected to argue that the successor owner has a duty to abate any such condition on his land and that, if he fails to do so, the release and the damages resulting therefrom were caused, at least in part, by failure to take all necessary action to abate the foreseeable harm. To date, there have been no judicial decisions on this point.

Some district courts have held that the current owners of land are proper defendants in actions under RCRA § 7003 seeking environmental cleanup and/or restitution for expenses incurred to date. In United States v. Ottati and Goss, Inc.,²⁰ the district court denied a motion to dismiss successor landowners from a RCRA § 7003 action, citing RESTATEMENT (SECOND) OF TORTS §§ 328E(c), 824, and 838, and holding that both a lessor or land on which its tenant created a hazardous condition and a successor landowner were proper parties to the government's action. The court said the successor owner was a proper party because it failed to take reasonable steps to abate the hazardous waste pollution on its land even though it had brought an action against the dumpers. The court also stated that regardless of whether the current owner was ultimately liable, it should be a party to enable the court to compel appropriate cleanup activities on its land. In United States v. Reilly Tar & Chemical Corp., EPA and the State of Minnesota felt it was necessary to join successor landowners only to insure that the remedial measures requested could be fully implemented.²¹ In United States v. Price, the district court rejected a motion for summary judgment that would have exempted successor owners from liability, holding that they were contributing to the disposal (the leaking of waste) merely by virtue of their "studied indifference to the hazardous condition that now exists" even though it was undisputed that [14 ELR 10020] they did not create the hazardous condition and were not aware of the hazardous condition at the time they purchased the property.²² The court went on to say:

Admittedly, the A.G.A. defendants [the successor landowner] did not create that hazardous condition. Nonetheless, they were aware, at the time they purchased the property, that it had been used as a landfill. As sophisticated investors, they had a duty to investigate the actual conditions that existed on the property or take it as it was. They deliberately chose the latter course. Moreover, they became aware, in the summer of 1979, that toxic chemicals had been dumpedat the landfill, but they have done nothing to abate the hazardous condition that exists. Under these circumstances, the A.G.A. defendants may be held responsible to stop the continued leaking of contaminants from the site.²³

Another district court reached a contrary result, holding that RCRA § 7003 is limited in scope to a prohibition of active conduct that presently causes or contributes to the initial deposition of wastes. In United States v. Waste Industries,²⁴ the court dismissed the government's complaint alleging claims under § 7003, holding that this section does not apply to inactive sites. After stating this ground for dismissal, however, the court stated further that this section can apply only to owners of operating sites and that nothing in the language or legislative history of RCRA supports a conclusion that successor landowners should be liable. In reaching this conclusion, it cited State Department of Environmental Protection v. Exxon Corp.,²⁵ which applied the old New Jersey Water Quality Improvement Act²⁶ and stated that current owners should be exempt from liability for pollution caused by spills and discharges of prior owners.

Potential Liability Under State Statutes

Many states have enacted laws similar to CERCLA and RCRA that impose liability upon landowners and others for hazardous conditions on land. Indeed, several states have enacted "super-lien" provisions in their superfund laws to enhance their ability to recoup cleanup expenditures. For example, § 13 of the Massachusetts Oil and Hazardous Material Release Prevention Act ("Massachusetts Superfund Law") provides that any liability to the commonwealth for cleanup expenses shall constitute a debt to the commonwealth together with interest thereon at the rate of 12 percent per annum from the date such debt becomes due and that such debt

shall constitute a lien on all property, and rights to property, real and personal, presently owned or after acquired, of the persons liable under this chapter ….

