ENVIRONMENTAL CONSIDERATIONS IN REAL ESTATE TRANSACTIONS

March 8, 2023

When buying or selling property with known or potential environmental concerns, there are numerous factors to account for in negotiating the purchase and sale (P&S) agreement. Buyers need to make sure they can get a full picture of a property’s condition and what work may be required to prepare it for the intended use. Sellers will want to make a profit without being on the hook for potential post-closing liabilities and obligations. To achieve their respective goals, each side of the transaction must enter negotiations mindful of relevant environmental considerations.

Important Federal and Pennsylvania Environmental Laws

CERCLA

The primary federal environmental law relevant to real estate transactions is the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also referred to as “Superfund,” which authorizes the Environmental Protection Agency (EPA) and private parties to respond to releases or threatened releases of hazardous substances into the environment and to recover costs for remediation. Under CERCLA, certain “potentially responsible parties” (PRPs) can be liable for response costs related to releases or even threatened releases. PRPs include current and former owners or operators of facilities where hazardous substances were released or are in danger of being released. CERCLA liability is strict (i.e., no regard to fault) and may be joint and several—where damages are not divisible between defendants and the plaintiff has the right to collect up to the full amount from any party.

There are three CERCLA liability defenses, the most important and readily available of which is the “bona fide prospective purchaser” (BFPP) defense. The BFPP defense enables certain purchasers to knowingly purchase contaminated property but avoid CERCLA liability upon taking title. To qualify, buyers must establish compliance with all eight BFPP criteria, including the “All Appropriate Inquiry” (AAI) Rule. The AAI Rule establishes regulatory and industry standards for performing environmental due diligence in real property transactions.

Pennsylvania Act 2

Pennsylvania’s Land Recycling Program, referred to as “Act 2,” establishes cleanup liability protection for entities, such as current and future owners, who engage in voluntary remediation of contaminated property. Attainment of Act 2’s cleanup standards provides a remediating entity with (1) a release from liability under state environmental laws for further cleanup of identified contamination, (2) protection from third-party citizen suits for further cleanup, and (3) protection from cleanup contribution actions by parties responsible for contamination. However, it is important to note that Act 2 does not provide protection against personal injury and property damage lawsuits.

An Act 2 Buyer/Seller Agreement is also a useful tool that allows parties to close on a real estate transaction involving contaminated property prior to the completion of an Act 2 cleanup. Such agreement is appropriate where certain criteria are met, including that the contaminated property is eligible for Act 2 remediation and that the buyer did not cause or contribute to the contamination. Under an Act 2 Buyer/Seller Agreement, a seller is typically obligated to remediate identified contamination and meet Act 2 cleanup standards, in exchange for a covenant not to sue by the Pennsylvania Department of Environmental Protection.

Purchase & Sale Agreement Environmental Considerations

A P&S agreement is an integral part of any real estate transaction, and certain parts of the agreement become particularly important when the subject property has known or potential environmental concerns.

It is imperative that a buyer perform environmental due diligence on a property prior to closing, and a buyer will need to negotiate an appropriate time allowance for the investigation. Buyers should follow AAI Rule standards for environmental due diligence. This is essential for establishing the availability of the BFPP defense as well as for obtaining environmental insurance (if desired), determining whether and what remediation efforts are necessary, and possibly providing the buyer with the opportunity to renegotiate certain provisions of the P&S agreement (e.g., a potential reduction in the purchase price).

An important consideration for sellers will be to minimize liability that may survive closing and any post-closing obligations. During due diligence, sellers should provide buyers will all information regarding known environmental conditions and be careful to not represent or warrant anything that the seller does not have knowledge of. If a seller is seeking to sell the property as-is, language can be included in the agreement indicating that, in addition to language releasing the seller from any surviving liability and indemnities.

Conclusion

Buyers and sellers of properties with known or potential environmental concerns should be aware of obligations and liability posed by federal and state laws, along with how a property’s environmental considerations should factor into negotiations over the P&S agreement. Our office can work with you to ensure that your interests as a buyer or seller are appropriately protected in a real estate transaction. Contact us to learn more at 215-717-2200.