ENVIRONMENTAL DUE DILIGENCE AND REMEDIAL PROGRAMS AND INSURANCE THAT CAN SAVE A REAL ESTATE TRANSACTION

Transcription

1 ENVIRONMENTAL DUE DILIGENCE AND REMEDIAL PROGRAMS AND INSURANCE THAT CAN SAVE A REAL ESTATE TRANSACTION May 2018 By: Keith H. Johnson Poyner Spruill LLP kjohnson@poyners.com

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3 INDEX Page I. Why Environmental Due Diligence is Necessary Before Buying or Leasing Real Property...1 A. Potential Assumption of Statutory Liability for Contamination, and Available Defenses Under the federal Superfund Law, or CERCLA...1 a. Potential Strict Liability as Property Owner or Operator...1 b. Defenses to Owner or Operator Liability under Superfund...3 (i) The Innocent Landowner Defense...4 (ii) The Bona Fide Prospective Purchaser Defense Under State Statutory Laws...7 B. Potential Tort Liabilities from Owning or Occupying Contaminated Property...9 C. Practical Reasons for Environmental Due Diligence...10 II. Utility of an Access Agreement...10 III. Who Has Duty to Report Environmental Findings from Due Diligence?...11 IV. Remedial Programs Available to Buyers of Property with an Environmental Impediment...12 A. Brownfields Eligibility of Applicant and Site Process of Applying For and Negotiating a Brownfields Agreement Costs of Program Tax Credits Liability Protection under a Brownfields Agreement, and its Limits...16 B. Petroleum Underground Storage Tank Releases Comfort letter from DEQ s UST Section State-lead program for orphan USTs Availability of Petroleum Underground Storage Tank Trust Funds...20 C. Dry-Cleaning Solvent Program Eligibility Process for Getting in Program Costs of Program...22 D. Site-Specific Clean Up Standards for Certain Sites...22 V. Environmental Insurance Products...24

4 Environmental Due Diligence and Remedial Programs that Can Save a Real Estate Transaction I. Why Environmental Due Diligence is Necessary Before Buying or Leasing Real Property. Environmental due diligence before purchasing real property is necessary due to the risks associated with owning or conducting operations on contaminated property. Those risks arise from both statutory and tort law, as discussed below. Also, if any trenching or grading will be conducted in redeveloping property, it is important to know soil conditions in advance. A. Potential Assumption of Statutory Liability for Contamination, and Available Defenses. 1. Under the federal Superfund Law, or CERCLA. a. Potential Strict Liability as the Property Owner or Operator. The risk of incurring environmental liabilities merely from acquiring title to contaminated property arises primarily from the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERLCA or Superfund. 42 U.S.C et seq. CERCLA was enacted to address the public health and other threats posed by sites where hazardous substances have been, or may be, released into the environment. In addition to establishing the Superfund - a federal fund to cover the costs of cleaning up sites for which no responsible party can be made to pay, CERCLA gives the federal Environmental Protection Agency ( EPA ) broad powers to clean up facilities contaminated by hazardous substances, either by arranging for the cleanup itself or ordering a responsible party to do so. 42 U.S.C. 9604, A broad range of chemicals and wastes that are toxic or otherwise harmful to human health or the environment are included within the scope of hazardous substances governed by

5 CERCLA. 42 U.S.C. 9601(14). Petroleum and other oil products, however, are excluded from the definition of hazardous substances. Id. A release of petroleum or other oil products are governed by state law. See e.g., North Carolina Oil Pollution and Hazardous Substances Control Act, N.C. Gen. Stat et seq. A facility under CERCLA includes any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located. 42 U.S.C. 9601(9). Section 107 of CERCLA imposes strict liability for the costs of responding to a release or material threat of a release of hazardous substances on a wide range of potentially responsible parties or PRP s. In general, anyone who incurs cleanup costs, whether it is EPA, a PRP or other private party, can sue PRP s to recover those costs, or a fair contribution of those costs. 42 U.S.C. 9607(a), 9613(f). The PRP s are: 1) the owner and operator of the facility; 2) any person who at the time of disposal of any hazardous substance owned or operated the facility at which such hazardous substances were disposed of; 3) Any person who by contract, agreement, or otherwise arranged for disposal or treatment, or arranged with a transporter for transport for disposal or treatment, of hazardous substances owned or possessed by such person, by any other party or entity, at any facility owned or operated by another party and containing such hazardous substances; and 4) Any person who accepts or accepted hazardous substances for transport to disposal or treatment facilities. 42 U.S.C. 9601(a)(1)-(4)(emphasis added). 2

