Environmental Law And Your Business

Environmental Law And Your Business

Governmental regulation of business practices that affect, or may affect, the environment continues to expand in response to the public’s increasing awareness and concern about the environment. Now more than before, the responsible and prudent businessperson must stay on top of, and deal with, environmental issues that may affect public health, day to day business operations or long range, strategic, business plans.

No business is immune. Although the headlines may focus on major environmental disasters in energy-related, chemical and other heavy industries, environmental choices must be made and environmental problems must be solved by small industries and businesses, and by financial and other service-oriented businesses as well.

The risks in ignoring the environment are great. Expanded civil liability, based on strict "no fault" liability, has increased the exposure of the ordinary businessperson to damages for clean up of environmental problems. Furthermore, the trend in legislation and prosecutorial policy is to treat the creation of environmental problems as a serious crime, to be severely punished.

The protection, preservation, and enhancement of our quality of life and the environment must be a top priority for the future of our nation. The maintenance of a stable and healthy economy and business climate must also be a top priority. These two priorities should complement each other, not conflict. The challenge of environmental law is to accomplish just that.

Environmental choices and decisions will arise throughout the life of your business. Although there are too many possible situations to cover in detail in this brochure, environmental choices and decisions often arise in the following situations.

The Ownership or Possession of Contaminated Real Estate

The serious nature of the threat to the environment by ground, water, or air contamination, has led to an expansion of civil liability. Those who actually spill or dump hazardous substances are liable for the costs of clean up. However, by the time their mistakes or wrongdoing are discovered, these parties might be bankrupt or otherwise financially unable to pay the entire cost of clean up.

The danger to the public that is posed by hazardous substances is too great to allow a solution to depend on the all too uncertain purse strings of those responsible for the problem in the first place. Therefore, the trend in environmental legislation is to spread liability to as many other parties ("deep pockets") as possible in the hope that some or all will be able to afford the costs of clean up.

Liability, in many instances, is not based on fault but, rather, is imposed on certain parties simply because they have a connection to the property where hazardous substances have been found.

For example, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") imposes civil liability on parties who own property where hazardous substances have been found, even if these owners were not actually involved in spilling or dumping the hazardous substances. Ownership alone may be sufficient to make you and your business liable for clean up of hazardous substances left behind by people who previously owned or used the property. A limited defense is provided to innocent owners who purchase property after making a good faith, diligent investigation to determine if hazardous wastes exist on the property before they buy. However, such a defense is small consolation to an owner who discovers toxic wastes after purchasing property. Although the innocent land owner may not be liable for clean up costs because of the good faith investigation defense, he is still the owner of property that may be unmarketable until clean up occurs. If there are no other "deep pockets," the toxic problem will not go away and will remain a problem for even an innocent landowner.

Any businessperson or business that wants to buy real property must take into account this risk. A careful, environmental audit or survey of the property, by qualified experts in order to discover hazardous wastes, must be done before any purchase of real property. The cost of such a survey may be allocated between the buyer and the seller, or assumed by one of them, as part of the overall negotiation of terms.

Furthermore, any businessperson or business that leases real estate to other businesses must take into account this risk. Tenants that utilize hazardous substances in their businesses may leave behind a toxic problem when their leases expire, terminate or are abandoned. When negotiating or renewing a lease, owners must make a careful evaluation of the prospective tenant’s business to determine if a present or future toxic hazard may exist, so that safeguards (such as specific clean up requirements, increased security deposits, bonds or letters of credit) may be included in the lease terms.

Finally, any businessperson or business that wants to sell land must take into account this risk. Even selling property "as is" may not eliminate a seller’s exposure to claims by the buyer if toxic wastes are later discovered. The law requires that a seller fully disclose to prospective buyers any known hazardous substance condition on land offered for sale. Such disclosure should be made up front and early. Responsibility for any toxic problems should be allocated in a clear, written agreement between seller and buyer so that the seller will know that, in selling the property, the seller is receiving a specified price and not buying a lawsuit. Otherwise, a buyer might later cancel escrow if a hazardous waste problem is disclosed or discovered, thus throwing a seller’s financial plans (based on the prospect of a completed sale) into disarray. If disclosure or discovery occurs after close of escrow, a buyer could attempt to set-off the cost of clean up against any portion of the purchase price carried back by the seller or sue for actual and punitive damages.

