This chapter discusses common issues that arise in
transactions involving contaminated property. The information in this chapter
is intended to provide buyers and sellers with knowledge of various state and
federal laws that may be applicable to such transactions, and offers
information to assist these parties in addressing environmental-related
concerns. Many of the statutes and common law principles discussed are
referenced in other chapters in this Deskbook.
Environmental liability relating to the purchase and sale
of real property is governed by statutory and common law principles. Liability
may arise by contractual agreement, by a party’s status as an owner or operator
of a contaminated site, by a party’s conduct in causing a release or threatened
release of contamination, or by a party’s conduct in failing to prevent
migration of contamination. Awareness of these potential liabilities will help
buyers and sellers consider appropriate avenues to minimize and allocate their
risk of exposure to lawsuits or government-mandated response activities.
B. Part 201 §7.3
Part 201 of NREPA, MCL 324.20101 et
seq. establishes, in part, the liability scheme for buyers and sellers of contaminated property. Part 201 serves as the Michigan counterpart to
the federal liability scheme under CERCLA, 42 USC 9601 et seq., discussed in §7.5 and discussed generally in Chapter 5. Part
201 applies only to property that is a “facility”, which is defined as:
any area, place or property where a hazardous substance
in excess of the concentrations which satisfy the requirements of section
20120a(1)(a) or (17) or the cleanup criteria for unrestricted residential use
under part 213 has been released, deposited, disposed of, or otherwise comes to
be located.
MCL
324.20101. Whether a “facility” requires cleanup or remediation will depend
on its designated use (i.e., residential, commercial, recreational, industrial
or other), as well as on the specific types and concentrations of contaminants
existing on the property. MCL 324.20120a. The DNRE has established generic soil and groundwater cleanup criteria for various common contaminants for facilities designated for residential, commercial and industrial use. 2002 AACS, R
299.5744, R
299.5748 and R
299.5750
. Buyers can determine if property is a facility by having
soil and groundwater samples taken and obtaining a laboratory analysis of those
samples to the part per million (ppm) level.
In contrast to the status-based strict liability scheme
under CERCLA, liability under Part 201 is causation-based and arises where the
owner or operator: (i) caused the release or threatened release; or (ii) became
the owner or operator of a facility on, or after June 5, 1995 unless the owner
or operator conducted a Baseline Environmental Assessment (BEA) prior to or
within 45 days after the earlier of the date of purchase, occupancy or
foreclosure, and disclosed the results of the BEA to the DNRE. MCL 324.20126. See §7.26 for a discussion of BEAs.
Part 201 contains specific liability exemptions that may
allow buyers or transferees of a facility (or a property interest therein) to
avoid liability under Part 201. These liability exemptions apply to a person
who hold an easement interest in a facility (for example, an access easement),
a person who owns severed mineral rights or severed subsurface formations or
who leases subsurface mineral rights or formations, a person who owns or
occupies residential real property if hazardous substances use is consistent
with residential use, a person who acquires a facility as a result of the death
or the prior owner or operator of the facility, whether by inheritance, devise,
or transfer from an inter vivos or testamentary trust (for example, transfer by
will, trust or joint tenancy), and a lessee who uses property for retail,
office or commercial purposes. MCL 324.20126 and (4) . These
exemptions apply only if the owner or operator is not responsible for an activity
causing the release or threatened release.
The most important provision of Part 201 for buyers and
sellers of real property is the liability exemption afforded with the
successful completion of a BEA. A buyer should conduct due diligence to
evaluate whether the parcel is a facility. If the property is a facility, DNRE
may force the seller to conduct further environmental investigation and
response activities even after the property is sold. Although a buyer may agree
to remediate the property once the sale is complete, a seller cannot escape
liability under Part 201 by contracting with another party. MCL 324.20130.
Due diligence takes time and requires access to the
property, typically through a written access agreement. Be sure to allow for
ample time to investigate the status of the property with counsel and
appropriate environmental professionals. The initial site investigation may
lead to further sampling. The level of contamination discovered may impact the
use of the property and cost of development, including the buyer’s ongoing “due
care” obligations (discussed in §7.4), which in
turn may influence the purchase price.
C. Section 20107a §7.4
A buyer of a facility must comply with “due care”
obligations even if the buyer completed a BEA (discussed in §7.26 and following) or is otherwise exempt from
liability under MCL
324.20126. Section 107a requires owners and operators of a facility to take
measures to prevent migration and further releases of contamination.
Due care requirements do not apply to an owner or operator
where contamination has migrated onto the owner or operator’s property from
another site, a person who holds an easement interest in a facility, or a
person who owns or leases severed subsurface mineral rights or formations, unless
the owner or operator exacerbates existing contamination. MCL 324.20107a (4)
and (5). Owners and operators violating section 107a may be liable for response activity costs and natural resource damages attributable to any exacerbation of contamination
as well as fines and penalties imposed by DNRE. MCL 324.20107a(2). Conducting sufficiently detailed investigation before the transaction will help protect both the both buyer and seller by allowing them to define the extent of contamination and determine whether post-sale activities caused the
exacerbation or migration of contamination.