6 The current owner and operator of the facility are among the liable parties pursuant to Section 107(a), even if no disposal of hazardous substances has taken place during their ownership, unless they qualify for the limited defenses discussed below. Again, environmental due diligence is conducted in large part to try to qualify for those defenses. Also, the Fourth Circuit Federal Court of Appeals, whose jurisdiction includes North Carolina, has broadly interpreted the term disposal as used in Section 107(a)(2) to impose liability not only for active involvement in the dumping or placing of hazardous substances, but for ownership of the facility at a time that hazardous substances were spilling or leaking. Nurad, Inc. v. William E. Hooper & Sons, Inc., 966 F.2d 837, 846 (4 th Cir. 1992). Thus, for example, if a tank, pipe or other vessel that is no longer actively used on the property contains hazardous substances that continue to leak from the tank, pipe or vessel, anyone who owned or operated the property during this passive leaking qualifies as an owner or operator during time of disposal under Section 107(a)(2) of CERCLA. This may be true even if someone bought the property unaware of the existence of the underground tank or piping that is the source of this passive leaking. b. Defenses to Owner or Operator Liability under Superfund. For anyone who meets any of the criteria stated above, the defenses to CERCLA liability are very limited. Those are the release of hazardous substances was caused solely by an act of God, an act of war, or by a third-party in certain circumstances. 42 U.S.C. 9601(b). The innocent landowner defense is technically just the third-party defense asserted by a current landowner. Essentially, an innocent landowner is one who bought the property after the disposal took place, did not know or have reason to know of the prior disposal of hazardous substances after making appropriate inquiries about the property, exercised due care with respect to the 3

7 hazardous substances once detected, and took precautions against foreseeable acts or omissions of the responsible third party. 1 There is also a defense for one who qualifies as a bona fide prospective purchaser or BFPP. There are similarities and differences between an innocent landowner and a BFPP. A BFPP, like an innocent landowner, must have acquired the property after the disposal took place, and also must have conducted appropriate inquiries about the property. Unlike an innocent landowner, however, a BFPP does not have to show that they did not know or have reason to know of the prior release of hazardous substances. The BFPP defense is the counterpart to the innocent landowner defense for prospective buyers who learn about contamination in the course of their pre-acquisition due diligence. The innocent landowner and BFPP requirements are set forth below. (i) The Innocent Landowner Defense. To qualify as an innocent landowner, the current owner of the facility must show: The release or threat of a release of a hazardous substance was caused solely by a third party; The third party is not an employee or agent of the current owner; 1 These defenses are set forth in Section 107(b) of CERCLA, which in relevant part provides: There shall be no liability under subsection (a) of this section for a person otherwise liable who can establish by a preponderance of the evidence that the release or threat of release of a hazardous substance and the damages resulting therefrom were caused solely by-- (1) an act of God; (2) an act of war; (3) an act or omission of a third party (other than an employee or agent of the defendant, or than one whose act or omission occurs in connection with a contractual relationship, existing directly or indirectly, with the defendant (except where the sole contractual arrangement arises from a published tariff and acceptance for carriage by a common carrier by rail, if the defendant establishes by a preponderance of the evidence that (a) he exercised due dare with respect to the hazardous substance concerned, taking into consideration the characteristics of such hazardous substance, in light of all relevant facts and circumstances, and (b) he took precautions against foreseeable acts or omissions of any such third party and the consequences that could foreseeably result from such acts or omissions. 42 U.S.C. 9607(b). 4

8 The acts or omissions of the third party did not occur in connection with a direct or indirect contractual relationship to the current owner, or if there was a contractual relationship (e.g., the one who sold the property to the current owner is a PRP), the current owner acquired the property after the disposal of placement of the hazardous substance, and one or more of the following were true: at the time the current owner acquired the facility, they did not know and had no reason to know that any hazardous substance which is the subject of the release or threatened release was disposed of, in, or at the facility, the current owner is a government entity which acquired the facility by escheat, or through any other involuntary transfer or acquisition, or through the exercise of eminent domain authority, or the current owner acquired the facility by inheritance or bequest; and The owner exercised due care with respect to the hazardous substances, and took precautions against foreseeable acts or omissions of the third party. 42 U.S.C. 9607(b), 9601(35)(A) (emphasis added). To establish that the property owner had no reason to know of a prior disposal of hazardous substances, Congress indicated it must have undertaken, at the time of acquisition, all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial and customary practices in an effort to minimize liability. 42 U.S.C. 9607(35)(B)(emphasis added). This is the origin of current environmental due diligence. The procedures of environmental due diligence established by the American Society for Testing and Materials ( ASTM ), including, Standard Practice for Environmental Site Assessment: Phase 1 Environmental Site Assessment Process, satisfy the all appropriate inquiries requirement. 42 U.S.C. 9601(35)(B)(iv)(II)(2002). 2 2 In the case of property for residential use or other similar use purchased by a nongovernmental entity, a facility inspection and title search that reveal no basis for further investigation is considered to satisfy the all appropriate inquiries requirement. 42 U.S.C. 9601(35)(B)(v). 5

