Foreclosures and Environmental Liability
The current economic outlook is somewhat unclear with divergent opinions on whether we will experience a hard landing, soft landing, or some version in between. Nevertheless, borrowing costs have practically doubled within a one-and-a-half-year period and the cost to refinance will inevitably put economic pressure on borrowers and sadly, push some landowners and businesses into default.
So, you might ask, what might this have to do with the environment? Let’s look at some of the environmental risks lenders face in the event of property default with respect to environmental contamination. It’s not a simple answer, since each state has its own nuanced environmental regulations that may differ from federal regulations.
The federal regulation governing this matter is most notably the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which has historically been used to shield prospective purchasers from environmental liability provided they meet the conditions of “all appropriate inquiry,” prior to acquiring the site or business, which is commonly satisfied through the completion of the ASTM 1527-21 Standard Practice for Environmental Site Assessments. CERCLA was enacted to identify potentially responsible parties (PRPs) that may be liable for environmental cleanup due to contamination. There are four classes of CERCLA liable parties: current owners or operators; past owners or operators of a facility at the time hazardous waste were disposed; generators and parties that arranged for the disposal or transport of hazardous waste; and transporters of hazardous waste that selected the site where the hazardous waste was brought.
CERCLA Section 101(20) contains a secured creditor exemption that eliminates owner/operator liability for lenders that hold ownership in a CERCLA facility provided they do not “participate in the management of the facility” and that they do not add to or exacerbate contamination.
Nevertheless, prior to foreclosing, the lender, specifically for commercial/industrial properties, should determine what environmental due diligence the borrower performed prior to acquiring the facility. If operations at the facility were chemically intensive, it is a good idea for the lender to use a qualified environmental professional to conduct a Phase I Environmental Site Assessment.
As an environmental professional, I wouldn’t be too keen on accessing a property that may be in default because it could be considered “breaching the peace,” and it is generally a bad idea to be a stranger walking around a property unannounced anywhere in the state of Florida. Section 679.609(2)(b) of Florida Statutes defines breaching the peace as: “(1) whether there was entry by the creditor upon the debtor’s premises; and (2) whether the debtor or one acting on his behalf consented to the entry and repossession.” An engineer operating on behalf of a creditor could be considered in violation of that Florida statue. Additionally, these matters tend to become contentious, and it would be unwise to put oneself in a position to be accused of causing damage to a property. Unfortunately, this means that a debtor can continue to occupy the property, and in certain instances, continue poor housekeeping and management practices for months, and in the case of the pandemic, years.
There are a variety of options in a creditor’s toolkit to structure the holding entity of such a foreclosed facility with environmental impairment, which is better left to a land use attorney to explain. Lenders should weigh the benefits of foreclosing on a property because they may be considered a responsible party of the property following foreclosure. A proactive lender that may be acting in the best interest of the community to initiate removal of hazardous substances from a property after foreclosure could be deemed to participate in its management and may void its CERCLA liability protection. Additionally, Broward County, Florida regulations diverge from CERCLA, specifically, Article XII, Section 27-352 defines a responsible party as, “The owner of operator of a facility where a contaminant is present or where a hazardous material has been released.” Therefore, if a debtor takes possession of a facility and through its entity has the financial capability to perform the remediation, it may be on the hook to do so. Performing environmental due diligence at the pre-foreclosure stage is essential because it present options to mitigate financial distress on the lender. It would be awful to be stuck with cleanup/remediation costs that exceed the fair value estimate of the property in a high interest rate environment.
For additional information, contact Patrick Ceres, at pceres29@lionpointeng.com.