Although DNRE has the burden of proof to establish
liability under Part 201, MCL 324.20126, the “party seeking relief” has the burden of proof in a determination of whether
exacerbation occurred. MCL 324.20107a.
D. CERCLA Liability
§7.5
A buyer of contaminated property can be liable under
CERCLA even though the buyer complies with Part 201. 42 USC 9614(a) (states may impose additional liability requirements); MCL 324.20142 (compliance with Part 201 is exempt only from claims for performance of response activities under Part 17 (Michigan Environmental Protection Act), Part 31 (Water Resources Protection) and common law). CERCLA liability applies to the
current owner of property contaminated with a hazardous substance, as well as
the owner or operator of the property at the time hazardous substance was
released. 42 USC
9607(a). CERCLA is discussed in Chapter 5.
An owner or operator of contaminated property can be
subject to CERCLA liability through the initiation of a lawsuit by a private
individual. For example, an owner or operator of contaminated property could be
liable under CERCLA to a neighboring landowner for the cost of remediating
contaminants that have migrated onto the neighbor’s property.
Amendments made to CERCLA in 2002 allow a buyer of
contaminated property to avoid liability. These amendments are discussed in §7.36.
Buyers and sellers of contaminated property may be liable
under common law principles for personal injuries and property damage caused by
contamination. For example, common law claims by third parties relating to a
failure to undertake due care obligations are not preempted by Part 201 (see MCL 324.20142) or CERCLA (see 42 USC
9652(d)) .. As with
liability under Part 201, a seller’s potential liability under common law does
not cease after completion of a sale, and a buyer of contaminated property is
not immune from common law liability even when the buyer complies with the
Section 20107a due care obligations. Id. Common law environmental
liability is discussed generally in Chapter 13.
Negligence and nuisance are typical common law claims that
are available for parties injured by soil or groundwater contamination
originating on another’s property. While liability under Part 201 is strict,
liability under common law principles is either fault-based (i.e., negligence)
or measured by the utility of the conduct causing the contamination (i.e.,
nuisance). An action for trespass is not available where property damage is
caused by migrating soil or groundwater contamination since soil and
groundwater contamination does not constitute a direct, physical invasion of
property. Adams v Cleveland-Cliffs Iron Co, 237
Mich App 51, 66-67; 602 NW2d 215 (1999).
A buyer and seller of contaminated property can be subject
to nuisance liability if the presence of the contamination presents a
substantial harm caused by an unreasonable interference with another’s use and
enjoyment of their property. Id.
Whether interference is “unreasonable” is determined according to the
public policy assessment of its overall value. Id.
The viability of a common law claim is not necessarily
dependent on the level of contaminants in the soil or groundwater. For example,
it is possible for low levels of contaminants to migrate onto an adjoining
parcel without the adjoining parcel becoming a “facility” under Part 201. The
levels of contaminants, however, may be sufficient to allow the landowner to
assert a common law claim for property damage.
Depending on the degree of the perceived risks of common
law liability involved, the parties to a purchase agreement may desire to shift
the risks of incurring common law liability through the use of indemnification
and hold harmless agreements. See §7.13. Part
201 expressly allows these types of agreements between private parties, but
they do not allow a party to absolve himself or herself from liability under
Part 201. MCL
324.20130. Be sure to provide for an adequate funding mechanism, such as
insurance, in any risk-shifting arrangement to avoid the party assuming the
liability not being able to pay the claim.
The purchase agreement defines the rights and obligations
of the parties to a land transaction. When the transaction involves
contaminated or potentially contaminated property, the purchase agreement is
the main mechanism by which buyers and sellers structure their respective
obligations and allocate risk.
The typical purchase agreement for contaminated property
contains provisions to allow the buyer to conduct due diligence and cancel the
sale if unacceptable contingencies are discovered. A buyer of such property is
often given a set period of time, as negotiated between the parties, to conduct
any due diligence that the buyer deems necessary to minimize the potential
liabilities associated with owning contaminated property. Typical terms in such
a purchase agreement include:
· The
buyer has the right to enter the premises at reasonable times with adequate
notice;
· The
buyer cannot damage or the property or interfere with the seller’s operations;
· The
buyer is given time to conduct a Phase I environmental site assessment (ESA),
see §7.20, invasive studies
such as a Phase II ESA, see §7.23,
and a BEA, see §7.26, and a Section 20107a
Compliance Analysis, see §7.35;
· The
seller will provide the buyer with copies of any reports relating to any
environmental conditions on the property;
· The
seller warrants whether the seller has actual knowledge of any past or present
violations of any environmental laws related to the property;
· The
buyer has the right to cancel the purchase agreement within a specified time if
the buyer is not satisfied with the condition of the property;
· The
buyer waives the right to terminate the purchase agreement if the buyer does
not provide notice of cancellation within the required time period; and
· The
seller indemnifies the buyer for any claims and liabilities arising from a
breach of any seller representations or warranties relating to the condition of
the property.
See Forms in Appendix.
