By: Mary S. Busby, Esq.
Environmental Practice Leader- Oswald Companies


Environmental Liability 101 – Real Estate

Environmental consultants performing Phase I Environmental Site Assessments to the All Appropriate Inquiry (AAI) Standard (ASTM 1527-05), know that the primary reason for performing these assessments is to help the client achieve a defense to CERCLA liability (e.g., innocent purchaser). We can often lose site of that in the hurry to get financing or close a deal, especially on such a tight budget. CERCLA makes an owner or operator of property liable for pollution conditions at, under or migrating through that property. This liability is “strict” and attaches without regard to fault. Although it has yet to be fully tested in court, the AAI Phase I ESA should allow a purchaser of property to assert that it did not know about adverse conditions (was innocent) at the property when it bought it, and therefore, it should not be held liable for those conditions.

So much environmental liability rides on the Phase I report, which costs on average about $2,700 and is often prepared in less than a two-week timeframe. When our clients stop to think about it in that light, it becomes clear that it would be risky to place all of their reliance on that one document.

Real estate attorneys will draft what are ostensibly iron-clad indemnifications that many clients also rely on to help them avoid environmental liability. For example, the seller may agree to hold the buyer harmless and indemnify the buyer for any environmental conditions existing at the property prior to sale. An indemnification is nothing more than a contractual right to sue and is only as good as the financial strength of the party giving it and the willingness of that party to abide by the terms of the contract. It does not provide any more liability protection than that. When things fall apart, it amounts to an invitation to litigation.

Once a client looks at the Indemnification in that light, both the client and the attorney realize it would be best to proactively engage in litigation avoidance. That is what insurance provides.

What Environmental Liability Insurance Covers

The broadest policy form will cover on- and off-site cleanup for new and preexisting conditions. It will also cover third-party claims for bodily injury and property damage as a result of those conditions. It will cover non-owned locations (such as non-owned disposal sites) for cleanup, bodily injury and property damage. It will also cover cleanup, bodily injury and property damage liability for pollution conditions arising from transported cargo or waste. In addition, the policy will cover business interruption suffered as a result of pollution conditions. None of these things are expressly meant to be covered on any policy other than an environmental liability policy.

You should advise your clients to seek the advice of a trusted insurance broker that specializes in environmental coverages, as it requires expertise in environmental and contract law. We often negotiate “manuscript endorsements” that we craft as a part of the insurance contract. As a trusted advisor, you would not want to recommend that your client seek the advice of a generalist on this subject.

The most overlooked reason for buying environmental liability insurance is legal fees. Legal fees are often the most costly portion of an environmental claim. Your client does not have coverage for the cost of these fees on any other insurance policy that it has and will be out of pocket for its defense costs if it does not have an environmental liability policy.

Case Study – Green Acre

This case is still in litigation. A small real estate developer wanted to purchase a vacant lot to build a strip center. He had an AAI Phase I performed, and no RECs were found. After purchasing the property, the EPA swooped in and took Corrective Action under RCRA against the new property owner, holding him liable for the cleanup of a 40-acre former RCRA facility. This buyer did everything (except one thing) right. What happened was that his one acre was the 40th acre from fence line to fence line of the former facility, and a 10-day storage pad (39 acres away and downgradient) at the facility had run afoul of RCRA. The former owner of the facility was gone, and the land was in Receivership. This innocent purchaser under CERCLA was the first to purchase a piece of the bankruptcy estate, and was the equivalent of the “Last Man Standing.”

The first question that I usually get asked when I tell this story, is “Did the environmental consultant have good Errors and Omissions Insurance?” I respond by stating that the environmental consultant was arguably correct in finding no RECs. The 10-day pad was 39 acres away and downgradient and very unlikely to have an adverse impact on the green acre that was the subject of the Phase I.

Now the innocent purchaser, who resembles many of your average clients, has completely lost the value of his real estate purchase, as he into the hundreds of thousands in legal fees. Had he simply gone one step farther and bought an environmental liability policy to cover this property at the time of purchase, his legal fees and ultimate liability would be covered.

A site with no RECs is inexpensive to cover, and is usually a drop in the bucket when compared to the value of the deal. Full coverage could have been placed for less than $10,000. This client is angry and ready to sue his consultants, his lawyers and anyone else he can find who led him into his current circumstance. This could all have been avoided.