Any lien filed pursuant to this section shall have priority over any prior encumbrancer or levying creditor, and over any subsequent purchaser, encumbrancer, or levying creditor of the owner of the property subject to the lien. Such lien shall continue until the liability for the amount so assessed is satisfied ….²⁷

This provision could seriously impair a buyer's equity or a lender's security in a mortgaged premises or any other property that is located within the state. Recognizing the implications of this law, the Federal Home Loan Mortgage Corporation (Freddie Mac) refused to purchase mortgages on multifamily projects in Massachusetts and threatened to stop buying mortgages on single-family residences if this law was not amended by December 15, 1983.²⁸

New Jersey's Spill Compensation and Control Act of 1977 contains a similar provision, which states that any expenditures made by the state pursuant to that act:

shall constitute a first priority claim and lien paramount to all other claims and liens upon the revenue and all real and personal property of the discharger, whether or not the discharger is insolvent ….²⁹

An amendment to this provision directs the state to file such liens with the Clerk of Court and the Register of Deeds in each county in which any property would be affected by the lien. This amendment supports an argument that prior recorded liens are paramount, but a court may hold that such an interpretation is inconsistent with the first sentence of the section which states that any expenditures shall constitute a first priority claim and lien paramount to all other claims and liens.

Currently, many state superfund laws do not include such super-lien provisions. For example, the Florida Resource Recovery and Management Act states simply that monies expended from the Florida superfund "shall be recoverable, jointly and severally, from the person or persons responsible."³⁰ Similarly, New York's superfund law does not contain a super-lien provision.³¹ While Pennsylvania does not have a superfund law, it is authorized to expend monies from several funds³² and to bring actions to recoup these expenditures. However, like Florida and New York, there is no super-lien provision in Pennsylvania.

Vigorous challenges to the constitutionality of super-lien provisions can be anticipated because these [14 ELR 10021] provisions could be interpreted to impose severe economic burdens on financial institutions and their investors by imposing retroactive, first priority liens on secured assets that did not, and could not, cause or contribute to the pollution. No doubt, these challenges will assert that any superfund claims that cannot be satisfied from unsecured assets should be underwritten by the various state and federal superfund tax revenues, not the assets of innocent lenders. Until these challenges are successfully concluded through legislative amendments or litigation, however, these super-lien statutes will remain serious threats to the security of real estate financers.

In addition to the various state superfund laws, many states have enacted other laws that may apply to a hazardous condition on land. New Jersey's Sanitary Landfill Facility Closure and Contingency Fund Act³³ and Major Hazardous Waste Facilities Siting Act³⁴ impose joint and several liability on waste disposal site owners and operators for site closure, cleanup, and certain damages that proximately result from operation or closure of sites.³⁵ These statutes define the term "owner or operator" to include:

in addition to the usual meanings thereof, every owner of record of any interest in land whereon a (landfill or major hazardous waste) facility is or has been located, and any person or corporation which owns a majority interest in any other corporation which is the owner or operator ….³⁶

To date, there have been no cases holding anyone liable who did not have a possessory interest in the affected land. Nevertheless, the potential for a subsequent landowner incurring liability complicates the life of both the real estate financer and the buyer. As a practical matter, mortgagees normally recoup their losses in case of default by forcing the real estate in question into the foreclosure process. If the property is potentially a hazardous waste site, however, the mortgaged premises may be of little value. Known or suspected contamination would discourage third party bidding. Taking ownership may expose the mortgagee itself to liability for the cost of cleanup as a successor landowner. Where such risks are involved, the use of other forms of security and other techniques for taking advantage of the value of the real estate in question must be considered.

Several successor landowners in Poennsylvania have been compelled to abate contamination of groundwater and surface water caused by preexisting conditions on the basis of the state's Clean Streams Law.³⁷ In National Wood Preservers v. Commonwealth, Department of Environmental Resources,³⁸ the Supreme Court of Pennsylvania upheld an order of the Departmnt off Environmental Resources (DER) that required a successor corporation to abate contamination caused by spilling, leaking, and disposing of wood preservatives. Initially, the DER ordered the landowners, along with a prior lessee that caused the condition, and two lessees that had not caused or contributed to the condition, to abate the hazardous waste pollution. All parties appealed to the Pennsylvania Environmental Hearing Board, which sustained the order. In an appeal of the Board's affirmance, the Commonwealth Court held that the current lessees could not be obligated to abate the condition under § 316 of the Clean Streams Law³⁹ because they neither knew or should have known of the condition and did not continue the pollution creating activities of their predecessors.⁴⁰ The Pennsylvania Supreme Court merely acknowledged the Commonwealth Court's reversal and dismissal of the current lessees, and noted that the DER failed to perfect a timely appeal. In its opinion holding the other parties liable for cleanup, it stated that "the validity of an exercise of the police power over land depends little upon the owner or occupier's responsibility for causing the condition giving rise to the regulation,"⁴¹ implying that successor landowners and lessees might be held liable for preexisting conditions.