This expanded civil liability may also extend to other less obvious situations. Depending on the facts, you may be held strictly liable without fault for clean up of hazardous substances on property of a corporation of which you were the controlling shareholder or on property you purchased at a foreclosure sale or from a bankrupt estate. You may also remain liable for clean up costs when your property is acquired by the government for a public project in an eminent domain action, even if the government paid less for your property because of the toxic condition. Furthermore, under certain circumstances, a parent corporation may be held strictly liable without fault for clean up of property contaminated by an existing or dissolved subsidiary corporation.

Loans Secured by Contaminated Property

Strict liability without fault may also extend to lenders who make loans secured by property contaminated with hazardous substances. Such liability should not arise simply because a lender is a mortgagee or beneficiary of a deed of trust encumbering contaminated property or because a lender takes full title to property merely as security for a loan. However, such liability may arise if the lender participates in the management of contaminated property.

A lender normally has rights to inspect and take action to protect the value of the lender’s security. As a borrower’s financial condition becomes more perilous, lenders typically exercise more control and exact further concessions from the borrower in exchange for additional time or more lenient terms. At some point, the lender may begin to participate in the actual management of the borrower’s business by exercising such control and taking advantage of such concessions. There is no bright line marking the border between permitted exercise of lender rights and prohibited control over the borrower. A lender must scrupulously stay clear of the grey area to avoid liability, or lawsuits asserting liability, arising from contaminated real estate.

A lender also may be liable if, through the lender’s own conduct as opposed to control over the borrower’s conduct, the toxic problem is made worse. For example, a lender may be held liable after obtaining title to a property through foreclosure, if the lender allows the existing toxic problem to get worse. Furthermore, a lender who takes action to clean up hazardous substances on real property securing the lender’s loan must do so carefully and dispose of the wastes in a proper manner or else face liability.

Lenders must be concerned about environmental problems affecting their security, even if they have taken precautions to insure that they will not be held strictly liable.

First, the existence of such problems directly affects the market value of the property securing the loan. Most appraisers value property as if it were cleaned up and disclaim any opinion as to the value of the property in a contaminated state. Therefore, the discovery of a toxic problem after a loan has been made may be disastrous. Typically, lenders fix the loan limit at a certain percentage of the appraised fair market value of the security for the loan. After discovery of a toxic problem, however, the remaining equity in the property (after its value has been reduced to take into account the toxic problem) may be insufficient to pay off the loan. Even if a lender forecloses and takes possession of the property, no one may be willing to buy it from the lender because of the toxics.

Second, some state laws create a superior lien for the costs of clean up that has higher priority than other existing liens. A lender holding a first deed of trust or mortgage may suddenly find its security junior to this "super lien."

Third, discovery of a toxic problem may stop development of a property until the problem is cleaned up. A lender who made a construction or other loan to facilitate such development, may then be faced with a borrower who might not be able to perform, even if the borrower wanted to perform and was otherwise able to complete the project.

Borrowers also should be prepared to address environmental issues when they apply for loans. If a borrower does not have a convincing and viable plan to investigate and deal with toxic issues, loan processing (and the borrower’s plans) will be delayed. Furthermore, insufficient data on the costs of clean up will affect a lender’s analysis of the value of his security, perhaps causing the lender to reduce the amount the lender will loan because of the uncertainty. Finally, if a borrower obtains competent and convincing estimates for the costs of clean up, a lender may be willing to advance part of the loan to cover clean up costs.

Paying for Clean Up

Environmental problems are best dealt with and resolved in advance. However, if, despite your best efforts, you still find yourself faced with the risk of strict liability for the clean up of hazardous substances, there are methods and mechanisms available that might limit your costs.

You may be able to obtain indemnity or contribution from those actually responsible for the problem or others held strictly liable without fault. Such rights may arise by law or by contract. In negotiating contracts that involve property that may be contaminated, it is therefore important to consider and spell out agreements regarding who will indemnify or contribute to whom in the event a toxic problem arises. There are limits to what can be shifted by contract, however, and you should consult an attorney concerning the effect of any indemnity or hold harmless agreement you are considering.

Insurance policies also may cover all or part of the cost of clean up. Insurance companies have acted to limit such coverage in their policies. However, some policies may still cover some aspects of environmental problems that may have arisen during the policy period but were not discovered until later.

If you have sufficient popular and political support, you may be able to obtain approval for establishing a local assessment district to spread the costs and benefits of clean up to all persons in the area who may be affected.

You also may be able to find legal alternatives to disposal of the cleaned up waste in an approved disposal facility. Disposal in such facilities (which are few in number and remote) is quite costly. Liability for the disposed material continues. Some substances, however, are highly toxic in their natural state but harmless if incorporated into finished manufacturing products. For example, an abandoned factory may contain dangerous chemicals used in manufacturing goods. These materials technically may be "toxic" if left to sit on the shelf or if they are hauled away to an approved disposal facility, but safe if sold or given to another factory for use in making finished goods. Although such a sale or gift may itself require a special governmental permit before the toxic materials are moved to a new location, the cost of obtaining such a permit and moving the materials may be much less than disposing of the materials in an approved disposal facility.