The typical purchase agreement requires sellers to
disclose environmental conditions on the property. Disclosure is governed by
the provisions of the Seller Disclosure Act (for residential sales), Part 201
and common law principles, discussed in §7.15 and
following.
Buyers typically conduct environmental due diligence,
which usually includes conducting a Phase I investigation and, if Recognized
Environmental Conditions (RECs) are discovered, a Phase II investigation. These
investigations are discussed in Part V.
Sellers typically have no obligation to conduct
environmental due diligence, except that a seller of commercial or industrial
property may want to conduct its own due diligence to attract a broader base of
potential buyers and eliminate uncertainty. The buyer’s due diligence may help
establish that the property is not a “facility”, or define the nature and
extent of contamination and avoid later negotiations to reduce the purchase
price due to unexpected or newly discovered contamination.
Buyers traditionally bear the cost of conducting due
diligence. Market conditions may provide a buyer with leverage to negotiate
splitting due diligence costs with the seller. Define the scope of work and
expected costs up front to avoid later misunderstandings.
The typical purchase agreement gives the buyer the choice
of either cancelling the transaction or allowing the seller to cure
environmental defects with the property. For example, if contamination is found
during the due diligence phase, the seller may opt to obtain site closure from
DNRE to allow the transaction to go forward. Site closure is discussed in Chapter
5, §5.__. The seller will wish to limit its cost to cure to a defined dollar
amount and require the buyer to accept any overage or cancel the transaction. This
technique avoids the seller taking on expenses that will not be recovered at
the existing sale price.
Purchase agreements typically allow the buyer to accept
the property or cancel the contract after completing environmental due
diligence.
G. Indemnification §7.13
The typical purchase agreement requires the seller to
indemnify the buyer for claims arising from contamination existing at the time
of the sale. Although a buyer that conducts an adequate BEA is ordinarily
exempt from liability under Part 201, a buyer nevertheless may face common law
claims from neighboring property owners for damages caused by migrating
contamination. Consider risk shifting based on a defined dollar amount, such as
“Seller pays for first $100,000 of remediation costs and Buyer pays for the
next $100,000 and then the parties split the remainder.” Any such agreement is
only as good as the financial ability and willingness of the parties to
perform.
A seller of contaminated property may be obligated to
disclose the presence of known contamination to a buyer under the Michigan
Seller Disclosure Act, MCL
565.951 et seq., for residential sales, discussed in §7.15, Part 201, discussed in §7.17, or common law principles,
discussed in §7.19.
1. In General
§7.15
The Seller Disclosure Act, MCL 565.951 et seq., requires the disclosure of any environmental problems regardless
of whether the property constitutes a “facility” under Part 201 (see §7.3). See Disclosure Form; MCL 565.957. The Act, however, applies only to transfers of interests in real estate consisting of not less than one or more than four residential dwelling units. MCL 565.952. The Act exempts the several transfers from its disclosure provisions. See MCL 565.953. The Act requires disclosures to be made on a “Seller’s Disclosure Statement” form as found at MCL 565.957.
Paragraph 10 of this form specifically requires the seller
to describe any “environmental problems” with the property of which the seller
is aware. The disclosure must be made in “good faith”, which is defined as
“honesty in fact in the conduct of the transaction.” MCL 565.960. A seller is not liable under the Act for failing to disclose information that could be obtained only through inspection or observation of inaccessible portions of real estate or could be discovered only by a person with expertise in a science or
trade beyond the knowledge of the seller. MCL 565.955(1). For example, a seller would not be liable for failing to disclosure the presence of an underground storage tank if the tank was unknown to the seller and discoverable only by an inspection conducted by an environmental
consultant. Seeking information about the historical fuel sources at a
residence will help determine the likely presence of underground or above
ground tanks.
A city, township or county may require additional
disclosures. MCL
565.959.
A seller is not liable for any error, inaccuracy or
omission in any information disclosed if the error, inaccuracy or omission: (i)
was not within the personal knowledge of the transferor or based entirely on
information provided by public agencies or provided through a report authored
by a professional expert dealing with matters within the expert’s expertise;
and (ii) ordinary care was exercised in transmitting the information. MCL 565.955(1).
The delivery of a report authored by an expert satisfies
the seller’s disclosure requirements under the Seller Disclosure Act if the
information is provided upon the request of the prospective purchaser and the
seller has no knowledge of information that contradicts the information
contained within the report. MCL 565.955(3). A seller of contaminated property should be careful to disclose any contamination known to exist if the requirements of the Seller Disclosure Act apply.
2. Timing of
Disclosure §7.16
Disclosure is typically made before the execution of a
purchase agreement so that the buyer is able to make an offer on the property
based on its known conditions. If disclosure is made after the execution of a
purchase agreement, the buyer may terminate the purchase agreement within 72
hours if disclosure was given in person, or within 120 hours if disclosure was
given by registered mail. MCL 565.954(3).
1. Disclosure
Requirements §7.17
Section 20116 of Part 201 sets forth the disclosure
requirement applicable to a transfer of an interest of a “facility”:
A person who has knowledge or information or is on notice
through a recorded instrument that a parcel of his or her property is a
facility shall not transfer an interest in that real property unless he or she
provides written notice to the purchaser or other person to which the property
is transferred that the real property is a facility and discloses the general
nature and extent of the release.
