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Practical steps and a defense to minimize environmental liability.

"The '90s-decade of the environment."

Perhaps this is an appropriate slogan.

One thing is clear, however--environmental issues are at the forefront of public concern, and this is unlikely to change in the near future.

The outcome of this concern has been the promulgation of a myriad of federal and state regulations, many of which are directed at property owners. These include the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. 9601 (CERCLA), and the New Jersey Spill Compensation and Control Act, NJSA 58:10-23.11.

Beyond the obvious endeavor to control and mitigate potentially undesirable conditions, a byproduct of this atmosphere of regulatory compliance is an increase in property owner liability. The regulatory climate can be accurately described as stormy.

Professionals who have honed their skills at understanding complex regulations often find themselves perplexed. Thus when a property owner asks, "Does mere regulatory compliance eliminate my liability?," the answer, unfortunately, may not always be "yes."

A case in point

The owner of a high-rise office building in a large eastern city was confronted with a dilemma upon learning that the building contained asbestos. This was not a typical asbestos-on-pipes-in-theboiler-room scenario, but rather a building replete with the cotton-candy-type, spray-applied asbestos considered most perilous.

The material was found throughout the facility above the lay-in ceiling panels. At the time, the regulations governing asbestos in buildings included requirements for reducing exposure only during renovation and demolition activities. A more comprehensive rule that required notifying occupants and implementing a sound asbestos management program was limited to schools.

What then does a prudent building owner concerned with potential liability do to reduce that risk? Certainly the potential exposure of the tenants was of clear and present concern, but owners cannot control or be held responsible for all of the activities that transpire in any given tenant's space. Or can they?

The first step is to identify and understand the liability. In this particular instance, the owner recognized that the regulations did not address all of the specifics of this particular facility. Nonetheless, if an occupant were exposed to asbestos, albeit inadvertently, the owner would remain liable.

With this in mind, the owner developed a plan that mirrored the comprehensive format required for schools. It contained the following points:

* All tenants were notified about the existence and location of asbestos in the building.

* All activities that could have had a detrimental impact on the asbestos were prohibited (routine maintenance, computer cable or telephone wire installation, and so forth).

* Work authorizations and subcontractor approvals were required for any alterations to tenants' spaces.

* Building maintenance operations were modified.

* Training programs were developed for those individuals most likely to encounter asbestos in their daily routine.

For new tenants, these requirements were linked to the lease agreement. For tenants already in place, the new rules were added to the existing list of ownermandated do's and don'ts for tenants. The net effect was that the owner appeared to have significantly reduced liability. Did the plan work, however?

As it happened, this owner's plan was put to the test. Unknown to building management, one of the tenants had circumvented the system and had retained a subcontractor to conduct renovation work in its space without prior approval. The construction company made no effort during its work to protect the tenant's employees from exposure to asbestos.

When the secretary who worked in the space telephoned the local regulatory agency complaining of white dust on her desk, the building owner was cited and fined $10,000. From the perspective of the agency, the issue was clear. The owner was in violation of the standard governing asbestos exposure during renovation or demolition.

It appeared that the nuances of managing a high-rise office building combined with an unscrupulous contractor conspired to undo the plan the owner had designed. The owner had recognized the potential liability and taken reasonable steps to reduce that liability.

While this was not considered by the regulatory agency when it initially levied the fine, the owner and the environmental consultant who had assisted in developing the program were able to document the program's reasonableness to the agency. In light of the facts, the agency relented and repealed the citation and fine against the owner. Instead, it took action against the subcontractor for violating the standard.

An environmental liability plan

This account illustrates what could be considered reasonable and effective defensive steps against environmental liability. The concept is not a new one, yet it can be useful to property owners when developing a program of environmental clue diligence.

In many respects, it is the foundation upon which most environmental risk assessments are based and represents a natural progression of the process that is initiated by a person seeking environmental information about a property before purchasing it. Such information enables the potential buyer to evaluate the desirability of the property, document the likelihood of existing liabilities, establish a defense to future liability, and satisfy a lender's concerns.

During property transactions, for instance, lenders can be adversely affected by the liability incurred by their borrowers. If the borrower's property is contaminated, the lender's collateral is reduced in value. If a borrower is responsible for contamination elsewhere, the liability for remediation of that contamination could have a very real impact on the borrower's financial worth.

The technical and transactional costs connected with contamination and its remediation can affect the borrower's ability to continue doing business and to meet his or her loan obligations. Consequently, these costs should be assessed and factored into a lender's evaluation of a potential borrower.

The message here is: Recognize the extent of liability, understand the compliance requirements of existing regulations, and develop a plan accordingly.

This philosophy differs little from the tack that owners currently pursue when addressing other property management issues such as fire and life safety, security, and routine maintenance. Thus, environmental issues join the list of operational details that owners currently contend with on a daily basis.

Using consultants

Many owners of large properties have cultivated an internal department of engineers and environmental specialists to assist in the evaluation of environmental risk. Owners of smaller properties often rely instead on environmental consulting firms.

Deciding how much expertise should be internally available is obviously a question of economics. Even with an in-house staff, however, the use of outside consultants may be inevitable.

To get the most from these specialists, a property owner should establish criteria for a framework within which the consultant can perform an assessment. Such criteria will provide the person reviewing the assessment's results with a guideline for determining whether the assessment satisfies the owner's need for information.

A Phase 1 environmental assessment, for example, is intended to be used in real estate transactions as a means of determining both the environmental risks posed by the property to be collateralized and the impact of a potential borrower's activities on that property.

The Phase I site assessment typically consists of four sections: a review of records; a site reconnaissance; interviews with the current owners, the operators, and local government officials; and an evaluation and report.

The interviews, site reconnaissance, and review and interpretation of information must be performed by an environmental professional. However, the user of the property is responsible for communicating to the environmental professional any pertinent, specialized information that is available.

Once all the information is obtained, the consultant prepares a report that describes all observations, interviews, and data received through the document review process. Ultimately, this is intended to satisfy the legal requirement that lenders conduct "due diligence" regarding environmental concerns before taking control of a property.

Although a legal due-diligence standard does not yet exist, there is movement in that direction. The State of Illinois, for example, is considering a bill (HB 3605) introduced by the state's Bankers Association. The bill would define that standard for the purpose of including the "innocent landowner" defense in that state's version of CERCLA.

Conclusion

With the advent of an environmental conscience in today's society, it was inevitable that environmental issues would permeate the realm of property management. That time is here.

Far from being unmanageable, however, these issues can be handled if they are recognized. Once the regulatory requirements have been defined, taking an incremental and reasoned approach allows property owners to demystify the environmental issues sure to confront them in the next decade.

John R Luxford is executive vice president and co-founder of Strategic Environmental Management Group, Inc., a New Jersey-based environmental consulting firm. Mr. Luxford has nine years of experience serving public and private clients on a variety of environmental, safety, and indoor air quality issues. He is the author of several articles and lectures frequently on environmental issues.

Catherine M. Ward, Esq., is an associate with Jubanyik, Varbalow, Tedesco, Shaw & Shaffer and is a member of the firm's Environmental Law Department A substantial amount of her practice consists of assisting lenders in implementing environmental policies. Ms. Ward previously headed a project management department of an environmental consulting firm.
COPYRIGHT 1993 National Association of Realtors
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Legal Issues
Author:Luxford, John R.; Ward, Catherine M.
Publication:Journal of Property Management
Date:Sep 1, 1993
Words:1497
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