The DER also takes the position that releases of contaminants to groundwater, surface water, adjacent land, or the atmosphere constitute "disposal" under the Pennsylvania Solid Waste Management Act and that, therefore, the owner or operator of such a site must either abate the condition or obtain a permit and satisfy the stringent conditions applicable to waste disposal facilities.⁴²

It will take numerous trial court and appellate decisions involving a myriad of issues under CERCLA, RCRA, and other statutes to provide any certainty with regard to the application of these complex laws. In the meantime, the position of the buyer and his financier will remain uncertain and, therefore, insecure.

Protecting the Buyer

Why the Risk is High

As suggested in the introduction, the hazardous waste control statutory regimes do not impose substantially different obligations from those said to exist under the provisions of the RESTATEMENT (SECOND) OF TORTS. Why then should there be an increase in concern about this problem? Five factors taken in combination justify an increased sensitivity on the part of those involved in real estate purchasing and financing.

* The Likelihood of Cleanup Claims. The RESTATEMENT provisions cited above are built upon the law of nuisance. Only a small number of nuisance claims for hazardous waste pollution have been brought over the years, in part because the value of damage to adjoining property is a complex technical question not easily proved in litigation. By contrast, Superfund and the analogous state statutes have established governmental [14 ELR 10022] machinery with substantial administrative discretion to determine which sites should be cleaned up and how much should be spent for that purpose. It would be very difficult as a matter of administrative law to establish that the government's decision to clean up the wastes at a particular site was outside the scope of its authority under the statute. Having passed that hurdle, the question is simply one of responsibility for reimbursement. Accordingly, the number of claims against landowners is likely to increase dramatically in the coming years.

* Quantification of the Loss. The RESTATEMENT stresses that the duty is merely "to do what is practical and reasonable under the circumstances." In a common law case, extended argument could be expected over the appropriate character and degree of the cleanup or other remedy (such as providing other water supply or purchasing adjoining land) that would be sufficient to meet the RESTATEMENT test. By contrast, the government's cleanup will be conducted in accordance with the National Contingency Plan, and the degree of cleanup may be largely a matter of administrative discretion. Moreover, once the cleanup has been carried out, the government's costs will constitute at least a prima facie measure of the amount of damages, eliminating a major uncertainty about the "value" of bringing a lawsuit to collect damages before a claimant's litigation begins.

* Public Awareness. The prospects for private litigation are significantly greater once the government takes the step of identifying a particular location as a hazardous waste site, whether or not the government itself gets around to conducting a cleanup. The information submitted to the government by disposers and former operators will provide the beginning of an evidentiary record, which may often be sufficient to precipitate the initiation of private litigation.

* Entanglement. Even though by hypothesis other parties are more directly and, therefore, primarily responsible for the conditions at the site than the successor landowner, the naming of the successor landowner as a party may be not only sensible but essential for both the government and private parties. Under the RESTATEMENT rule as well as the hazardous waste statutes, the owner may be responsible under appropriate circumstances for the condition on his property, and no government or private plaintiff's attorney would have any reason to omit the current landowner as one of the defendants. Thus, even though the successor landowner may ultimately escape an adverse judgment or may be successful in establishing rights to a contribution or reimbursement under applicable purchase contracts, substantial legal fees and other business costs may be incurred in the process.

* Deep Pocket. Finally, the current landowner may be the only potentially responsible party that is solvent. Many of the individuals and corporations involved in the hazardous waste disposal business over the years have turned out to have little or no assets when the time came to pay for cleanup. Accordingly, rights to indemnification, reimbursement, or contribution may be of little value, however ironclad. The recent bankruptcy filings of the Manville Corporation and Braniff Airways, and the balancing acts of Chrysler Corporation and some major steel companies, suggest that even a well-known name may turn out to be of little value when the time for cleanup actually arrives, perhaps decades later.

