READING BETWEEN THE LINES: WHAT TO LOOK FOR IN ENVIRONMENTAL DATA PROVIDED BY A SELLER OF CONTAMINATED PROPERTY.
By John Reaves
The phrase, “caveat emptor,” or buyer beware, has never applied with greater force thanto the purchase of contaminated property. Blind trust in the conclusion of a seller’s consultant,for instance, that contamination was not found or was minor, can lead to bankruptcy. A buyer ofcontaminated property should work with a technically knowledgeable environmental lawyer andconsultant to methodically evaluate the nature and extent of contamination and attempt toquantify the value of the risk of the property.Why shouldn’t the buyer save costs and rely on environmental data provided by a seller?Sellers who test their property rarely go beyond bare necessities: limited testing around areasmost likely to generate concern or known to have contamination, such as where tanks, clarifiersor other underground containers of hazardous materials were located. Consultants rarely expressopinions or discuss risks which they perceive to be against the interest of their client. Theseller’s environmental data should always be presumed inadequate.Testing is not only expensive, but the results usually suggest more hazards and the needfor new tests. Knowledge of a problem may also trigger reporting requirements to agovernmental agency, which may result in an order to further assess and remediate the site. Theseller must then sell a known liability. A buyer must then ponder whether the knowncontamination is manageable or represents the tip of the proverbial iceberg.There is no way to ever assess the risk of a site to 100% certainty. But one needs to haveenough data to make an “educated” guess. What is “enough” will vary from site to site but willalways include, at a minimum, sufficient tests to reasonably characterize and define the extent ofall contaminants known, found or suspected to have been used around the site.The following checklist offers a systematic approach to reviewing environmental dataand valuing risk so that the buyer can better decide whether to place him or herself, or acompany, and the investment in this site, at risk.* Verify whether all environmental reports and data have been provided. Reportstypically include site assessments prepared by an environmental consultant after undergroundtanks are removed, contamination is discovered and/or in anticipation of a sale of property.Avoid relying solely on maps showing contaminant concentrations prepared by the consultant:important lab data in the appendix may not be on the map.Typically, county health departments and regional water boards have the most relevantCopyright (C) John H. Reaves, Esq.records concerning recent chemical use, underground tank information and contaminationproblems; in addition, the state and federal Environmental Protection Agency (EPA) may haveinvestigated a company’s operations, overseen significant contaminated sites and receivedreports by companies concerning hazardous materials use. While all agencies’ records are notessential in all cases, the buyer may need to examine more than one source of information to geta more complete picture.* Get as much site (and possibly adjacent site) history so that all relevantchemicals are tested. One needs a good overall understanding of the historical uses of a site todecide what tests to use for the chemicals in question. A gas station, for instance, stores and usesdifferent chemicals than a dry cleaner or plating operation. The environmental report whichglosses over or omits a complete site history (with sources of information identified) maydeliberately be withholding crucial telltale information. Interviews with the owner and operator,aerial photos, older telephone and business directors, and old fire department maps can all helpdraw a more complete picture of a site and its activities.* Determine where chemicals were stored, used and spilled to know where testsshould be performed. Were the tests taken at locations best calculated to find the worst potentialcontamination? When underground tanks are removed, for instance, the state now requirestesting immediately underneath the former tank at time of removal. A consultant’s conclusionthere is no known contamination may not rule out the possibility of a spill where tests were notperformed.* Determine if the reports reasonably define the nature and extent of allcontamination. Have all potential hot spots been adequately tested and is the contamination fullydefined? The contamination must be defined from surface to depth at which it is no longerdetected as well as horizontally at all depths found. To have any reasonable comfort level, oneneeds to be able to circumscribe contamination by drawing a circle connecting a reasonablenumber of test locations where insignificant or no chemical was found. If other factors suggestthe possibility contamination might have spilled in, or migrated to, an area where testing doesnot exclude that possibility, then more testing is needed.* Pay particular attention to the groundwater and property borders. Mostremediation is very costly when groundwater is impacted. Moreover, chemicals generallydissolve in or float on the groundwater and contaminate clean soils above and below thefluctuating groundwater level. They can spread out and beyond the property lines. If impactedgroundwater is in a zone designated as “beneficial” by a regional water board, then morestringent cleanup requirements apply, particularly if there is a drinking water aquifer nearby.While groundwater generally follows broad topographical (surface) trends, it moves quitecomplexly up close. For instance, water travels more readily and faster through sand than clay,which can create different zones of pressure. As a result, groundwater may travel in directionscontrary to prevailing gradient and gravity. If it seems counterintuitive that groundwater cantravel uphill, just think of a spring or geyser forcing water to the surface.Copyright (C) John H. Reaves, Esq.* Are any other sites impacting this site? Until proved otherwise, assume closeand upgradient gas stations, dry cleaners, platers or long-term industrial sites have contaminatedgroundwater, which could have affected the site. Has seller’s consultant addressed theseconcerns adequately?* Examine location of underground pipes and structures. Groundwater, and thuspollutants, commonly follow underground pipes, such as sewer and water, and structures, such astanks, which intersect the groundwater. Determine their most likely location and depth.Migration of pollutants will likely have been altered from prevailing directions in those areas.Pollutants may have pooled unexpectedly in those locations, too.