Here's another topic from our "ticking sound" series covering insurance issues and environmental issues . . .
Most discussion of the environmental issues that can come with foreclosed property focuses on when the CERCLA lender safe harbor provisions and its state-law analogues apply. What doesn't get discussed often enough is how a lender goes about selling an environmentally challenged piece of property and its obligations during the sale process independent of CERCLA.
The problem for lenders or others who foreclose on property with environmental problems is that CERCLA requires them to try to sell it. This means listing the property, keeping control of any brokers or listing agents acting on seller's behalf, learning enough about the issues there to provide accurate disclosures and appropriately responding to the purchaser's efforts to make "all appropriate inquiries" as it tries to shoehorn itself into EPA's "innocent purchaser" safe harbor, while trying at the same time to maximize the sale price so as to satisfy security holders or regulators. There obviously can be real tension for a lender or servicer caught between these requirements.
Maneuvering through these obstacles safely starts by recognizing that the environmental problems on the property cannot and should not be concealed. Not only is it difficult if not impossible to engage in such concealment in these days of multiple on-line environmental clean-up databases and deed records, established law recognizes that immediate and possibly later purchasers of the property may have a cause of action for misrepresentation based on the concealment. (See, e.g., Rhee v. Highland Development Corp., 162 Md. App. 516, 958 A.2d 285 (Md. App., October 7, 2008)(developer that failed to disclose existence of a graveyard in real estate development liable to immediate and subsequent purchasers for concealing this information).)
EPA does not require the lender or foreclosing party to get full price for the property; its safe harbor regulations only require that the price be reasonable in light of the property's condition and the market. With this in mind there simply is no reason not to come clean – no pun intended – on the issues of the parcel's environmental problems.
The next step for a safe transit of these obstacles is to actively consider offering environmental insurance as a part of the sale. The days when environmental impairment insurance was a cookie cutter product are long since gone, and while principles of fortuity put some constraints on insuring known environmental problems, there almost always is a "workaround" available that will help resolve the issues. Again, EPA does not prohibit use of environmental insurance by a lender or foreclosure purchaser. On the contrary, transferring the risks of environmental contamination to a solvent third party is something most environmental regulators would applaud.
Finally, the idea of cleaning up should not be rejected out of hand. EPA safe harbor regulations do not prohibit a lender from taking steps to improve environmental conditions on property it has acquired. Most states have voluntary clean-up programs and tailored remediation standards that may allow a relatively small investment in clean-up costs to result in a much larger return in sale price and peace of mind.
As with so much else in the foreclosure/workout process, early consultation with competent professionals, both scientific and legal, can result in large benefits. It's simply a matter of not being afraid to roll up one's sleeves and getting to work.
If you have any questions or war stories, please post a comment.