Protective Legislation

Allowing properties containing hazardous materials to be sold to unsuspecting buyers is not in the interest of either the buyer or the public. Recognizing this fact, some states now require a seller to notify prospective buyers if the seller has actual knowledge of a preexisting hazardous condition. Pennsylvania law requires the seller to give notice in the deed if he has any knowledge that hazardous waste was disposed on the premises.⁴³ A recent New Jersey statute requires the vendors of a wide range of industrial facilities to submit cleanup plans to the state and to purchasers prior to sale if the vendors are aware of hazardous wastes on the premises.⁴⁴ However, one commentator argues that the Act has shortcomings that may significantly weaken the protection from liability for concealed hazardous conditions that it ostensibly offers land purchasers.⁴⁵

Practical Self-Help

Whatever steps state legislatures may take, the prudent business person will proceed with great caution before purchasing any property such as an industrial facility or vacant land that may have been used as a disposal site for hazardous wastes. Eight practical steps can help minimize the risks.

* Consult an Informed Environmental Lawyer. Experience indicates that even sophisticated corporate buyers have a tendency to rely upon the sellers' lawyers for information about the facts and legal consequences surrounding hazardous waste disposal activities on the land. Because the hazardous waste cleanup legislation is relatively new and the magnitude of the potential exposure may be great, seller's counsel may be uninformed or may indulge in wishful thinking either about the nature of the risk or the efficacy of purchase agreement indemnity provisions to protect the buyer. The buyer should rely on its own environmental lawyers or outside counsel familiar with hazardous waste liability issues in structuring the real estate transaction.

* Consider Alternatives To Buying. In our society, land has always been considered an excellent asset — permanent, easily mortgaged, typically appreciating in value. If hazardous waste problems are lurking, however, land may be far more a liability than an asset. Other mechanisms to accomplish the business objective should be studied carefully. For instance, a long-term lease makes one neither the owner nor operator under Superfund. While the lessor may still be the possessor under the RESTATEMENT, [14 ELR 10023] that exposure may be mitigated by appropriate lease cancellation provisions. If the potential hazardous waste problem affects only part of the location, consider carving out that portion of the premises and leaving it with the vendor subject to an option or right of first refusal. If the vendor is willing to sign an indemnity clause protecting the purchaser against hazardous waste liability, the partial sale alternative should be equally attractive, at least if the overall purchase price is not significantly affected. Another alternative is to purchase only the improvements, leasing the land itself or leaving it with the vendor.

* Interpose a Corporate Veil. The establishment of a separate land-holding company may be justified for a number of business reasons. If so, it may insulate most of the purchaser's assets from exposure to hazardous waste cleanup claims. Whether such a separate structure, even if rigorously observed in other matters, will be respected by the courts if its primary purpose is to minimize exposure to hazardous waste liability will be a subject for future litigation in this field.⁴⁶

* Learn the Character of the Risk. The value to the prospective commercial real estate purchaser of independent site investigation, including technical studies where the circumstances warrant, cannot be overstated. In past decades, records of waste disposal typically were not made or they were routinely destroyed after a few years, particularly when a property changed hands: former owners had no interest in preserving the records, and new owners may not have been aware of either their existence or their significance. If the land in question has changed hands a number of times over the years, neither good faith nor reasonable diligence on the part of the vendor may produce accurate information on the existence, nature, or magnitude of hidden hazardous waste problems.

* Require Adequate Disclosures and Warranties. Typical real estate purchase agreements, particularly in conjunction with corporate acquisitions, often do not include representations and warranties sufficient to protect against the hazardous waste liabilities outlined in this article. First, such agreements often are focused on loss because of defect in legal title; second, they typically are limited to suitability for the current or planned use of the property and compliance with applicable laws. Unfortunately, liability may arise even though (1) no defect of title exists, (2) the property is physically suitable for the use contemplated by the purchaser, and (3) the property itself is in compliance with all applicable laws. As noted above, CERCLA does not make liability for cleanup depend upon the violation of any statute; rather, cleanup may be initiated by the government to abate a perceived threat to public health, and liability, if any, follows from the government's action.