Conclusion

Environmental Liability Insurance is one highly advisable component to any transaction involving real estate. As a trusted consultant, it is in both your clients’ and your best interests to guide them to the other experts that can help them.

For additional information, please contact Mary Busby at Oswald Companies at 216-367-4920 or at mbusby@oswaldcompanies.com.

Mortgage foreclosures have been increasing exponentially since 2007. The common practice has been to blame subprime mortgage lenders and the so-called 'liar loans.' However, an analysis of loan-level data from McDash Analytics, a component of Lender Processing Services Inc., paints a vastly different picture.

The analysis was conducted by Stan Liebowitz, a professor of economics and director of the Center of Analysis of Property Rights and Innovation in the management school at the University of Texas in Dallas. The loan-level data from McDash Analytics is the largest source of such data available, covering more than 30 million mortgages.

Mr. Liebowitz's analysis indicated that the most important factor, by a large margin, related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. Although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

As reported by the Mortgage Bankers Association, 51% of all foreclosed homes had prime loans, not subprime. Also, the foreclosure rate for prime loans grew by 488% as opposed to a growth rate of 200% for subprime foreclosures.

Other factors that had some impact on foreclosures are FICO scores (i.e., creditworthiness), income levels, unemployment rates and whether the house was purchased for speculation. However, the 2 villains of the foreclosure mess, teaser rates and liar loans, had virtually no impact on foreclosures.

This data is important because most of the 'solutions' being pushed by various lawmakers and others are directed at the teaser rates, liar loans and other subprime issues that have no significant relationship to the mortgage meltdown and therefore cannot reasonably be expected to solve the problem.

For more information, check out Stan Liebowitz's article* published in the Wall Street Journal on July 3, 2009.


*links to WSJ articles online generally go stale in a week.

An easement is a common mechanism used in real estate law. An easement is the right to use or to control activities on the property of another. By definition, you cannot hold an easement on your own land. A typical example of an easement would be the easements provided to utility companies.

A "servient tenement" is the land that is subject to the easement. A "dominant tenement" is the land that is benefitted by the easement. The owner of the servient tenement has full use to the land to the extent that the use is not inconsistent with the easement owner's reasonable enjoyment of the easement.

There are 2 types of easements; "appurtenant easements" and in "gross easements". Appurtenant easements run with the land and whomever owns the land that controls the dominant tenement benefits from the easement. An example of this might be a landlocked owner's easement right to cross adjoining land in order to access the street. Should that owner transfer his or her parcel of land, the ingress and egress easement across the adjoining property would transfer with the parcel of land.

In gross easements do not run with the land, with ownership of the easement being independent of ownership of any parcel of land. An example would be utility easements controlled by utility companies.

Easements are presumed to be perpetual unless there is specific language in the grant of the easement that indicates otherwise. How an easement is worded is crucial as language and intent will govern. If a court become involved in an action to enforce an easement, it will not look beyond the wording in document granting the easement unless it finds the language to be ambiguous.

The easement owner has a duty to maintain its easement. If there is an express agreement relating to maintenance regarding an easement, the courts will enforce it.

When negotiating an easement agreement, the parties need to carefully consider the wording of the easement to clearly state the intent, what it covers (e.g., including a sufficiently accurate description so a surveyor can locate it on a survey), address whether it is an exclusive easement or not, and address any other duties or restrictions necessarily related to the easement..

Thanks to Scott Wick, summer associate at Kohrman Jackson & Krantz for his assistance in the preparation of this post.

Below is a link to an article at CantonRep.com titled "How to painlessly prepay a mortgage and save thousands" by David Myers, which covers safe and easy ways to pay down that debt.

Click here to access the article.

Don’t forget to change your forms’ format.

HB 525 creates a revised Section 317.114 of the Ohio Revised Code, with the following requirements for recorded real estate documents, effective July 1, 2009:

1) Computer font size of at least ten point;

2) Maximum paper size: 8 ½ x 14; Minimum paper size: 8 ½ x 11;

3) Margins of 1 inch on each side of the page and on bottom;

4) 3 inch margin on the top of the first page, reserved for recorder, auditor and engineer;1 ½ margin on the top of each of the remaining pages;

5) Black or blue ink only.

If a document does not conform to these guidelines, an additional recording fee of $20 will be due.

HB 525 does NOT apply to: (i) any document from any court or taxing authority; (ii) Plats;(iii) DD214’s; (iv) any state or federal document; and (v) any document executed before July 1, 2009.