MCL
324.20116. Unlike the Seller Disclosure Act (discussed in §7.15 to §7.16),
§20116(1) applies to all property transactions, including residential,
commercial and industrial. Since a “facility” is defined broadly as any “area,
place or property”, a seller of property on or under which contamination is
present at levels below DNRE’s criteria for a “facility” may be required to
disclose the general nature and extent of the contamination since the property
could be considered part of a “facility”. For example, if property A is
contaminated with volatile organic compounds that have migrated from
neighboring Property B, and the concentration of the VOCs on Property A is below
DNRE’s cleanup criteria for unrestricted residential use, but the VOCs on
Property B are above criteria, DNRE may consider Property A to be part of a
“facility” due to the contamination on Property B.
MCL
324.20116(3) also requires a seller of an interest in real property to fully disclose any land or resource use restrictions that apply to that real property as part of a remedial action that has been or is being implemented in compliance
with MCL 324.20120a. Once the seller of a facility obtains approval from DNRE that all response
activities have been completed, the seller can record a document with the local
register of deeds verifying that all response activity required in an approved
remedial action plan (RAP) has been completed. MCL 324.20116(2). If the remedial action plan is completed in accordance with DNRE’s criteria for the applicable residential category, the property will no longer be considered a “facility” pursuant to MCL 324.20101 and the disclosure requirements in MCL 324.20116 would not apply.
If the seller prepared a Baseline Environmental Assessment
(BEA, discussed in §7.26) when the seller purchased
the property, and the seller wishes to maintain liability protection under Part
201, the Part 201 administrative rules require the seller to disclose the
contents or a summary of the BEA to the purchaser. 2002 AACS, R
299.5919(5), (7) . A seller should be sure to include any prior BEA or related documents in the disclosure packet and list the documents in the purchase agreement.
Unpublished decision: 1031 Lapeer LLC v
Rice, unpublished opinion per curiam of the Court of Appeals, issued August
5, 2010 (Docket
No. 290995) (failure to comply with MCL 324.20116 can render a transaction void).
D. Common Law
Disclosure Requirements §7.19
Compliance with the Seller Disclosure Act does not
insulate a seller from common law liability for innocent or fraudulent
misrepresentation. MCL
565.961. A claim for innocent misrepresentation requires a buyer to prove detrimental reliance upon a false representation by the seller in a manner that the injury suffered inured to the benefit of the seller. M&D, Inc v WB McConkey,
231
Mich App 22, 27; 585 NW2d 33 (1998). A buyer does not need to prove the seller made an innocent misrepresentation with a fraudulent intent or purpose. Id. at 28.
A claim for fraudulent misrepresentation requires a
showing that: (i) the seller made a material misrepresentation; (ii) the
representation was false; (iii) when the seller made the representation, he
knew it was false or he made it recklessly, without knowledge of its truth;
(iv) the seller made the representation with the intent that the buyer would
act upon it; (v) the buyer reasonably acted in reliance upon it; and (vi) the
buyer suffered damages. Bergen v Baker, 264
Mich App 376; 691 NW2d 770 (2004). A claim of silent fraud is also available where there is a suppression of material facts, there is a legal or
equitable duty of disclosure, and there is some type of misrepresentation
whether by words or action. Id.
An “as is” clause in a purchase agreement does not insulate a seller from
liability where there is an alleged fraudulent misrepresentation. Id.
Compliance with the Seller Disclosure Act will not bar a
claim for misrepresentation where the disclosure form contains a
misrepresentation, error, inaccuracy or omission of which the seller had
personal knowledge, or should have had personal knowledge with the exercise of
ordinary care. Id.
Furthermore, a misrepresentation claim may be allowed to proceed to a jury
even if a buyer conducts his own inspection. Id.
A seller of contaminated property subject to the Seller
Disclosure Act should carefully draft the language of the disclosure to avoid a
potential claim for misrepresentation. Such a seller should consider disclosing
any evidence of presently existing contamination on the property in order to
minimize the potential for future litigation. Residential transactions that
encourage professional inspections for matters other than environmental
(furnace, structural, etc) may minimize post-purchase claims for
later-discovered problems.
Unpublished decision: Huhtasaari v
Stockmeyer, unpublished opinion per curiam of the Court of Appeals, issued
Dec. 5, 2005 (Docket
No. 256926) (claim for fraud may fail where the buyer knows of the existence of a report containing environmental information on a property, but fails to condition the purchase of the property on receiving the report).
V.
Buyer Perspectives
A. Non-Invasive
Environmental Site Assessment (Phase I Investigation) §7.20
A non-invasive environmental site assessment (commonly
referred to as a Phase I investigation) is the preliminary step in conducting
due diligence. A Phase I investigation often is conducted by an environmental
consultant and will include reviewing historical data related to the prior use
of hazardous substances on the property, conducting an on-site inspection, or
both.