Two kinds of disclosures should be sought. The first is disclosure of any reports of hazardous wastes found or disposed on the premises (which reports should have been made under § 104 of CERCLA or state law). The second is a description of the types of materials used or disposed in conjunction with any industrial or waste disposal activities conducted on the premises. If necessary, a purchaser should be willing to keep these disclosures confidential until the purchase is completed. These disclosures should, of course, be accompanied by warranties that the vendor has made all relevant disclosures and has exercised due diligence seeking to discover the existence of the information to be disclosed.

* Include an Indemnity Provision. If the vendor believes that no significant risk exists, it should be willing to indemnify the purchaser against all expenses, including attorneys fees and related litigation expenses, which should be reimbursable as incurred without waiting for the ultimate outcome of the litigation, and any judgment.⁴⁷ Noting what has been said above about insulating corporate structures, take care to assure that the party responsible under this indemnification agreement (as well as for the other representations and warranties in the purchase agreement) is a legal person that has, and is likely to continue to have, substantial assets with which to meet this obligation.

* Look into Insurance. The question of insurance protection has two aspects. First, the vendor's past or present insurance may be broad enough to provide protection for both the purchaser and the vendor should a hazardous waste cleanup claim be imposed. The purchaser should ask for copies of any relevant insurance policies and a statement from the vendor describing its understanding of the scope of the obligation of the insurer under these policies. Insurance policies in effect at the time of disposal (perhaps 25 years or longer in the past) may be operative so changes in policy language and scope of coverage (or even its existence) will be important (though sometimes difficult) to establish. Second, inquiry should be made about the availability and cost of insurance for the future. If such insurance is available, finding out the size of the premium and the scope of the available coverage will be useful in focusing thought on the nature of the risk being undertaken by the purchaser, whether or not insurance is ultimately acquired.

* Obtain Covenants. Lenders should obtain covenants and verification that any land to be mortgaged does not contain hazardous materials and that the borrower will not make, store, use, treat, or dispose of such materials on the premises. If the borrower intends to conduct such activities, the lender should insist upon adequate insurance coverage which names the borrower as a coinsured. In states that have super-lien statutes, lenders should obtain covenants and verification that the borrower is not subject to any claims that may mature into such a super-lien. If such a covenant cannot be obtained, the lender should avoid nonrecourse mortgages and obtain security interests in other property of the [14 ELR 10024] borrower that is located outside states that have super-lien statutes. Additionally, breach of any applicable covenants should be included as a basis for acceleration of the underlying debt, enabling the lender to recoup the loan proceeds before a borrower's assets are expended or attached by a judgment or super-lien.

Conclusion

In sum, the impending rise in the incidence of claims for damages from and the costs of cleaning up hazardous waste pollution adds a new dimension to the risks of owning real estate. Only after careful consideration and with a full range of legal protection should the purchaser place itself in such a position of risk. The costs of careful planning to minimize these risks are insignificant in comparison to either the value of the real estate or the scope of the potential liability. Accordingly, careful attorneys and sensible business people will take every precaution to protect the buyer's and financier's interests.

1. 42 U.S.C. §§ 9601-9657, ELR STAT. 41941-58.

2. EPA Hazardous Waste Sites — National Priorities List, 48 Fed. Reg. 40658 (1983) (to be codified at 40 C.F.R. pt. 300 app. B); in addition, EPA proposed adding 133 sites to the list, 48 Fed. Reg. 40674 (proposed Sept. 8, 1983).

3. See, e.g., Rogers, Three Years of Superfund, 13 ELR 10361 (1983); Hall, The Problem of Unending Liability for Hazardous Waste Management, 38 BUS. LAW. 593 (1983).

4. RESTATEMENT (SECOND) OF TORTS § 839 (1979).

5. Id. comment d.

6. Id. comment e.

7. See Comment, Successor Landowner Liability For Environmental Torts: Robbing Peter To Pay Paul, 13 RUTGERS L.J. 329, 348-52 (1982) [hereinafter cited as Landowner Liability].

8. State Department of Environmental Protection v. Ventron Corp., 440 A.2d 455, 463 (N.J. Super. Ct. App. Div. 1981), aff'd in part, rev'd in part on other grounds sub nom. New Jersey v. Ventron Corp., 463 A.2d 893, 13 ELR 20837 (N.J. 1983).