9 (ii) The Bona Fide Prospective Purchaser Defense. In 2002, Congress amended CERCLA by adding a new defense. The relevant provision provides that a bona fide prospective purchaser ( BFPP ) whose potential liability for a release or threatened release is based solely on the purchaser being considered to be an owner or operator of a facility shall not be liable as long as the BFPP does not impede the performance of a response action. 42 U.S.C. 107(r)(1). A bona fide prospective purchaser is a person that: Acquired ownership of the facility after the date of enactment of the 2002 Act (signed into law January 11, 2002); All disposal of hazardous substances at the facility occurred before the acquisition; Made all appropriate inquiries into the previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards and practices....; Provided all legally required notices with respect to the discovery or release of any hazardous substances; Exercised appropriate care with respect to hazardous substances found at the facility by taking reasonable steps to stop any continuing release, to prevent any threatened future release, and to prevent or limit human, environmental or natural resource exposure to any previously released hazardous substance; 3 Provided full cooperation, assistance, and access to persons that are authorized to conduct response actions; Is in compliance with any land use restrictions established applied to the property; Complied with any request for information or administrative subpoena; and 3 Regarding this requirement, the test is whether the party took all precautions regarding the waste that a similarlysituated reasonable and prudent person would have taken in light of all relevant circumstances. See PCS Nitrogen v. Ashley, 714 F.3d 161 (4 th Cir. 2013)(upholding finding that property owner failed to meet this requirement since it failed to clean out and fill in sumps containing wastes and did not adequately address conditions of debris pile.) 6

10 Is not potentially liable, or affiliated with any person who is potentially liable for response costs through any familial relationship, any contractual, corporate or financial relationship (other than a contractual, corporate or financial relationship that is created by the instruments by which title to the facility is conveyed), or the result of a reorganization of a business entity that was potentially liable. 42 U.S.C. 9601(40). As with the pre-existing innocent landowner provisions, all appropriate inquiries means compliance with ASTM procedures. So due diligence is required to qualify for the third-party defense as an innocent landowner, or as a BFPP. The difference is the BFPP defense is available even when the buyer learns of a prior release of hazardous substances during its due diligence, provided it meets the other criteria of a BFPP. In contrast, the pre-existing third-party defense for an innocent landowner is only available if the buyer shows that it did not know or have reason to know of a prior release after making appropriate inquiry Under State Statutory Laws. Under relevant North Carolina statutes, liability for a past release of oil or hazardous substances does not ordinarily arise merely from being the current property owner or operator. However, North Carolina s environmental statutes also warrant conducting appropriate due diligence. Under the North Carolina Inactive Hazardous Waste Sites Act, which is North Carolina s version of the federal Superfund law, the categories of responsible parties reads like the list under the federal Superfund law, but the current owner or operator of the site are not included in 4 For local governments who may seek brownfields grant funds, having conducted all appropriate inquiry before acquiring title to the site is also a prerequisite for qualifying for such grant funds. 7

11 that list. The responsible parties under the N.C. Inactive Hazardous Waste Sites Act are any person who: discharges or deposits; contracts or arranges for any discharge or deposit; accepts for discharge or deposit; or transports or arranges for transport for the purpose of deposit... any hazardous substance, the result of which discharge or deposit is the existence of an inactive hazardous substance or waste disposal site. N.C. Gen. Stat. 130A There is nevertheless a specific innocent landowner defense provision in that Act. See id. Also potentially applicable to a spill of oil or hazardous substances is the North Carolina Oil Pollution and Hazardous Substances Control Act, N.C. Gen. Stat et seq. Under that Act, the responsible party for responding to such a spill or discharge is the one in control of the oil or hazardous substance immediately prior to its discharge into the environment. N.C. Gen. Stat Nevertheless, the Secretary of N.C. Department of Environmental Quality ( DEQ ) or a local health director does have the statutory authority to order the property owner, lessee, operator or other person in control of the property to abate an imminent hazard or public health nuisance, or take action to abate the hazard or nuisance and place a lien on the property for the costs of doing so. N.C. Gen. Stat. 130A Also, DEQ has postured that a current property is responsible for a past release of oil or hazardous substances if no responsible party could be found, and contaminated soils remain on site that are a source of groundwater quality violations, though this position has never been tested in litigation and lacks the requisite statutory basis. 8