A Phase I investigation will typically be necessary for
transactions involving commercial and industrial properties, as well as
residential properties that are in close proximity to commercial or industrial
areas and residential properties that may have environmental concerns such as
heating oil storage tanks.
Industrial properties usually have the highest likelihood
of having soil and groundwater contamination. Commercial properties also can
have an elevated risk of having soil and groundwater contamination depending on
their specific uses, such as gas stations or dry cleaners. For example, a
former dry cleaning site is more likely to
have soil and groundwater contamination than an office building because a dry
cleaner typically uses petroleum or hydrocarbon based hazardous substances. Residential
properties have a risk of soil or groundwater contamination when they are in
close proximity to industrial or commercial sites that use hazardous
substances.
A typical Phase I investigation includes hiring an
environmental consultant to review property records and conduct an on-site
inspection. Rules promulgated by the EPA under CERCLA set the standard for the
appropriate scope of a Phase I investigation. See 42 USC 9601 and 40
CFR 312.20. The standards for performing a Phase I investigation under these rules are referred to as “all appropriate inquiries,” which, among other obligations, requires an environmental consultant to conduct interviews with prior
owners and operators, conduct a visual inspection of the property and review
governmental records. 40
CFR 312.21. An environmental consultant should be able to identify any recognized environmental conditions (RECs) based on historical property use records, such as operating permits related to the property and hazardous substance
storage records. If RECs are identified from such records, an inspection may be
necessary to determine evidence of prior hazardous substance releases through
visual observation. For example, evidence of staining on concrete or drains
could be evidence of historical hazardous substance chemical releases at the
property.
A Phase I assessment may, in fact, show that no recognized
environmental conditions exist, but later be proved wrong. In Krygoski
Construction Co, Inc v City of Menominee, 431
F Supp 2d 755, 757-758 (WD Mich 2006), the consultant prepared a Phase I for a proposed municipal park expansion that showed no RECs, but after a local environmental activist (and corporate representative of Krygoski) took samples
at the site that allegedly showed elevated levels of lead and chromium, the
consultant and city engineers met at the site and discovered “crushed barrels”
that contained a substance that appeared to be yellow paint.
B. Invasive
Environmental Site Assessment (Phase II Investigation) §7.23
A Phase II investigation is more detailed than a Phase I
investigation. A Phase II investigation typically involves the use of an
environmental consultant to determine the specific hazardous substance use and
disposal activities on the property and take soil and groundwater samples for
analysis.
A Phase II investigation is appropriate when property is
known to be contaminated or when a Phase I investigation reveals RECs
associated with the property.
2. Typical
Scope §7.25
The scope of a Phase II investigation depends on the
extent of the RECs found on the entire property. For example, soil and
groundwater samples should be taken from an area of a suspected leaking
underground storage tank (LUST) (storage tanks are discussed in Chapter 6). If
the LUST is the only REC on the property, investigation on other portions of
the property may not be necessary. The cost of the investigation will vary
dramatically with the scope. Special care should be taken in defining the scope
of the investigation to help ensure that the right level of effort is applied
under the site-specific circumstances.
A typical Phase II report will contain data relating to
results of soil samples, groundwater samples, or both, along with a map showing
the location of the sampling points and a table showing the results as compared
to the applicable action levels established by the DNRE. The Phase II is
typically prepared to inform the buyer whether the property meets the
definition of a “facility” under Part 201.
There are many qualified environmental consultants in
Michigan that can perform a Phase II investigation. In circumstances where a
party in unfamiliar working with consultants, one should consider working with
experienced counsel to assist in streamlining the process, and potentially
bidding out portions of the work if the investigation revealed elevated levels
of contamination.
1. In General
§7.26
The purpose of a Baseline Environmental Assessment (BEA)
is to define the nature and extent of contamination existing at the time of
purchase so that buyers or transferees of a facility can maintain liability
protection under Part 201. There are three types of BEAs: Category N involving
no use of hazardous substances, discussed in §7.29,
Category D involving use of different hazardous substances, discussed in §7.30, and Category S, involving use of the same
hazardous substances, discussed in §7.31.
In order to gain liability protection under Part 201, a
BEA must be conducted by a buyer if the Phase II investigation reveals, or the
buyer has information showing, that the property is a “facility”. MCL 324.20126. A BEA only provides liability protection when the property is a facility before
the transaction occurs. The definition of “facility” and a discussion of the
Part 201 liability scheme is discussed in § II.A.
BEAs are divided into three categories: (i) Category N,
discussed in §7.29; (ii) Category D, discussed
in §7.30; and (iii) Category S, discussed in §7.31. The specific category that a buyer should
conduct depends on what hazardous substances, if any, the buyer intends to use
on the property.
a. Category N
BEA §7.29
A Category N BEA is typically appropriate for a buyer of a
facility that does not intend to use any hazardous substances on the property. DNRE
rules describe a Category N BEA:
A ‘Category N BEA’ means a BEA that is conducted for a
property where hazardous substances are not, as of the date the BEA is
conducted, anticipated by the submitter to be present in a quantity and manner
that constitute significant hazardous substance use at the property after
ownership or occupancy commences.