Written By: Barry A. Cik, BCEE, CP, PE, QEP, CHMM

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Background:

Since 1980 (CERCLA), owners of real estate have been liable for the cleanup of contamination caused by prior owners and users of the property (Joint and Several Liability). The far-reaching effects of this law have now been curtailed with the enactment of the Brownfields Amendments in January 2002, and more specifically, the EPA “All Appropriate Inquiries” (AAI) which went into effect in November 2006.

The new owner will no longer be held to be a potentially liable party if the new owner performed an AAI prior to taking title. The liability protections are applicable regardless of whether the new owner did not know about prior contamination (Innocent Purchaser), or did in fact know about prior contamination (Bona Fide Protective Purchaser). The liability protection is also effective if the contamination never originated on-site, but rather migrated from off-site (Contiguous Property Owner).

So What’s the Problem?

Performing “All Appropriate Inquiries (AAI)” is not enough to block potential liability for cleanup of contamination which exists at the property when taking title. The law also requires that the new property owner comply with any “Continuing Obligations” that may apply. The problem is that neither the law nor the EPA has in the past defined what constitutes “Continuing Obligations.”

ASTM Rescues Landowners.

ASTM will shortly be releasing a new “Standard Guide for Identifying and Complying With Continuing Obligations on Real Property Impacted by Chemicals of Concern.” This Standard will help landowners further protect themselves against environmental liability by addressing “Continuing Obligations” with a defensible industry standard.

The new ASTM Standard was developed with the participation and blessing of the U.S. EPA. The ASTM Committee also included representation from the environmental consultant community, commercial and industrial property owners, and related sectors.

What Are Continuing Obligations?

In order for a new property owner to be free of potential liability for contamination caused by others, the new property owner does have to prevent or limit human, environmental, or natural resource exposure to such prior hazardous substances releases. This includes, for example, disposing or emptying leaking containers, and/or otherwise limiting exposures to chemicals of concern currently present at the property.

The value to landowners of complying with the applicable Continuing Obligations that may apply is that the landowner would no longer be responsible for the big dollar expenditures associated with contamination cleanup. Such big dollar expenditures, which the new property owner would not be responsible for, could include removing source material, buried drums, preventing migration of uncontained groundwater containing chemicals of concern, preventing the leaching of chemicals of concern from soil into the groundwater, etc.

How To Determine “Continuing Obligations”.

To define the Continuing Obligations that may be applicable to your site, it would be prudent to hire the services of a Professional Engineer (P.E.), Professional Geologist (P.G.), or other state certified environmental professional (e.g. State of Ohio VAP Certified Professional).

For new real estate translations going forward, it would be best to identify the Continuing Obligations together with the Phase I/AAI environmental assessment. This way, the new property owner will know with relative certainty what obligations – and associated costs – come with the property (in order to avoid the big dollar potential liabilities that might otherwise apply).

For real estate already bought and owned, the Continuing Obligations can be assessed at any time (as opposed to the Phase I/AAI which must have been done prior to taking title). Remember that the liability protections only apply to properties purchased after January 11, 2002, and only if a Phase I/All Appropriate Inquiries was done prior to taking title.

There is no specific requirement to perform a Phase II investigation. If the new use of the property is industrial in nature (including the use of hazardous chemicals), then a Phase II is usually necessary in order to be able to distinguish and document the contamination caused by prior owners and users of the property. If the new use of the property is benign, and if there are no blatant contamination issues evident at the property, then a Phase II would usually not be necessary. However, where residual chemicals of concern may pose an unacceptable risk to human health and the environment for the intended use of the property (and this would include the zoning and intended demographics), then a Phase II or other further environmental investigations may be prudent.

Finally, “Continuing Obligations” requirements would also include complying with any institutional controls or land use restrictions (zoning, covenants, easements, consent decrees, etc.), providing full cooperation, assistance, and access to government paid-for response actions, complying with CERCLA information requests, and providing any applicable legally required notices with respect to the discovery or release of any hazardous substances.

While all the above may appear daunting, it doesn’t have to be. Hire an environmental consultant who understands “All Appropriate Inquiries” and “Continuing Obligations” and you will likely not be liable for the big dollars of cleaning up the contamination caused by prior owners or users of your property.