12 The other potentially relevant North Carolina statutes apply to petroleum underground storage tanks ( UST ). Liability for a past petroleum release from a UST does not arise merely from becoming the current property owner or operator. The responsible parties are the UST owner and/or operator. N.C. Gen. Stat E(a). The operator is the person in control of, or having responsibility for, the operation of a UST. N.C. Gen. Stat A(5). Obviously, a party that owns the land after the UST was no longer is use does not qualify as its operator. Determining UST ownership can be more complicated. Who is the owner depends upon whether the UST was still in use as of November 8, 1984, when UST rules went into effect. For a UST in use on or after that 1984 date, the owner is any person who owns the UST. N.C. Gen. Stat A(6)a. If it is still in the ground, DEQ takes the position that it is a fixture that runs with the land, and thus, a current landowner would qualify as the UST owner, even if they never used it. If the UST was no longer in use on that 1984 date, the owner is the person who owned it immediately before discontinuation of its use. N.C. Gen. Stat A(6)b. Thus, someone who buys property well after USTs were removed will not qualify as having responsibility for a past petroleum release. Also, under these definitions, there can be old orphan USTs still in the ground that were out of use prior to November 1984, for which the UST owner or operator can no longer be identified or found. Such situations are addressed below. B. Potential Tort Liabilities from Owning or Occupying Contaminated Property. In addition to potential statutory liabilities for past releases of oil or hazardous substances, there is also potential tort liability to adjacent property owners if one buys a site 9

13 where a past release of contaminants occurred, and the contaminants continue to migrate off site after the acquisition via groundwater or stormwater, causing property damage or personal injury. The potential claims in such circumstances include trespass, nuisance and negligence. See Wilson v McCleod, 327 N.C. 491, 398 S.E.2d 586 (1990). C. Practical Reasons for Environmental Due Diligence. Besides minimizing the risk of incurring liability for environmental conditions on a site, conducting environmental due diligence may be essential if redevelopment of the site will involve any significant degree of digging for installing underground utilities or other earthmoving. The additional costs of properly handling contaminated soils can blow a development budget, not to mention the risk arising from workers on site being exposed to contaminated soils. Even if a buyer will not assume responsibility for an old UST or other impediment, they need to know of its existence, assess its impacts on development and land use plans, and appropriately address it with the property seller. 5 II. Utility of an Access Agreement. Particularly if the prospective buyer will be conducting any phase 2 investigation (soil or groundwater sampling), the parties will be well-served by having a written access agreement governing the parties rights and responsibilities from such activities on site. This is particularly true for the seller if, as typical, the buyer can terminate the purchase agreement if it is not comfortable with the results of such an investigation. A typical access agreement will address: When on-site sampling may take place, and what advance notice is needed; 5 While this paper focuses on environmental conditions, due diligence should include inspections for asbestos and lead paint if demolition is anticipated of, or in old buildings. 10

14 Whether the seller will be allowed to monitor the sampling, and split samples and at its own expense; An indemnity from the buyer to the seller for any property damage resulting from the sampling; and A warranty that the property will be restored to its prior condition, and the buyer will at its own expense properly handle any soil borings or cuttings that are produced during well installation or other sampling activities; and Whether the seller will receive a copy of any sampling results, which is important given the parties respective responsibilities for reporting any evidence of a past release of oil or hazardous substances on the property, which is discussed in the next section. III. Who Has Duty to Report Environmental Findings from Due Diligence? Who has a duty to report evidence of a past release of oil or hazardous substances found on a tract of land can be a gray subject. Under a relatively recent amendment to the North Carolina Inactive Hazardous Waste Sites Act, any owner, operator or responsible party must report any findings of an inactive hazardous waste site (i.e., a past release of a hazardous substance), and provide a copy of any relevant sampling data, to DEQ within 90 days of receipt of the information. N.C. Gen. Stat. 130A-310.1(b) (emphasis added). This reporting requirement thus applies to a property owner or operator, even if they are not a responsible party for the contamination. The result of such a report is the property will be included on DEQ s list of Inactive Hazardous Sites, and will remain on that list until corrective action is completed. For that reason, if a buyer needs to conduct soil or groundwater sampling, the seller may want to put in the access agreement a provision by which the buyer: (a) only uses the resulting data for its own purposes and does not disclose it to any third-party (e.g., regulatory agency), and (b) will not communicate the results of the sampling to the seller unless the seller requests it. 11