9. Mott, Liability For Cleanup of Inactive Hazardous Waste Disposal Sites, 14 NAT. RESOURCES LAW. 379, 414 (1982). This view was cited by the court in United States v. Waste Industries, 556 F. Supp. 1301, 1318, 13 ELR 20286, 20294 (D.N.C. 1982).

10. See New Jersey v. Ventron Corp., 463 A.2d 893, 909, 13 ELR 20837, 20843 (N.J. 1983) (affirming cross-claim judgment in favor of successor landowner against Ventron for fraudulent nondisclosure in the sale of realty); Minnesota v. Medtronic, No. B-46882, 6 CHEM. & RADIATION WASTE LITIG. REP. 75 (Minn. Dist. Ct. Feb. 23, 1983).

11. For examples of cases imposing common law joint and several liability for hazardous waste pollution, see City of Perth Amboy v. Madison Industries, 13 ELR 20554 (N.J. Super. Ct. App. Div. Apr. 21, 1983) (landowner/generator) and State v. Schenectady Chemicals, Inc., 13 ELR 20550 (N.Y. Sup. Ct. Feb. 18, 1983) (waste generator).

12. Air and water pollution control provisions that could be relied on by the federal government in suits to compel abatement of dangerous conditions on the land include Clean Air Act § 303, 42 U.S.C. § 7603, ELR STAT. 42256; Clean Water Act §§ 311(e), 504, 42 U.S.C. §§ 1321(e), 1364, ELR STAT. 42134, 42147; Refuse Act § 13, 33 U.S.C. § 407, ELR STAT. 41142; and Safe Drinking Water Act § 1431, 42 U.S.C. § 300(i), ELR STAT. 41110.

13. RCRA § 7003, 42 U.S.C. § 6973, ELR STAT. 41922.

14. CERCLA §§ 106, 107, 42 U.S.C. §§ 9606, 9607, ELR STAT. 41947.

15. CERCLA §§ 106(b), 107(c)(3), 42 U.S.C. §§ 9606(b), 9607(c)(3), ELR STAT. 41947, 41948.

16. 42 U.S.C. § 9604(a), ELR STAT. 41945.

17. These costs may include on-site and off-site cleanup, investigation of the alleged hazardous condition, laboratory fees, fees of contractors and consultants, attorneys fees and court costs, and charges for the time dedicated by government personnel to investigate the matter, supervise cleanup, and litigate actions for equitable relief and compensation for expenses.

18. 42 U.S.C. § 9607(a), ELR STAT. 41947.

19. 42 U.S.C. § 9607(b), ELR STAT. 41947. Section 107 of CERCLA deals only with the release and cleanup of a "hazardous substance," which is a term of art under the Act, whereas § 104 of the Act authorizes EPA or the states to undertake a cleanup operation where there is a release or threat of release of a "hazardous substance" or any other "pollutant or contaminant" if such pollutant or contaminant may present an imminent and substantial danger to the public health or welfare. 42 U.S.C. §§ 9607, 9604, ELR STAT. 41947, 41945. The federal government argues that CERCLA §§ 106 and 107 make responsible parties jointly and severally liable when the injury is indivisible.See generally Comment, Conservation Chemical: Generator Liability for Imminent Hazards on the Docket, 13 ELR 10208 (1983). Two district courts have accepted this argument. See United States v. Chem-Dyne Corp., 13 ELR 20986 (S.D. Ohio Oct. 11, 1983); United States v. Wade, 14 ELR 20096 (E.D. Pa. Dec. 20, 1983).

20. United States v. Ottati & Goss, Inc., No. C80-255-L, 2 CHEM. & RADIATION WASTE LITIG. REP. 417 (D.N.H. Oct. 20, 1980).

21. United States v. Reilly Tar & Chemical Corp., 546 F. Supp. 1100, 1105, 12 ELR 20954 (D. Minn. 1982).

22. United States v. Price, 523 F. Supp. 1055, 1073-74, 11 ELR 21047, 21055 (D.N.J. 1981), aff'd on other grounds, 688 F.2d 204, 12 ELR 20120 (3d Cir. 1982).