* Take a sobering look at the potential liability of cross-border migration. Oncecontamination has moved offsite, the potential liability of the site expands greatly. Where thereare other likely contributors to the offsite problem, potential liability increases exponentially dueto the specter of protracted litigation. Similarly, if an offsite source has contaminated theproperty in question, buyer will probably be purchasing a lawsuit to get the property partly clean.* Don’t rely on a government agency’s letter saying it will take no further actionat the site. Take a close look at the so-called “no further action” letter: it requires no furtheraction “at this time”! Once you change the use of the property, you may then have to takefurther action! Granted, placing a parking lot over a former gas station will not likely triggerfurther action. But if you dig on site, you may encounter previously undetected contamination,and off you go again. Health departments may require additional remediation if chemical gasesare a threat to occupants.* Remember, as knowledge of chemicals’ toxicity evolves, cleanup requirementschange. Likewise, the “no further action” letter is only as good as the agency’s knowledge of thechemicals’ extent and toxicity when it wrote the letter. Take, for example, MTBE, a fairly recentadditive to gasoline to reduce air pollution. . . . Until a few short years ago, no one tested forMTBE. Even after limited testing for MTBE began, no remediation was driven by MTBE. Bynow, however, MTBE drives many site cleanups and has a very stringent cleanup target. What isnext?* Is “clean” ever clean enough? The seller’s consultant says the property hasbeen remediated and is “clean.” What is clean enough for the seller or governmental agencywill, with virtual certainty, never be clean enough for the buyer. But is it clean enough to avoidfuture problems? Generally not. Remember, buyer will face the same question when selling theproperty. Once contaminated, most properties remain less marketable as long as risk due tocontamination is conveyed too.* Don’t forget the buildings themselves! Lead may remain in older paints, andasbestos remain in building materials such as vinyl tiles, wallboard and sprayed acousticalceilings. Residues of chemical operations may have encased or eaten into building materials.The building may need its air tested to assess if there is a buildup of contaminants. Mold andmildew can also cause “indoor air pollution”; look for flooding history. An industrial hygienistCopyright (C) John H. Reaves, Esq.should survey a building for hidden hazards where occupants may be at risk.Quantifying risk is problematic even when one has a fairly good understanding of thecontamination on a property. But a systematic approach to ranking risks and placing a range ofvalues on each risk using a best and worst case scenario is essential.* Worst case valuation. First, one needs to review each of the known andunknown risks on and off a site and rank and value each from worst to least based upon a worstcase scenario for each item. Consider known onsite risks; all other possible onsite risks unlessscientifically ruled out; known offsite risks; all other possible offsite risks unless scientificallyruled out.Within these broad categories, list and value all relevant possible risks and damages using thefollowing guidelines (and accompanying chart):* Site assessment;* Site remediation;* Other costs of “closing” site with governmental agencies;* Development costs including delays due to contamination, extra costs resulting fromdiscovery of additional contamination and higher interest rates;* Liability to third parties, e.g., governmental agency suit or claim; prior owners and operatorsof the property; tenants; downgradient property owner(s); water utility; gas utility; otherpotentially responsible parties regarding a commingled plume; parties who have been exposed tothe contaminants. Include legal fees and costs; expert costs; settlement/judgment costs;* Suits you bring against third parties (to the extent not included as a cross-complaint above;* Long-term devaluation after remediation, if any (stigma);* VALUE OF BUYER’S TIME.Include items even if they cannot yet be fully evaluated. For instance, if the possibilitycontamination has migrated to the adjoining down gradient property cannot be ruled out, thenassess costs of remediation and lawsuit for severe contamination (relative to contamination foundon site).Be sure to consider as many things as possible which can go wrong — they usually do.For example, even if the full nature and extent of contamination have been assessed, remediationcosts are prone to cost overruns. How long could development be delayed while contaminationis remediated? What if contamination remains where development will break ground? What if atenant’s business is interrupted substantially by remediation?Copyright (C) John H. Reaves, Esq.Second, now go through each of the foregoing items and place a value based on a bestcase scenario. The result usually produces a big gap between best and worst case scenarios. Thevalues will differ greatly if you do not have enough information to evaluate highly ranked issuesthoroughly. The greater the information, the closer these values will be, and the greaterconfidence buyer can have in them.After valuing each of the above risks from worst to least, one should then consider thecollective prior experience with other contaminated sites. Are the significant, but speculative,risks at this site really unmanageable in the real world? Are the odds of occurrence or damageclaim very good? Are there ways to manage the risk? Sometimes, for instance, a governmentaltrust fund may be tapped for petroleum spills, or the parties might limit the costs of remediationby purchasing pollution insurance.Get an estimate of the property’s value without any contamination problem. Subtract theworst case value for the cynic’s valuation. Subtract the best case value for the optimist’svaluation. In all likelihood, the truth lies between, but closer to the cynic’s valuation.Resulting negotiations focus on shifting risks. The buyer asks for protections in the formof price reductions and/or indemnities or their equivalents. In many cases the seller isuncompromising, claiming there is no evidence of major contamination (and hoping to find aless discriminating buyer!)If the seller refuses to retain those risks, the buyer must carefully evaluate whether toproceed. Is acquisition of this particular site necessary to achieve a broader business plan? Howdoes the risk compare to the overall cost and projected return for the site?A systematic review of the risks and range of values as described in this article can helpthe buyer focus soberly on the possible consequences of a purchase, which are oftenunderappreciated by those outside of the environmental field. The buyer who tempersexcitement over buying contaminated property by a business-like apprehension of risk willinvariably be the long-term winner.Copyright (C) John H. Reaves, Esq.