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Month: January 2017

CERCLA Environmental Lender Liability

Lenders can maintain CERCLA exemption by following ownership / liability tests

The EPA Lender Liability Rule does not encourage controlling borrowers but rather it supports proper loan management.

Also see: Environmental management for banks, financial institutions & other lenders

It may appear the EPA holds financial institutions responsible for the failings of others because lenders have attempted to be responsible in their dealings with developers on environmental issues. However, we must keep in mind that the EPA is responsible for defining and identifying responsible owners and operators in order to assign responsibility for environmental failures, which can have long-lasting and far-ranging effects.

Indeed, the EPA has, on occasion, ruled that lenders have been too involved in the daily operation of a company and, therefore, have been given the responsibility for clean up. Ongoing daily involvement, even if initiated more recently than the violations, confers responsibility because it also suggests some knowledge or awareness of the failures.

Lenders that have failed to conduct due diligence or which were not thorough in protecting their security interests have inherited huge environmental liabilities under CERCLA.

There are, however, important and appropriate lender activities as an owner or operator which are shielded from CERCLA (1980) liability under the secured creditor exemption. The Lender’s Exemption provides that the term “owner” or “operator” specifically does not include a person, who “without participating in the management of a . . . facility, holds indicia of ownership primarily to protect his security interest in the … facility.”

The stated purpose of the EPA Lender Liability Exemption is to define and specify the range of permissible activities a lender may conduct without exceeding the bounds of exemption.

The EPA has defined three key and identifiable elements of activities which lenders may conduct without being deemed to have exceeded the bounds of CERCLA exemption. Those elements are: “indicia of ownership”; the requirement that ownership be held “primarily to protect security interest”; and, the prohibition of secured creditors from participating in the management of a facility.

The key elements, all of which must be in place for the lender to avoid liability, are expanded for clarification:

“Indicia of ownership” is defined by the EPA rule as “evidence of interests in real or personal property.” Qualifying indicia of ownership include a mortgage, deed of trust, legal or equitable title obtained through foreclosure, a guarantee of an obligation, an assignment, lien, pledge, or other right or form of encumbrance against the property.

To avail itself of the exemption, a lender must prove it holds the indicia of ownership principally for the purpose of securing payment, or performance of a loan or other obligation.

There is a two-pronged test for identifying when a lender has crossed the lines and can be deemed to be “participating in management.” Activities of management the secured creditor is prohibited from include: a) exercised decision-making control over the borrower’s environmental compliance; or, b) assumed overall management responsibility encompassing the day-to-day decision-making of the borrower’s enterprise.

Acceptable participation

How can lenders protect their loans if they cannot exercise some control over borrowers? The EPA Lender Liability Rule does not encourage controlling borrowers but rather it supports proper loan management.

The United States Environmental Protection Agency has defined four areas where lenders can be involved in environmental inquiries and loan management without being labeled as having “participated in management” of a borrower’s company.

Acceptable loan management activities from an environmental standpoint may occur:

  • Before the loan transaction takes place, or at the inception of the loan
  • During the tenure of the loan
  • While undertaking a financial workout with a defaulting borrower
  • At foreclosure and when preparing the facility for sale or liquidation

Financial institutions serious about avoiding “unacceptable participation” rulings design and implement their own Lender Loan Management Programs to coincide with the four areas of acceptable participation defined by the EPA. The two most important focused objectives of such a program are to minimize environmental liabilities throughout the life of each loan, and to maintain the Lender’s Exemption when borrower viability appears to be at issue.

A solid Lender Loan Management Program addresses lender conduct from the onset of lending conversation, perhaps even before application, and all the way through to loan termination.

Look before leaping:
Lender Loan Management Program

There are several tools and a number of procedures for the various phases of loan management which comprise an effective Lender Loan Management Program.

At the inception of the loan transaction, a Transaction Screen Questionnaire (defined by the ASTM in protocol E1528-93) is used to determine if a Phase I Environmental Site Assessment will be necessary. It is rare that some form of in-depth evaluation is not required on commercial property. Furthermore, it is inaccurate and can be risky to view the Transaction Screen as a shortcut or substitute for a Phase 1 environmental site assessment because, performed according to ASTM protocol, there are many points where the screen leads directly to a full Phase 1 environmental site assessment.

An intermediate tool devised by Harris & Lee Environmental Sciences, LLC is a modified or abbreviated environmental site assessment report. It includes a summary computer data radius report, a brief site reconnaissance, and investigative inquiries into historical use. It is performed in conformance with ASTM protocol, and when performed by experienced senior personnel to draw comprehensive conclusions, it will indicate additional environmental conditions which warrant a Phase 1 environmental site assessment. Not only is the client assured costs will be kept to a minimum, the report can be expanded if considerations require additional detail. Though components of the modified assessment are done in compliance with ASTM standards, it does not technically meet ASTM standards because it is abbreviated. Even so, this abbreviated environmental site assessment will satisfy due diligence requirements for the first phase of the Lender’s Exemption rule. Please email for more information.