23. Id. at 1073, 11 ELR at 21055. Curiously, the court cited United States v. Vertac Chemical Corp., 489 F. Supp. 870, 887-88, 10 ELR 20709, 20717 (E.D. Ark. 1980), for the proposition that it is not a novel idea that ownership imposes responsibility for hazardous conditions on one's land. However, in Vertac, the landowner conceded the point by indicating its willingness to comply with the court's proposed cleanup orders and the prior landowner agreed to "pay its fair share of the expenses."

24. United States v. Waste Industries, 556 F. Supp. 1301, 13 ELR 20286 (D.N.C. 1982).

25. 151 N.J. Super. 464, 376 A.2d 1339 (App. Div. 1977).

26. N.J. STAT. ANN. § 58:10-23.1 et seq. This law has been repealed and succeeded by New Jersey's Spill Compensation and Control Act, N.J. STAT. ANN. § 58:10-23.11 et seq.

27. MASS. GEN. LAWS ANN. ch. 21E, § 13; ELR, STATE SUPERFUND STATUTES 1984 at 38 (1983). See generally Comment, State Hazardous Waste Superfunds and CERCLA: Conflict or Complement?, 13 ELR 10348 (1983).

28. The Wall Street Journal, Nov. 16, 1983, at 33.

29. N.J. STAT. ANN. § 58:10-23.11f.f., ELR, STATE SUPERFUND STATUTES 1984 at 66 (1983).

30. FLA. STAT. ANN. § 403.725(5) (West 1983), ELR, STATE SUPERFUND STATUTES 1984 at 15 (1983).

31. N.Y. ENVTL. CONSERV. LAW § 71-2723 (McKinney 1982), ELR, STATE SUPERFUND STATUTES 1984 at 74 (1983).

32. Depending upon the harm or risk of harm presented, the Pennsylvania Department of Environmental Resources may utilize money from funds established under its air and water pollution and solid waste statutes to clean up sources of hazardous waste and other pollution. These funds are financed from permit fees and penalties. See e.g., Pennsylvania Solid Waste Management Act § 6018.701 (solid waste abatement fund), 35 PA. CONS. STAT. ANN. § 6018.701 (Purdon 1982), ELR, STATE SUPERFUND STATUTES 1984 at 96 (1983).

33. N.J. STAT. ANN. § 13:1E-100 et seq.

34. N.J. STAT. ANN. § 13:1E-49 et seq.

35. N.J. STAT. ANN. §§ 13:1E-103 and 13:1E-62, respectively.

36. N.J. STAT. ANN. §§ 13:1E-102(b) and 13:1E-51(n), respectively.

37. 35 PA. CONS. STAT. ANN. § 691.1 et seq.

38. 489 Pa. 221, 414 A.2d 37, 10 ELR 20724 (1980).

39. 35 PA. CONS. STAT. ANN. § 691.316.

40. Philadelphia Chewing Gum Corp. v. Department of Environmental Resources, 35 Pa. Commw. 443, 461, 387 A.2d 142, 150-51 (1978).

41. National Wood Preservers v. Commonwealth, Department of Environmental Resources, 489 Pa. 221, 238, 414 A.2d 37, 45, 10 ELR 20724, 20728 (1980).

42. 35 PA. CONS. STAT. ANN. § 6018.101 et seq.

43. 35 PA. CONS. STAT. ANN. § 6018.405.

44. New Jersey Environmental Clean-up Responsibility Act, Assembly Bill No. 83-1231.

45. See Landowner Liability, supra note 4.

46. The merits of this alternative must be evaluated on a case-by-case basis. For example, it may not provide the desired protection in states such as New Jersey, which defines a site owner to include parent corporations and other majority holders. See supra note 36. But see New Jersey v. Ventron Corp., 463 A.2d at 908, 13 ELR at 20843.

47. Although such an indemnification will be effective between the parties to such an agreement it may not exempt responsible parties from federal claims under Superfund. CERCLA § 107(e), 42 U.S.C. § 9607(e), ELR STAT. 41946.