15 Does a prospective buyer have a duty to report evidence of a past release of oil or a hazardous substance? Assuming they had no responsibility for causing the contamination, in the opinion of this author, the answer is no, at least not a legal duty. If they take title, then such a duty would arise under G.S. as discussed above for a hazardous substance. N.C. Gen. Stat. 130A-310.1(b). IV. Remedial Programs Available to Buyers of Property with an Environmental Impediment. The remainder of this paper provides an introduction to the various programs available for reimbursement of environmental investigation and cleanup costs, or that allow application of risk-based cleanup standards that can substantially reduce the costs of reaching closure for a past release of oil or hazardous substances into the environment. Buyers of contaminated property can utilize these programs to limit their liability for environmental investigation and cleanup costs. A. Brownfields. The purpose of federal and State brownfields programs is to give prospective developers and their lenders comfort that any costs the developer must incur to address contamination can be defined and limited. Also, while no direct government funding is available to developers, there are tax credits available, which are discussed below, that may exceed any environmental costs the developer agrees to incur in a brownfields agreement. The intent is to give developers incentives to redevelop sites that are idle or under-utilized because of an environmental impairment, and make it possible for them to get the necessary financing to do so. And, both the liability protection and tax credits are transferrable to a subsequent owner of the property. 12

16 While federal brownfields legislation provides a framework for addressing brownfields sites generally, a brownfields agreement is entered with DEQ, which suffices for purposes of liability protection. 6 The specifics for such an agreement are discussed below. For more information, DEQ has a webpage and links for its brownfields program at 1. Eligibility of Applicant and Site. Under the Brownfields Property Reuse Act of 1997, DEQ is given discretion to enter into a brownfields agreement with a prospective developer who satisfies the Act s requirements. N.C. Gen. Stat. 130A (a). A prospective developer eligible to enter into a brownfields agreement with DEQ is any person with a bona fide, demonstrable desire to either buy or sell a brownfields property for the purpose of developing or redeveloping that brownfields property and who did not cause or contribute to the contamination at the brownfields property. N.C. Gen. Stat. 130A (10). In addition, to be eligible for brownfields agreement, the applicant must show, among other things, that: As a result of the implementation of the brownfields agreement, the brownfields property will be suitable for the uses specified in the agreement while fully protecting public health and the environment instead of being remediated to unrestricted use standards. There is a public benefit to a brownfields agreement. The prospective developer has or can obtain the financial, managerial, and technical means to fully implement the brownfields agreement, and assure the safe use of the brownfields property. 6 The federal brownfields program provides funding to states to operate a brownfields program, and grant funds to local governments for identifying and assessing brownfields sites in their jurisdictions. 13

17 N.C. Gen. Stat. 130A (a)(2)-(4). While a current landowner who is a responsible party for the contamination is not eligible for applying for a brownfields agreement, DEQ has been piloting a Ready-For-Reuse program where, in cooperation with the current owner, DEQ will develop a draft brownfields agreement that can be entered for the site with a future prospective developer. This is an option for making a contaminated site more marketable. A brownfields property or site means abandoned, idled, or underused property at which expansion or redevelopment is hindered by actual environmental contamination or the possibility of environmental contamination, and that is or may be subject to remediation under any State remedial program or that is or may be subject to remediation under CERCLA. 7 The prospective developer must have an intent to redevelop the property. If a buyer simply intends to continue pre-existing manufacturing operations on a site, they and/or the site may not qualify for a brownfields agreement. 2. Process of Applying For and Negotiating a Brownfields Agreement. The first step is submitting an application to DEQ for a determination that a party qualifies as a prospective developer for the site. The application must include information about the site conditions, and intended uses of the property once it is redeveloped. There is no cost for this, and a response can be obtained in a manner of weeks. It is not required, but much easier if the eligibility determination is received before the developer acquires title to the site, particularly if any waste remains stored on site or any manufacturing or 7 The only exception is any site listed on EPA s National Priorities List under CERCLA of sites contaminated with hazardous substances are exempted from this definition, and cannot be the subject of a state brownfields agreement. N.C. Gen. Stat. 130A (1). There are only about 50 such sites currently in North Carolina. 14

18 other operations will continue on site for any period of time after the acquisition. That is because of the applicant s burden of showing that they did not contribute to the contamination. Assuming eligibility is confirmed by DEQ, DEQ then produces a draft Agreement based upon the information submitted in the application. DEQ can first require additional investigation if it perceives there are any gaps in needed data about site conditions. Once an agreement is finalized, the Act requires a 30 day public comment period before DEQ can sign it. N.C. Gen. Stat. 130A If a site is in the normal pipeline with the brownfields program unit, this process can take a long time due to limited staffing. DEQ currently projects it could take 18 months. For that reason, for the additional fees discussed below, an applicant can participate in the Redevelopment Now Program that helps fund dedicated staff to review the project and expedite the process. And, as noted, the process can be expedited by a prospective seller by utilizing the Ready-For-Reuse program. 3. Costs of Program. For a site in DEQ s usual pipeline, the fees for a brownfields agreement are currently $8,000, though DEQ reserves the right to increase that fee if the project takes what DEQ deems to be excessive staff or attorney time. A $2,000 fee is due when the eligibility determination is made. When the $6,000 balance is due is addressed in the brownfields agreement. The fee for expedited review under the Redevelopment Now program is $30,000. The fee for the Ready-For-Reuse program is currently $15,000, payable in two installments: (i) half upon receiving an eligibility determination, and (ii) the other half when the draft Agreement is completed. 15