Finally, ONLY the All Appropriate Inquiries – Environmental Site Assessment, Phase 1 Investigation satisfies the requirement for one of the three landowner liability exemptions provided by the CERCLA Brownfields Amendments. It must be performed in accordance with ASTM E 1527-05. The advantage for lenders is that these landowner exemptions protect the borrower and collateral in commercial real estate loans.

Tenant assessment vs. tenant compliance

The technical term for that time when a facility undergoes a detailed audit in which all phases of environmental compliance are investigated is “multimedia environmental compliance audit.” Put simply, it means the auditor’s investigation will include all areas for which the potential of contamination exists: soil, air, and occasionally, employee safety and health. The Tenant Environmental Compliance Audit examines not only the paper trail, but chronicles the actual daily practices to minute detail. It is a comprehensive audit process which is important in that it detects noncompliance with numerous and varied regulations, many of which impose heavy fines and cleanup requirements.

A Tenant Assessment is not intended to prevent the facility from minimizing fines due to faulty practices, but rather to identify and to prevent faulty management practices which are likely to create liability by extension to the Lender. An example of the difference in tenant assessment vs. tenant environmental compliance would be incorrect completion of a hazardous waste manifest, as opposed to the outright disposal of hazardous waste without any manifest. Incorrect completion of the manifest could lead to financial fines to the facility, but disposal of the hazardous waste without a proper manifest implies an illegal disposal practice which may be viewed as a criminal offense.

The assessment requires an experienced environmental auditor with a broad philosophical outlook because the hazardous waste was generated from the property, the property owner, or the lender in some cases, could be held responsible.

New vs. existing tenant

Potential environmental risk is minimized when, prior to lease development, a visit is made to the potential tenant’s existing facility. A review of relevant processes and how they are presently handled is the best indicator of how the operation will be run once the tenant is situated on the new property. The hazardous waste materials management plan and tools are reviewed and a determination is made as to how well it is followed. Specific issues regarding future compliance can be identified for coverage in the lease agreement.

Lenders should expect to monitor ongoing compliance at tenant facilities on a regular and agreed upon basis. Such monitoring protects the long-term value of the property. The most important aspect of tenant monitoring is to identify and document potential environmental problems which will or may devalue the property, or cause the extension of liability ownership to the Lender.

Depending on circumstances, the EPA has assigned liability of previous owners and lenders to the current occupant of a property. However, because previous tenants and lenders can be assessed penalties, lenders are urged to have pre-evacuation and pre-lease termination assessments of the property. Doing so minimizes the owner and lender exposure by documenting the tenant’s departure activities. It may, on occasion, be prudent to require a tenant to develop a comprehensive closure plan, and to police the implementation of that closure plan, as well as to monitor the effectiveness of such a plan. It is helpful to stipulate and draw a prospective tenant’s attention to this lender option in the lease. The intention is that tenants who are aware they will be monitored are more likely to be well-prepared, and lease termination may be more manageable.

When Borrowers default

The EPA rule does permit a lender to take necessary steps to protect collateral. For loans threatening default or already in default, borrowers may need professional consultation, which can come at the request of the lender. Lenders may foreclose and not be considered owners for purposes of CERCLA liability. The lender may avoid liability if it undertakes to sell, release or otherwise divest itself of the property in a reasonably expeditious manner. In foreclosure, a property may be operated by a lender under the exemption so long it, as the holder, does not improperly arrange for disposal of hazardous substances at the facility or for transport and disposal at the facility.

Essentially, all EPA rules which applied to the previous tenant apply to the lender as holder in a foreclosure.

Use of expert support

The term “participating in management” as applied by EPA is broad and difficult to interpret. Expert support offering a thorough understanding of the processes and their relationship to all parties is essential to assist lenders in upholding their responsibilities without crossing the line. Technical environmental support should also include appropriate legal assistance to interpret vague language and to assist in refining procedures.

Also see:
Environmental management for banks, financial institutions & other lenders

Robert S. Harris is president and senior scientist of Harris & Lee Environmental Sciences, LLC, a Santa Rosa, California environmental consulting firm serving the western United States. He holds degrees in chemistry and biochemistry, and has 32 years experience in environmental analytical chemistry and environmental toxicology. Mr. Harris has established and operated large laboratories and has developed several ground-breaking methodologies for environmental analysis, including the standard method for analysis of polychlorinated biphenyls in water, soils and oils. His firm has saved lenders, insurance, real estate and law clients millions of dollars, including conversion of waste costing $120,000 per month to a usable fuel. He can be reached by email or phone at (707) 571-8961.