In short, all legal alternatives and avenues available to reduce clean up costs should be pursued.

Notice Requirements

As an alternative or adjunct to strict liability, many environmental statutes and regulations require that notice of the existence of an environmental problem be given to those who may be affected. This theoretically allows the persons affected to move or take other precautions for their own health and safety.

For example, many buildings contain asbestos, a substance that is dangerous when it is released as fibers into the air. Owners of buildings containing asbestos may have a duty to inform employees and tenants periodically about the situation and the health risks associated with the situation. Contractors performing work that may cause asbestos fibers to be disturbed or released into the air may also have a duty to search for asbestos and disclose its existence.

Owners of factories and other pollution generating sources may also have a duty to notify residents in the area of the level of risk they face in living near the pollution source.

Notice requirements differ from industry to industry and often depend on the type of hazardous substance involved and the size of the problem. The businessperson should check with local health authorities and legal counsel to determine what notice is required and when.

Business Establishment and Expansion

Environmental choices and decisions also face the businessperson who seeks to establish or expand a business, even if the business is not located on property having toxic problems.

Most development projects must undergo environmental review by the appropriate governmental agencies. If a project may have a significant effect on the environment, mitigated negative declarations or environmental impact reports are required to analyze the effect the project will have on the environment and the quality of life in the area of the project.

Environmental impacts may arise from the increased traffic (and resulting decreased parking) caused by a new or expanded development project or business. A new project may involve the demolition of an older building having historic value. Increasing concern over air quality has caused many local areas to adopt air quality regulations that may lead to disapproval of a project or development if appropriate measures are not taken to decrease the effect the new project will have on air quality. Such measures may be costly and may include requirements that businesses establish car pooling programs for employees.

Those opposed to a new or expanded project or business may adopt the tactic of filing lawsuits alleging failure to comply with applicable environmental laws and regulations in an effort to delay and increase the expense of a project to a point where it is no longer economically feasible.

In short, any businessperson who seeks to establish or expand a business, must plan and budget for the environmental review process and possible litigation arising during the process.

The Role of Experts and Consultants

Experts and consultants in a wide range of areas provide valuable advice and assistance in dealing with environmental problems.

Experts may be needed to conduct environmental audits or surveys of property to determine the nature and extent of any toxic contamination affecting real property. Experts may be needed to develop plans for clean up and to negotiate the requirements for such plans with the governmental agencies supervising clean up. Experts may also be helpful in developing less costly legal alternatives for clean up and disposal of hazardous substances.

In a development project, consultants and experts are usually involved in all phases of the environmental review process. For example, they may be called upon to develop data and render opinions on the effects that a given project may have on traffic and parking, on how endangered species of plants and animals living in a project area (or their habitats) may be protected, or on how alternatives to a given project may be more or less environmentally safe and sound.

Before retaining an expert, the businessperson should carefully inquire into the expert’s qualifications, experience and knowledge, and the expert’s methods of charging for his or her work.

The Role of Environmental Lawyers

Environmental lawyers assist clients in dealing with the entire range of environmental problems. Environmental law is a highly specialized area with new laws and regulations constantly going into effect, and new cases being decided that interpret such laws and regulations. Although no formal designation or title such as "Environmental Specialist" exists, some attorneys have greater experience than others in dealing with environmental issues and problems. Also, some lawyers have more experience in a particular area of environmental law than they do in others.

Competent environmental counsel should be retained in litigation involving environmental problems and to represent you in negotiations with others concerning environmental choices and decisions, including negotiations with governmental agencies. Environmental lawyers help their clients find experts who are qualified and experienced in evaluating the nature, extent, cause and cost of environmental problems. Environmental attorneys use their experience and skill to point out potential environmental legal problems and to help clients resolve them.

Environmental lawyers may charge for their services on an hourly basis. However, depending on the facts of a given problem or case, they also may work on a contingency fee or fixed fee basis. Fees are not set by law and are negotiable. Often, an attorney will meet with a potential client to discuss an environmental problem for an initial consultation at no cost.

This brochure gives only a summary of major problems arising in environmental law. Many environmental problems involve unique and complex legal issues that should be reviewed in detail by an experienced environmental attorney.

The material contained in this brochure is for general background use only and should never be applied to a specific problem without first obtaining review and advice from legal counsel.

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