19 4. Tax Credits. G.S is entitled, Taxation of improvements on brownfields. It provides: (a) Qualifying improvements on brownfields properties are designated a special class of property under Article V, Sec. 2(2) of the North Carolina Constitution and shall be appraised, assessed, and taxed in accordance with this section. An owner of land is entitled to the partial exclusion provided by this section for the first five taxable years beginning after completion of qualifying improvements made after the later of July 1, 2000, or the date of the brownfields agreement. After property has qualified for the exclusion provided by this section, the assessor for the county in which the property is located shall annually appraise the improvements made to the property during the period of time that the owner is entitled to the exclusion. (b) For the purposes of this section, the terms "qualifying improvements on brownfields properties" and "qualifying improvements" mean improvements made to real property that is subject to a brownfields agreement entered into by the Department of Environment and Natural Resources and the owner.... (c) The following table establishes the percentage of the appraised value of the qualified improvements that is excluded based on the taxable year: Year Percent of Appraised Value Excluded Year 1 90% Year 2 75% Year 3 50% Year 4 30% Year 5 10%. There is an application process with the Dept. of Revenue for obtaining these exclusions. These exclusions may be transferred to future owners of the property, provided they also complete that application process. 5. Liability Protection under a Brownfields Agreement, and its Limits. Besides the tax credits, the other major benefit of a brownfields agreement is the liability protection it offers not just the prospective developer, but also its lender, lessors or future 16

20 property owners. See N.C. Gen. Stat. 130A (a). The Act provides that a prospective developer who enters into a brownfields agreement with DEQ and who is complying with the brownfields agreement shall not be held liable for remediation of areas of contaminants identified in the brownfields agreement, except as specified in the brownfields agreement, so long as: (i) the activities conducted on the brownfields property by or under the control or direction of the prospective developer do not increase the risk of harm to public health or the environment, and (ii) the prospective developer is not required to undertake additional remediation to unrestricted use standards pursuant to certain re-openers discussed below. N.C. Gen. Stat. 130A (a). Because of these re-openers, a brownfields agreement does not provide ironclad protection against having to conduct further investigation or clean up beyond what is agreed to in the agreement. To the contrary, and somewhat ironically, DEQ would have greater enforcement authority against the prospective developer if a re-opener occurs than it would have had against the developer if a brownfields agreement had never been entered. The prospective developer or subsequent landowners can ensure that some of the reopeners do not occur. The relevant re-openers are: If a land use restriction applied to the property is violated, in which case the owner of the property at the time of the violation shall be liable for remediation to unrestricted use standards; and The prospective developer knowingly or recklessly provides false information that forms a basis for the brownfields agreement, or that is offered to demonstrate compliance with the brownfields agreement, or fails to disclose relevant information about contamination at the brownfields property. Other re-openers, however, are beyond the control of the prospective developer or subsequent landowners. Those are: 17

21 New information indicates the existence of previously unreported contaminants or an area of previously unreported contamination on or associated with the brownfields property that has not been remediated to unrestricted use standards, unless the brownfields agreement is amended to include any previously unreported contaminants and any additional areas of contamination. If the brownfields agreement sets maximum concentrations for contaminants, and new information indicates the existence of previously unreported areas of these contaminants, further remediation shall be required only if the areas of previously unreported contaminants raise the risk of the contamination to public health or the environment to a level less protective of public health and the environment than that required by the brownfields agreement. The level of risk to public health or the environment from contaminants is unacceptable at or in the vicinity of the brownfields property due to changes in exposure conditions, including (i) a change in land use that increases the probability of exposure to contaminants or in the vicinity of the brownfields property or (ii) the failure of remediation to mitigate risks to the extent required to make the brownfields property fully protective of public health and the environment as planned in the brownfields agreement. DEQ obtains new information about a contaminant associated with the brownfields property or exposures at or around the brownfields property that raises the risk to public health or the environment associated with the brownfields property beyond an acceptable range and in a manner or to a degree not anticipated in the brownfields agreement. Any person whose use, including any change in use, of the brownfields property causes an unacceptable risk to public health or the environment may be required by DEQ to undertake additional remediation measures under the provisions of this Part. N.C. Gen. Stat. 130A (c)(2)-(4). It is important to have good, comprehensive data about environmental conditions about a site before entering a brownfields agreement, so that the risks of a re-opener can be assessed. B. Petroleum Underground Storage Tank Releases. The State has specific programs for addressing releases of petroleum from underground storage tanks ( USTs ). There are funds available to defray the costs of responding to petroleum UST releases, one for commercial USTs, and one for non-commercial USTs. These funds are 18

