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Brownfields Development on the Rise - But There's Good Reason for Caution

Q:  What are “brownfields” and why have we been hearing so much about them lately?
A:
  Brownfields are properties that either are or may be contaminated. Contaminants might include gasoline, solvents, or other waste materials. While such properties may represent opportunities for developers, they also create unique environmental and legal risks. Many brownfield properties are in urban areas, but they also are found in small towns. They are often abandoned or underutilized because fears of legal liability and cleanup costs have scared off developers, businesses and banks. However, careful planning and analysis can reduce the environmental and legal risks of re-using brownfields.

Q:  Why is brownfield development on the rise?
A:
  Many factors have caused this increase, including:  state and federal financial incentives (e.g., Ohio formerly offered grants of up to $3 million for  brownfield property cleanup under the Clean Ohio Revitalization Fund and now offers grants and low-interest loans under the JobsOhio program); diminishing “greenfield” (uncontaminated) sites; and increasing pressure to prevent urban sprawl and loss of farmlands. In addition, many state brownfield and voluntary cleanup programs now establish objective cleanup standards. These allow cost-effective risk-based cleanup based on how the property will be used and what engineering and institutional controls will be employed. This, in turn, may allow a developer to avoid cleaning up to strict residential standards if there are restrictions on how the property is used. These programs also provide liability protection to parties that clean up properties, and some (such as the Ohio Voluntary Action Program) allow a remediating party to recover its costs from the parties that cause the contamination. Finally, lenders have become increasingly likely to provide loans for purchase and re-development of these properties.

Q:  If I buy a brownfield property, should I worry about legal liability for contamination?
A:
  Yes. Even if you, the buyer, did not cause the contamination, you may be liable for the costs of cleanup and other liabilities. These costs may far exceed the value of the property.

Q:  Can I buy the brownfield property through a business so I won’t lose my home if there is a problem?
A: 
Maybe. You can set up a limited liability corporation (LLC) to shield your personal assets from liability when buying a brownfield property. Even though environmental laws are far-reaching, you can use a “corporate shield” to protect the assets of parent corporations, holding companies and shareholders. However, if you are a small business owner, you still may be held personally responsible for your company’s actions if you directly managed the company or the property. Also, if the company is bankrupt or has been dissolved, a court, under some circumstances, may decide to “pierce the corporate veil” and make parent corporations, shareholders, managers, and heirs liable for environmental problems. 

Q:  How can I reduce my risks before buying a brownfield property?
A:
  First, completely check out the environmental conditions at the property.

At a minimum, conduct a “Phase I” assessment in accordance with ASTM International Phase I Environmental Site Assessment Standard (ASTM E1527-13). The Phase I assessment will include, among other things, a review of property records, a site inspection, and interviews with current owners and government officials. You may need to test soil and groundwater. After completing your investigation, you can estimate the potential cleanup costs and better evaluate the risk that other problems may be present. 

If you conduct an appropriate Phase I assessment (and comply with other requirements), you may be eligible for the "innocent purchaser" or "bona fide prospective purchaser" defenses under the federal Superfund law. However, these defenses do not protect you against state agency enforcement actions or third-party claims.

Second, require the seller to disclose in the purchase agreement all known or suspected environmental problems and, if possible, get an agreement saying that the seller is responsible for pre-existing contamination. 

Third, consider implementing a cleanup under Ohio’s Voluntary Action Program (where available). This may allow you to get certain protections from liability, including a “covenant not to sue” from the state and may provide you with a right to recover your costs from responsible parties. 

Fourth, explore insurance policies, such as pollution legal liability policies to protect yourself against claims made by third parties and cleanup obligations for newly discovered contamination, and cost cap policies to provide coverage if the cleanup costs are higher than expected.

Q:  Are there any other considerations?
A: 
Complex issues can arise when you buy and develop brownfield properties. Ask experienced legal counsel and environmental consultants to help you determine your level of risk and guide you through the process. In addition, federal, state, and local programs may give you incentives to buy and develop brownfield property.  Identify these funding sources early; the grant process may take a year or two. Also, check with lenders (banks, etc.) early so you know their expectations and limitations. This will help you negotiate your contract and learn what you must do to check out the property before you buy. Be cautious about potential environmental liabilities, but do not walk away from a good opportunity because of unsubstantiated fears.

1/22/2014

This "Law You Can Use" consumer legal information column was provided by the Ohio State Bar Association (OSBA). It was prepared by attorney Andrew L. Kolesar, a partner in the Cincinnati office of Thompson Hine and the leader of the firm’s environmental practice group.

Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

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