Environmental liability risk management program

The ultimate responsibility for compliance with environmental laws and regulations rests with the property owner. Protect yourself with an environmental liability management program

While the CERCLA Brownfields Amendments  provides three specific landowner environmental liability exemptions, only those who rigorously follow the All Appropriate Inquiries Rule (AAI) prior to purchase are protected.  However, these exemptions do not protect a property owner from environmental liability for damage that occurs during his tenure as owner.

When private property is contaminated or damaged, the ultimate responsibility for compliance with environmental laws and regulations rests with the property owner.

A property may be “clean” when purchased, but the owner must ensure that current uses, by employees, tenants, or even the owner himself, do not create environmental liability that could require costly cleanups and/or reduce the value of the property.

What practical steps can a property owner take to achieve confidence that his property is environmentally safe–without taking actions that could be construed as direct involvement in a tenant’s business management?

Develop an environmental liability risk management program

Property owners who actively manage risk associated with environmental liability can help protect the value of leased and owner-occupied properties and ensure compliance with federal and state environmental regulations.

The objectives of this program should be to identify any potentially environmental damaging processes conducted on the property and help the owner or tenant mitigate such situations before problems occur.

An effective environmental liability risk management program has three parts:

  • New-Tenant Assessment. Prior to lease development, evaluate the facility, review relevant processes, conduct an investigation looking for past environmental hazard violations, and identify issues for specification in the lease.
  • Existing-Tenant Monitoring. To ensure ongoing compliance with lease agreements and environmental regulations, visit tenant facilities on a timely basis. The frequency of visits depends on results of the initial assessment.
  • Exiting-Tenant Assessment. Prior to lease termination, visit the facility to verify the tenant’s lack of impact on the building and environs.

Owner/landlords and developers of commercial and industrial properties find such an environmental liability risk  management program an asset in protecting their investments.

Financial institutions making loans on commercial/industrial properties recognize that owners using an environmental liability management program are serious about preserving property values. In some cases, this alleviates a large concern about commercial/industrial real estate financing and can result in a better loan package with the lending institution.

Law firms charged with writing lease agreements use the environmental liability management program to obtain scientific, regulation-based guidelines for tenant property use to include in the lease.

Tenants also benefit from environmental liability management because the program monitors for practices that are technically substandard, helping them avoid the liabilities inherent to contaminating a property and/or to not reporting the release or use of a hazardous substance.

Harris & Lee Environmental Sciences, LLC offers an environmental liability risk management program designed for owners of single- and multiple-tenant commercial and/or industrial properties. We created the program to assist owners and tenants in avoiding property endangerment and its associated legal responsibilities and costs.

We have extensive experience working with and coordinating efforts among property owners, attorneys, insurance companies, and financial institutions, with the goal of protecting investments by recommending efficient, scientifically sound business practices and procedures that meet regulatory requirements and limit environmental liability for other’s acts. For details on the Harris & Lee Environmental Sciences, LLC Environmental Liability Risk Management Program please email us.

Environmental liability risk management

An environmental risk management plan can help safeguard your property from tenant impact.

Also see:

Dry cleaners pose worst of worst environmental risk for property owners

Create an environmental liability risk management program

Manage environmental risk by monitoring tenants’ impact on the environment

A small commercial strip center has a variety of small businesses located on the premises anchored by one moderately large retail establishment.

  • One of the small tenants is a dry cleaner which began operations in the strip center shortly after it was constructed.

The dry cleaner initially used an apparatus for its cleaning equipment that was not a closed loop system although he did convert to a closed loop design three years later.

As the economy went through its various gyrations, the financial status of the dry cleaner owner also varied. Personal problems severely affected his ability to perform proper maintenance on the equipment in the business.

  • Accordingly, the required maintenance on the dry cleaning apparatus was “make do” and done in an improper manner.

When the strip center owners were seeking to refinance their property, the lender required an environmental site assessment. Soil samples were collected from beneath the concrete slab underneath the dry cleaning machine.

  • The soil samples indicated that the dry cleaning apparatus had been leaking Perchloroethylene (PCE) solvent.

Before any further progress could be made on the loan, more investigation was required. As the investigation progressed, it became clear that the dry cleaner had been leaking solvents for some time.

  • The PCE contamination plume extended for a distance of over 300 feet from the source.

Had the property owner proactively managed environmental risk by insisting from the beginning that the dry cleaner maintain scrupulous care in the management of the equipment and solvents, this case might never have happened. If, for instance, the owner had insisted that the dry cleaning apparatus be kept inside a secondary containment (in addition to that which is supposedly intrinsic with the apparatus), then small spillage might have been eliminated.

Five key safeguards for environmental risk management:

  • Be sure that tenants are using solvents and chemicals safely.
  • Be sure that tenants have taken every safety precaution with their equipment so that in the event of leaks (for example) the property is not impacted.
  • Be certain that the tenant complies with all local, state and federal regulations.
  • Require that the tenant verify to the property owner that the above items are complete and proper.
  • Consider having a qualified environmental auditor conduct brief but complete audits of the property on an occasional basis.


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