1999 AACS, R
299.5901(e). A Category N BEA is the least extensive type of BEA that is required by DNRE to gain liability protection under Part 201. The minimum requirements for a Category N BEA are specified in 1999 AACS, R
299.5907(2).
A Category N BEA is appropriate when the buyer does not
anticipate using any hazardous substances on a “facility”. For example, a
Category N BEA would be appropriate for a purchaser of an abandoned gas station
that intended to use the property for a retail clothing store. A Category N BEA
must contain an affirmative statement that the buyer will not use any
significant hazardous substances on the property. R
299.5907(2)(h). The typical scope of a Category N BEA contains the same information that is typically generated in a Phase II environmental investigation report, such as the location of all known contamination, locations of aboveground and
underground storage tanks, photographs of the property. R
299.5907(2)(a)-(g).
b. Category D
BEA §7.30
A Category D BEA is appropriate where the buyer intends to
use hazardous substances that are different from hazardous substances present
in the soil and groundwater at the property at the time of the sale. For
example, a Category D BEA would be appropriate for a buyer of a former dry
cleaning site that used perchloroethylene that intends to use the property as a
gas station. The minimum technical standards under the Part 201 regulations are
set forth in 1999 AACS, R
299.5907(3).
A Category D BEA is required to contain the same
information as a Category N BEA, but must also include the identification of
all hazardous substances that the buyer intends to use on the property as well
as environmental data showing that such hazardous substances have never been used
on the property. R
299.5907(3)(i).
c. Category
S BEA §7.31
A Category S BEA is appropriate when the buyer intends to
use the same hazardous substances that are present in the soil and groundwater
at the property. As might be expected, the Category S BEA is the most difficult
to obtain and likely will be the most expensive to conduct. For example, a
Category S BEA would be appropriate for a buyer of a gas station that intends
to operate the property as a gas station. The minimum technical standards for a
Category S BEA under the Part 201 rules are set forth in 1999 AACS, R
299.5907(4).
A Category S BEA is required to contain the same
information as a Category D BEA, but must also include information to allow the
delineation of existing environmental contamination from new releases of
hazardous substances on the property. R
299.5907(4)(i). This may include, for example, the placement of clean fill to over an area of existing contamination to show that the contamination was present before purchase rather than caused by a release that occurred post-purchase.
Two important time limitations apply to a purchaser
conducting a BEA: (1) the date by which the BEA must be completed, and (2) the
date by which the BEA must be disclosed. A BEA must be completed within 45 days
of after the earliest of the following events: (i) date of purchase; (ii) date
of occupancy; or (iii) date of foreclosure. MCL 324.20126. The date of occupancy is not triggered by accessing the property to conduct a
BEA. MCL 324.20126(1)(c)(i). A BEA must be disclosed to DNRE within eight months after the latest of the following events: (1) the date of purchase; (2)
the date of occupancy; or (3) the date of foreclosure. 2002 AACS, R
299.5919(3).
If a BEA is only disclosed to DNRE, DNRE will not
determine whether the BEA is adequate. Rather, DNRE will file the BEA. No
further action on the part of the purchaser is required. There is no fee to
disclose a BEA to DNRE.
A purchaser may choose to petition DNRE for a
determination that the BEA is adequate. 1999 AACS, R
299.5911. The fee to submit a petition is $750.00. Depending on the time that the petition is submitted, the petitioner may have the opportunity to cure any defects in the BEA. 1999 AACS, R
299.5917. For example, the DNRE may believe that soil samples should be expanded into areas not investigated during a Phase II investigation. The petitioner may be given additional time to take such samples and provide the results to the
DNRE to supplement the BEA. On the other hand, there will be additional expense
for the additional work and the DNRE ultimately may determine that the
investigation is not sufficient.
A petition for a determination of the adequacy of a BEA is
used less often than disclosure due to the additional fee for a petition and
the length of time the DNRE may take to review a petition. Also, a buyer who
conducts a Category N or Category D BEA has less of an incentive to submit a
petition because the technical requirements for those BEAs are less stringent
and thus there is less risk that the DNRE would find those BEAs to be
inadequate. A buyer who conducts a Category S BEA has more of an incentive to
file a petition since the technical requirements of a Category S BEA are more
stringent and the buyer may have an opportunity to cure defects if the petition
if the buyer has not yet began to use hazardous substances on the property. 1999
AACS, R
299.5917. The advantages and disadvantages of disclosure and petitions
should be carefully evaluated.
A buyer that fails to complete an adequate BEA will be
liable under Part 201. MCL 324.20126. A BEA will be inadequate if it fails to meet the minimum technical standards for
the applicable BEA category discussed above (i.e., Category N, Category D,
Category S). A buyer should visually inspect property to judge whether a
consultant identified and inspected obvious areas of concern, such as
above-ground storage tanks and to better understand the recommendations for
further investigation.