Barry A. Cik is Chief Engineer at G.E.M. Testing and Engineering Labs, holds multiple offices in professional engineering and environmental organizations, has been a featured speaker and prolific author in numerous publications, and currently is a member of the ASTM Committee drafting the new Standard Guide with the participation of the U.S. EPA.

G.E.M. Testing & Engineering Labs of Cleveland, Ohio has a quarter century of experience investigating and assessing hazardous materials/contamination, resolving environmental problems, and protecting human health, safety, and the environment. For more about G.E.M., log on to their website at: www.gemtesting.com.

Justin Lahart and Brian Blackstone (in their June 18, 2009 Wall Street Journal article: “Consumer Prices Keep Inflation in Check”) reported that consumer prices in May, 2009 posted their largest annual decline in fifty- nine years (according to the U.S. Department of Labor’s Bureau of Labor Statistics [BLS]). While the “CPI-U” rose .01 percent from May to April of this year, the CPI-U for May, 2009 was down 1.3 percent from May 2008; the largest decline since 1950.

According to the BLS, the CPI-U for the Cleveland/Akron area was 2.3 percent below its year-ago level of 2008. (By comparison, the Cleveland area CPI-U rose 4.4 percent from May 2007 to May 2008).

What is the Consumer Price Index (“CPI”)? The CPI is the most widely-used measure to determine consumer price inflation. CPI measures the average change over time in prices paid by consumers for goods and services that live in urban areas. The Bureau of Labor Statistics of the U.S. Department of Labor collects this price information and then calculates the CPI statistics. CPI is actually measured for two groups: 1) All urban consumers (CPI-U); and 2) Urban wage and clerical workers (CPI-W). CPI-W measures consumer price inflation for urban residents who live in households that receive more than half of their income from clerical or wage occupations, and have one wage earner employed for at least 37 weeks during the previous 12 month period. Urban wage and clerical workers represent a subset of the CPI-U population.
CPI-U is the most commonly-used index because it has the largest population coverage (approximately 87 percent). However, the CPI-W is frequently used to make cost-of-living adjustments for labor contracts. In addition to the U.S. CPI, the BLS publishes CPI statistics for twenty-six of the nation’s metropolitan areas.

What does CPI have to do with commercial leases? Landlords may insist upon CPI adjustments in commercial leases so that rents and common area charges (“CAM”) keep up with expenses, which typically increase because of inflation. Also, landlords and tenants often use CPI adjustments to determine what the rent during an option term should be. In the late 70’s and early 80’s, most landlords felt comfortable with CPI adjustment clauses since a change in the index ranged from six to twelve percent in those years. That comfort level remained, even as “corrective” adjustments to the index by BLS, and more currently, recessionary factors, brought CPI index changes to the two to four percent range. Now that the CPI is in negative numbers, however, typical CPI clauses are no longer helpful for most landlords, and could serve to decrease rents (if a poorly drafted provision calls for CPI adjustments vs. CPI increases).

The problem is magnified when energy, labor, and tax costs for landlords increase at a greater rate than CPI. With negative index changes, this “magnification” is guaranteed. According to UBS economist, James Sullivan (quoted in Mr. Lahart’s article), the problem is expected to continue for some time, because “inflation is not likely soon, and it will be under downward pressure for years to come” due to the current recession and unemployment rate.

So, what’s a landlord to do?

1) First and foremost, landlords should make sure that their CPI provisions call for “increases” only. Use of the word “adjustments” may result in the unintended result of receiving lower rents;

2) A CPI increase provision may still be beneficial. However, landlord and tenants should negotiate a “floor” and “ceiling” to the increases. Consider the following clause: “Notwithstanding the above, in no event shall Rent be increased by more than six percent (6%), or less than three percent (3%) over the Rent for the previous Lease Year";

3) Budget CAM charges based on the previous year, and reconcile same at the end of each lease year. For tenants that require more certainty, limit “controllable” CAM charge increases to a fixed “guesstimate”, or base same on an alternate cost analysis such as a historical average of specific CAM charges, subject to revision mid-lease;

4) For option rent, it is advised that landlords negotiate a set figure. From the landlord’s perspective, the higher the better, as an option, by nature, only obligates the landlord. The tenant has the option to accept it or reject it.

While decreasing costs is good news for consumers, landlords are advised to closely monitor expenses, and review their leases with brokers and attorneys to help ensure that “outgo” does not exceed income.