22 financed by taxes on gasoline sales, though the funds have had solvency issues. These programs have saved many deals selling corner parcels where a gasoline station was once operated. 1. Comfort letter from DEQ s UST Section. As noted, someone who buys property after USTs were removed will not qualify as having responsibility for a past petroleum release. DEQ will upon request issue a letter confirming that a current property owner or prospective buyer does not qualify as either a UST owner or operator. Sometimes, such a letter is all that is necessary to satisfy a lender. 2. State-lead program for orphan USTs. DEQ has the authority to utilize trust funds to investigate and remediate contamination from petroleum UST releases where the UST owner or operator cannot be identified or located. N.C. Gen. Stat G(a)(2). If a buyer or lender are not satisfied with a letter from DEQ confirming the buyer will not be incurring liability for a past UST release in buying the property, enrolling the incident in the State-lead program may provide the desired level of comfort. There is no formal process for petitioning for a UST incident to be addressed in the Statelead program. We typically provide the results of an investigation about the UST history to DEQ via an affidavit. The information should include when the UST was last used and by whom, or testimony from someone who worked on the site for a stated period and was not aware of the UST s existence. It helps to establish the UST was last used prior to November 1984, and thus, is an orphan UST. Once a past UST release is accepted into the State-lead program, after some initial assessment is completed, no funds are likely to be spent in further assessment or actual remediation unless the location and circumstances present a serious health risk. 19

23 3. Availability of Petroleum Underground Storage Tank Trust Funds. In a case where the UST owner or operator cannot be identified or located, the property owner also can step into the shoes of the UST owner or operator for purposes of qualifying for trust fund coverage. See N.C. Gen. Stat E(b1). However, such a landowner is still responsible for any applicable deductible, see id., which can be quite significant for a past release that is detected today. See N.C. Gen. Stat B(b) on deductibles. For that reason, we do not see many current landowners exercising this option, opting instead to get the incident enrolled in the State-lead program discussed above. C. Dry-Cleaning Solvent Program. There are an estimated 900 active or abandoned sites in North Carolina where releases of solvents in the environment occurred from dry-cleaning operations. The dry-cleaning solvent program was implemented to provide a fund, administered by DEQ, for assessment and cleanup of such sites. It is funded by taxes on cleaning solvents used in the industry. See N.C. Gen. Stat C. This program has proven to save several real estate transactions our firm was involved in. 1. Eligibility. Any party responsible for responding to a past release of solvents resulting from drycleaning operations may apply for funding. A responsible party is defined as anyone who may have liability for assessment, monitoring, treatment, mitigation, or remediation of dry-cleaning solvent contamination resulting from a release at a dry-cleaning facility, an abandoned drycleaning facility, or a wholesale distribution facility. N.C. Gen. Stat B(b)(21). Eligible parties include owners of the property who took title after the release since such solvents 20

24 are hazardous substances, and landowners are among those responsible for releases of hazardous substances under CERCLA. See 42 U.S.C. 9604(a)(1). A buyer of a site eligible for this program can get into a chicken and egg situation in applying. Technically by the statute, they must have already bought the property to be eligible. On the other hand, the buyer and/or their lender may need confirmation that the site will be enrolled in the program before closing on the acquisition. In such circumstances, DEQ has proven cooperative and issued a conditional eligibility, indicating the buyer will qualify once they take title. 2. Process for Getting in Program. The applicant must request that DEQ certify the site for enrollment under this program. The petition for such certification must include documentation that the property is, or was the site of a dry-cleaning operation, that there was a solvent release from those operations, and that current operations demonstrate compliance with minimum management practices that apply to dry-cleaning operations. The applicant must also show they are financially capable of paying the statutory deductibles under the program, and an intent to enter an assessment agreement with DEQ for the site. N.C. Gen. Stat F. After certification of a site into the program, the applicant enters an Assessment Agreement with DEQ. The applicant then contracts for an initial assessment designed to provide DEQ with the information needed for it to determine the site s priority for clean up under the program. The costs of that assessment are applied to the applicant s deductible, discussed below. After the preliminary investigation, DEQ contracts for any further assessment and clean up utilizing money from the dry-cleaning fund, subject to any deductible that still must be paid. 21

