Although real estate lenders are generally shielded from liability for environmental contamination on properties in their portfolios, lenders could inadvertently lose those protections and assume unnecessary environmental risk if they are not careful. Lenders can minimize their risks associated with contaminated properties by exercising caution in conducting their due diligence, drafting loan documents, and managing properties serving as loan collateral. This article describes the legal bases of liability for environmental contamination and statutory protections from liability for lenders, and provides some practical suggestions for minimizing the risks associated with loans secured by environmentally-challenged properties.
The federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) imposes broad liability on owners and operators of a facility at which hazardous substances were disposed of, persons who transported hazardous waste to the facility, or persons who generated the hazardous waste. CERCLA is a strict liability statute, which means that parties can be held responsible for the cleanup regardless of fault. Maryland law similarly imposes liability on property owners, operators, transporters, and generators of hazardous substances and holds them responsible for the cleanup.
A lender who holds a security interest in property generally is exempt from liability for environmental contamination on the property as long as it does not participate in the management of the facility and does not add to or make the contamination worse. A “security interest” includes having a right under a mortgage, deed of trust, assignment, judgment lien, security agreement, factoring agreement, lease, or any other right to secure the repayment of money. What constitutes “participating in the management” of the facility is a bit harder to define and has been the subject of litigation. A lender is deemed to participate in the management of a facility if it undertakes decision-making control or responsibility for the hazardous substances handling or disposal practices at the site. A lender could also be deemed to participate in the management of the facility if it exercises managerial control over the “day-to-day decision making” with respect to the operational functions of facility, such as acting as plant manager or operations manager. Management of the facility typically becomes an issue after a lender forecloses on the property and then has some control over the property before it can be sold.
Lenders face several types of risks involving loans secured by contaminated property. First, the costs of remediating contaminated property and complying with environmental laws may impact a borrower’s ability to repay its loan, as well as the value of the collateral for the loan. Second, environmental contamination may impact a lender’s decision to foreclose on property if it will be difficult to resell because of actual or perceived contamination. Third, lenders who do foreclose on contaminated property to protect their security interest must be careful not to accidentally become an “operator” of the property and assume liability for the contamination. Lenders can take several steps to avoid inadvertently assuming risks associated with environmental contamination:
With appropriate precautions, lenders can minimize the risks of loans secured by properties with varying amounts of environmental contamination. For additional information on environmental risks in loan transactions or to discuss a particular property issue, contact Maggie Witherup at 410-576-4145 or email@example.com.