D. Section 20107a
Compliance Analysis §7.35
Compliance with MCL 324.20107a is discussed in §7.4. A buyer of a facility is required to prepare
a “due care plan” upon purchasing the property. A due care plan is typically is
prepared by a qualified environmental consultant. The scope of the due care
plan will depend on the risk of exposure that exist at a facility. For example,
an owner of a site with abandoned containers containing a hazardous substance
may be required to place spill containment around the containers to prevent a
release. R
299.51009. Buyers of contaminated property should take due care requirements into consideration when purchasing a facility, since due care measures can be costly depending on the degree of risk of a release of contamination from the
property.
E. “All Appropriate
Inquiries” under CERCLA §7.36
The “all appropriate inquiries” (AAI) rule is CERCLA’s
counterpart to a BEA conducted under Part 201. See 42 USC 9601. The requirements for conducing AAI are found at 40
CFR 312.2, which incorporates the American Society for Testing and
Materials (ASTM) 1527–97 and the procedures of the American Society for Testing
and Materials (ASTM) 1527–00, both entitled “Standard Practice for
Environmental Site Assessment: Phase 1 Environmental Site Assessment Process.” The
AAI rule is discussed more fully in Chapter 8.
In practice, compliance with Part 201’s BEA requirements
will satisfy the AAI rule under CERCLA as the standards for completing AAI are
similar to the standards for preparing BEA. In addition, DNRE and EPA have a
Memorandum of Understanding in place that implies that EPA will not take
enforcement action against an owner or operator who complies with Part 201’s
BEA and Section 20107a due care requirements.
In order to obtain liability protection under CERCLA, in
addition to performing AAI, a buyer must be a “bona fide prospective purchaser”
and enter into a prospective purchaser agreement with the EPA. In order to
qualify as a bona fide prospective purchaser, a buyer must: (i) not have caused
contamination on the property; (ii) performed all appropriate inquiries into
the past uses of the property; (iii) undertake due care activities; and (iv)
cooperate with those responsible to conduct response activities. 42 USC 9601. A bona fide prospective purchaser cannot be affiliated with any other person
that is potentially liable for conducting response costs. Compliance with Part
201’s BEA requirements generally alleviates the need to enter into a
prospective purchaser agreement with EPA. 42 USC 9601.
Typical
Purchase Agreement Provisions
Due Diligence Period and Escrow
for Purchaser’s Due Care Obligations
(a) Purchaser shall have until [DATE], to
conduct, at its sole discretion, the following invasive and non-invasive
studies at its own expense:
(i) Phase I and/or Phase II Environmental
Investigations (Reports) on the Premises that provide that the information and
opinions in the Reports may be relied upon by Purchaser in respect of the
Premises, and which may include analysis of soil and groundwater samples taken
from the Premises.
(ii) A Baseline Environmental Assessment
(BEA), as defined by MCL 324.20101 (d), applicable to any parcel that is
identified in the Report as a "Facility", as defined by MCL
324.20101(o).
(iii) A Section 7a Compliance Analysis
(Section 7a CA) that conforms to the requirements of MCL 324.20129a(1). This
Agreement is expressly contingent upon Purchaser receiving a written
determination before the Closing Date from the Michigan Department of Natural
Resources and Environment, pursuant to MCL 324.20129a(2)(a), that affirms that
the criteria for obtaining an exemption from liability under MCL 324.20126 (1)(c)
have been met and that the proposed use of the Premises would satisfy the
Purchaser's "Due Care" obligations imposed under MCL 324.20107a.
(b) On or before the Closing Date, Seller shall, at
his own expense, dispose of all aboveground materials on the Premises that are
identified in the Reports as Hazardous Substances (as defined hereinafter). All
such Hazardous Substances shall be manifested in the Seller's name for
disposal.
(c) Further, Seller hereby makes the following
representations and warranties, which Seller understands to be material:
(i) Except for the environmental disclosures
in Exhibit [X – ATTACH SEPARATE LIST OF KNOWN ENVIRONMENTAL CONDITIONS] of this
Agreement, Seller has no actual knowledge that Seller has ever used Hazardous
Substances on, from, or affecting the Premises in any manner which violates in
any respect any federal, state, or local laws, ordinances, rules, regulations,
or policies governing the use, storage, treatment, transportation, manufacture,
refinement, handling, production, or disposal of Hazardous Substances. Further,
to Seller's actual knowledge, no prior owner of the Premises or prior tenant,
subtenant or occupant of the Premises has used Hazardous Substances on, from,
or affecting the Premises in any manner which violates in any material respect
any federal, state or local laws, ordinances, rules, regulations or policies
governing the use, storage, treatment, transportation, manufacture, refinement,
handling, production or disposal of Hazardous Substances.
(ii) Except for the environmental disclosures
in Exhibit [X] of this Agreement, Seller has never received any notice of any
"Material Violation", defined as: (1) any condition giving rise to
the issuance of a "Consent Order", pursuant to MCL 324.1115a(2), by
the Michigan Department of Natural Resources and Environment (previously,
Michigan Department of Environmental Quality); (2) any condition giving rise to
the issuance of a notice designating the Seller as a "Potentially
Responsible Party" pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 USC 9607(a); or (3)
migration of Hazardous Substances from the Premises, and has no actual
knowledge of any existing violation of federal, state or local laws,
ordinances, rules, regulations or policies governing the use, storage,
treatment, transportation, manufacture, refinement, handling, production or
disposal of Hazardous Substances at the Premises, and Seller has no actual
knowledge of any actions commenced or threatened by any party for noncompliance
which affects the Premises.