25 3. Costs of Program. The applicant s financial responsibility is limited to the applicable deductible. The deductible ranges from $5,000 to $25,000, and depends upon the number of employees the drycleaner has for current operations. Here is a basic breakdown- No. of Employees: Less than 5 full time Deductible: $5,000 plus 1% of costs over $200k, but not over $1.0MM 5-10 full time $10,000, plus 2% of costs over $200k but below $500k, and 1% of costs over $500k but not exceeding $1.0MM More than 10 For wholesale or abandoned facilities $15k, plus 3% of costs over $200k but not over $500k, and 1% of costs over $500k but not exceeding $1.0MM $25k, plus 3% of costs over $200k but not over $500k, and 1% of cots over $500k but not exceeding $1.0MM N.C. Gen. Stat F(f). Otherwise, the assessment agreement provides the applicant with liability protection for any costs beyond the deductible. D. Site Specific Cleanup Standards for Certain Contaminated Sites. In 2015, the General Assembly broadened the scope of contaminated sites where sitespecific, risk-based remediation standards may be determined and applied, under certain circumstances. See Session Law , House Bill 756 (2015). DEQ recently published administrative procedures for applying alternative risk-based standards to contaminated sites. 8 8 See Administrative Procedures for Risk-Based Environmental Remediation of Contaminated Sites Pursuant to N.C.G.S. 130A , DEQ (Feb. 2018). 22

26 This is a relatively new option for addressing risks associated with contamination. Where none of the more specific programs already discussed in this paper do not apply for addressing contamination, this option of petitioning to apply site-specific, risk-based standards should be considered. This is especially true where groundwater contamination exists above the State groundwater quality standards published in 15A N.C. Admin. Code 2L. 9 This option is available for any site subject to the North Carolina Inactive Hazardous Sites Act, the State s hazardous waste management program, or the State s groundwater protection corrective action requirements, and most sites subject to the N.C. Oil Pollution and Hazardous Substances Control Act. N.C. Gen. Stat. 130A (a). It is not available for sites subject to the N.C. leaking petroleum underground storage tank program, or the State drycleaning solvent program, both discussed in this paper. N.C. Gen. Stat. 130A (b). However, those two programs are inherently risk-based. After a comprehensive assessment is completed, site-specific remediation standards for each medium (e.g., soil, groundwater) may be developed to achieve remediation that eliminates or reduces to protective levels any substantial present or probable future risk to human health, including sensitive subgroups, and the environment, based upon the present or currently planned future use of the property comprising the site. N.C. Gen. Stat. 130A (b)(emphasis added). That is what makes the standards site specific basing them on the future uses of the property. There are certain statutory limitations in determining site-specific cleanup standards. Air quality and surface water standards must be met. While the State groundwater quality standards may not apply, potential receptors of impacted groundwater must be protected or eliminated. 9 For sites with only soil contamination, alternative risk-based remediation standards can be determined and used without having to follow the administrative procedures and paying the fees discussed in this Section. See id., p

27 Soils must be remediated to levels that no longer constitute a continuing source of groundwater contamination in excess of the site-specific groundwater remediation standards. Id. Soils on residential property must be remediated to unrestricted use standards, with some exceptions, such as a mixed use building with no residential use of the first floor. Soil vapor exposure must be evaluated. Id. The developer or applicant must show that contamination will not migrate off the property, unless the consent of the impacted adjoining property owner is obtained. N.C. Gen. Stat. 130A (b), 130A A. Notice of intent to pursue a cleanup to site-specific standards has to be provided not only to any such adjoining property owner, but to the local governments with taxing or land-use jurisdiction over the property, who may submit comments on the plan. N.C. Gen. Stat. 130A There are both application and oversight fees associated with remediations to site-specific cleanup standards. The application fee cannot exceed $5,000 for each acre or portion thereof of contamination, with a cap of $100,000. N.C. Gen. Stat. 130A (a)(1). The oversight for an approved remediation plan shall not exceed $500 for each acre or portion thereof of contamination, with a cap of $25,000. N.C. Gen. Stat. 130A (a)(2). V. Environmental Insurance Products. Another tool for managing environmental risks associated with buying real property where chemicals or fuel were once used is to procure pollution liability insurance. This is different than a comprehensive general liability policy that most businesses have, which contains broad pollution exclusions. Pollution liability insurance will typically provide coverage in part for cleanup costs the insured must incur to the extent required by law, and liability to thirdparties arising from a pollution event that occurred: after an identified date (the retroactive 24

28 date ), but prior to the policy period, provided the claim arises during the policy period. The policy period can vary, but in my experience is rarely longer than 10 years. The retroactive date defining how far back in time the coverage stretches, is a key provision. The insured will want a retroactive date that precedes the known use of chemicals or fuel on the property, since identifying the historical date of a release or discharge of oil or hazardous substances could be impossible. Such policies also typically provide coverage for a new pollution event, meaning one that occurs during the policy period