Relating to Real Estate

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There is Oil in Pandora’s Box

A recent change in regulations adopted by the Maryland Department of the Environment (MDE) will frequently require consultants hired by prospective buyers to notify MDE of petroleum contamination before the sellers are notified. This change may significantly impact the sale of commercial and industrial land. Just as Pandora discovered a surprising consequence she could not undo when she opened her box, sellers may find a similar outcome from a required Phase II environmental assessment.

Maryland oil control regulations have extensive provisions dealing with the obligations of owners and operators of oil storage facilities, requiring they notify the Department of the Environment when a leak is detected. However, the oil control statutes and regulations never imposed an obligation on a prospective purchaser who does not take title. The provisions also did not previously obligate consultants to directly report test results.

All of that has now changed. For the first time, the new regulation specifically requires a consultant who is performing a due diligence investigation to report oil contamination directly to MDE.  That obligation exists regardless of whether the consultant was hired by the current owner/seller or by a prospective purchaser. It also applies whether or not the transaction is ever consummated.

Worse yet, the obligation to report is “immediately, but not later than 2 hours” after a visual detection of free product and “within 48 hours” after a lab result above action levels. Consultant’s reports are never drafted by those deadlines. So, the consultant is now required to report the results to MDE before a report has been prepared and sent to the prospective buyer or seller.

This new directive is deep within an extensive set of new regulations concerning “Oil Pollution Control & Storage Tank Management” and appears on the 67th page of a 133 page “Guided Copy” of the regulations posted online by MDE:

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COMAR If evidence of a spill, release, or discharge is discovered during an environmental assessment conducted on a property as part of a due diligence investigation in support of a property transaction or a loan refinancing, the person conducting the environmental assessment and the owner of the property shall report the suspected spill, release, or discharge to the Department:

(a) Immediately, but not later than 2 hours after the visual detection of free product; or

(b) Within 48 hours of receiving an analytical laboratory report described under §B(1) of this regulation. [emphasis added]

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Visual evidence identified by a consultant means “free product” – which is defined as a nonaqueous phase liquid. Basically, that means oil sitting on top of groundwater rather than dissolved.  The trigger for reporting of a lab result is more complicated. The result must be reported if the lab result exceeds “a cleanup standard or action level published by the Department for the petroleum constituent and media type.” The results must be published whether the detection was “in soil, groundwater, drinking water or soil vapor.”

Practitioners have usually taken steps to control information about a site if a transaction does not occur. Strategies have included trying to protect consultant reports through attorney-client privilege and explicit non-disclosure agreements. Many of these strategies were of doubtful value if the current owner of the property or operator of an oil facility received the results. The obligation to report was imposed on the owner under existing regulations. In addition, there were significant risks of tort liability if an owner was aware of contamination that could impact third parties and the owner did not take action to prevent harm. However, the previous strategies would give owners time to evaluate the results and develop a plan of action before approaching the authorities.

It is clear now that none of those strategies will protect positive petroleum results from immediate disclosure to MDE. Because it is a legal obligation, the regulation will override any conflicting contractual requirements. Maryland Rule 19-301.6, makes it clear that a legal obligation may overrule the attorney/client privilege. Given that the assessment is a routine part of a real estate transaction, and the consultant is not a typical client seeking legal advice, the applicability of the privilege seems especially weak.

Worse yet, the obligation applies to a consultant with whom the seller has no contractual or attorney/client relationship. Typically, assessments are performed by a consultant working for the prospective purchaser. That purchaser may either favor disclosure to clarify liability or will not care because the transaction is being abandoned.

MDE did clarify that the consultant would not become liable for the discharge as a result of notification: 

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COMAR The person performing an environmental assessment on a property or the owner of the property may not be considered a person responsible for the discharge solely as a result of discovering evidence of a spill, release, or discharge or reporting a suspected spill, release, or discharge…

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However, the Department provided a somewhat confusing explanation of this provision in response to comments:

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…whenever the adopted regulations place a requirement on more than one person, the following applies: MDE may hold all or each person individually liable for the violation; at least one of the persons listed shall meet the requirement; and each person listed shall ensure the requirement is met. (MDE Response to Comments, Number 22)  

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It should be noted that the statutory authority for the new regulation is questionable. For authority the Department cited a series of provisions in the Environment and State government articles. The most relevant is Environment Article §4-410 which mandates notice by anyone who “either actively or passively participates in the discharge or spilling of oil either from a land-based installation … or from any vessel…” It is a significant stretch to claim that a consultant who simply observes a condition is passively participating in the discharge. In addition, the statutory provision is limited to leaks from facilities and vessels. The new regulation will apply to conditions observed, even if there is no local facility or vessel from which a discharge could have occurred. 

In response to comments, MDE stated that the expanded notice requirements “formalize a current Department practice.” Of course, an organizational practice does not provide a statutory authorization. It will also likely be a surprise to many environmental practitioners that MDE considered this to be an existing requirement. 

Despite this weak foundation, it is likely that many consultants will prefer to comply rather than risk being held in violation of the regulation. One interesting limitation is that the new provision is part of the oil control regulations and therefore is limited to petroleum contamination. The detection of other hazardous materials is not governed by the same requirements.

So, what protections can a seller take? The best option may be for the seller to condition access on advance or contemporaneous notice when the consultant makes a discovery that requires notice to MDE. This, at least, allows the owner to be aware that MDE is receiving the information. However, the notice must go to MDE within two hours (if a visual detection) or 48 hours (if via a lab result), so the warning will not provide much time to react. If potential problems are a strong possibility, the seller may want to have their own consultant or environmental attorney on speed dial to handle the Department’s response to the notice.

Another alternative is for the seller to perform their own investigation. This does not negate the obligation to report but the seller could prepare for the potential and have expert guidance available in the event of a positive result.

Obviously, another alternative is to simply never look. In response to comments, MDE indicated that exempting consultants from liability would assure that the new regulation did not discourage due diligence investigations. That is likely correct from the standpoint of the consultants but ignores the very real possibility that potential sellers of property may decide not to take the risk of performing a Phase II. 

However, the owner should recognize that this will mean that the property cannot be sold or financed. No responsible buyer or bank would be interested in a commercial or industrial property that has not been assessed by an environmental professional. At best, the owner has simply kicked the can down the road. At worst, the seller may have a problem that will spread beyond the bounds of the property and present environmental or health concerns. Beyond the obvious moral issues, avoiding the problem may increase exposure to liability.

Like Pandora’s box, the assessment may discover an environmental issue that cannot be pushed out of sight. Preparation for a bad result is, at the end of the day, the only response.

For more information, contact Michael C. Powell.

Michael C. Powell
410-576-4175 •