(iii) Except for the environmental
disclosures in Exhibit [X] of this Agreement, Seller has not caused or
permitted as a result of any intentional or unintentional act or omission on
the part of Seller a release of any Hazardous Substances onto or from the
Premises.
(d) For purposes of this
Agreement, "Hazardous Substances" include, without limitation, any
flammable explosives, radioactive materials, hazardous wastes, hazardous or
toxic substances or related materials defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended (42
USC 9601 et seq.), the Hazardous Materials Transportation Act, as
amended (49 USC 5101 et seq.) and in the regulations adopted and
publications promulgated pursuant to such Acts, the Michigan Natural Resources
and Environmental Protection Act (MCL 324.20101 et seq.) or any other
federal, state, or local governmental law, ordinance, rule, or regulation. The
provisions of this paragraph shall be in addition to any and all other
obligations and liabilities Seller may have to Purchaser in common law and
shall survive the execution of this Agreement and the closing of this
transaction.
(e) In the event that Purchaser reasonably
determines as a result of his own investigation during the due diligence period
that there exists a condition, or in the event at any time prior to closing
Purchaser reasonably determines that there is a violation of any representation
or warranty contained in this Paragraph, which affects the Premises such that
Purchaser reasonably deems the same to be unsatisfactory for the intended use
of the Premises (an "Environmental Condition"), the Purchaser shall
have the right, by written notice to the Seller given in the manner provided in
Paragraph [Y – PROVIDE THE NAME AND ADDRESS FOR WRITTEN DISCLOSURE], on or
before the expiration of said due diligence period, as to matters disclosed in
the Report, and at any time prior to closing, as to violations of the
referenced representations or warranties, or as a result of any other
Environmental Conditions, at his option, to elect to receive an immediate
refund of the entire deposit in full termination of this Agreement and
reimbursement of any costs expended by Purchaser for the Environmental Due
Diligence under this Paragraph. In the event Purchaser elects not to so
terminate on account of the existence of the Environmental Condition, Purchaser
shall be deemed to have waived any objections as to any matters raised in the
environmental report and/or relating to any Environmental Condition. The
parties shall proceed to close on the Closing Date, unless said Closing Date
occurs earlier or is extended as set forth herein.
(f) Upon acceptance of this Agreement, Seller shall
turn over to Purchaser any copies of environmental or engineering reports or
soil boring reports and site plans Seller has in its possession or control with
respect to the Property. Seller shall also advise Purchaser in writing of any
other environmental or soil boring reports respective to the Property which are
known to Seller but which are not in Seller's possession or control.
(g) Purchaser shall cause [$ DOLLARS] of the total
Purchase Price to be placed into escrow to cover Purchaser’s "Due
Care" obligations imposed under MCL 324.20107a. Purchaser shall complete
any “Due Care” necessary, and upon written notice of Purchaser’s satisfactory
completion of Purchaser’s “Due Care” obligations by the Michigan Department of
Natural Resources and Environment, Purchaser shall release the remaining sums
to Seller, less amounts expended for “Due Care” costs. In no event shall
Purchaser receive any such funds prior to [Closing Date].
Representations and Warranties of Seller
Except as provided by Seller in Exhibit [X] to this
Agreement, Seller represents and warrants to Purchaser that:
(a) Seller has received no notice of any such,
actions, or proceedings pending, by any person or party, including any
governmental authority or agency, against or involving the Premises, or to
which Seller is or may become a party in connection with the Premises. Seller
has no actual knowledge of any violations of zoning, building, fire, health,
environmental, private restrictions of record, or other statutes, ordinances,
regulations or orders in regard to the Premises or any part or use thereof.
(b) During the interim period between the signing of
this Agreement and the closing, Seller will continue to maintain the Premises
in the same manner that Seller has maintained the Premises since the time the
Seller first obtained title to the Premises.
(c) Seller represents and warrants, which
representation and warranty shall survive the closing, that Seller has
disclosed any and all information on the environmental condition of the
property, as set forth in Exhibit (X) to this Agreement, attached hereto,
except for such additional conditions that are disclosed in any environmental
report provided by Seller to Purchaser within three (3) days before the Closing
Date.
Indemnification and Right of Setoff
Seller agrees to indemnify Purchaser and hold Purchaser
harmless from and against all damages, including but not limited to actions,
suits, judgments, costs, charges, expenses, fines, penalties, reasonable
attorney fees, and the consequences of any liabilities of any nature that are asserted
against or affect the Premises arising out of any Hazardous Substance present
on, or migrating from, the Premises prior to the Closing Date, regardless of
whether such actions or claims are asserted prior to, or subsequent to, the
Closing Date. To the extent that any damages to arise, Purchaser may set off
the amount of the damage against the Purchase Price, as set forth in Paragraph
[LIST PARAGRAPH CONTAINING PURCHASE PRICE].
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