Unit 21-6 DEALING WITH ENVIRONMENTAL ISSUES
Learning Objective: Explain the responsibilities and duties of real estate professionals regarding environmental issues.
Although federal and state laws have defined many of the liabilities involved in environmental issues, common law (case law based on judicial precedent) is often used for further interpretation. The real estate professional and all others involved in a real estate transaction must be aware of both actual and potential liability.
Sellers often carry the most exposure to liability. Purchasers may be held liable even if they didn’t cause the contamination. Lenders may end up owning worthless assets if owners default on loans rather than undertake expensive cleanup efforts. Real estate professionals could be held liable for improper disclosure; therefore, it is necessary to be aware of the potential environmental risks from neighboring properties, such as gas stations, manufacturing plants, or even funeral homes.
Additional exposure is created for individuals involved in other aspects of real estate transactions. For example, real estate appraisers must identify and adjust for environmental problems. Adjustments to market value typically reflect the cleanup cost plus a factor for the degree of panic and suspicion that exists in the current market. Although the sales price can be affected dramatically, the underlying market value might possibly remain relatively equal to others in the neighborhood. The real estate appraiser’s greatest responsibility is to the lender. Although the lender may be protected under certain conditions by virtue of the 1986 amendments to the Superfund act, the lender must be aware of any potential problems and may require additional environmental reports.
Insurance carriers also might be affected. Mortgage insurance companies protect lenders’ mortgage investments and might be required to carry part of the ultimate responsibility in cases of loss. More important, a hazard insurance carrier might be directly responsible for damages if such coverage was included in the initial policy.
A real estate professional can avoid liability for environmental issues by
- becoming familiar with common environmental problems in the licensee’s area,
- looking for signs of environmental contamination,
- suggesting (and including as a contingency) an environmental audit if the licensee suspects contamination, and
- giving no advice on environmental issues.
Discovery of environmental hazards
Real estate professionals are not expected to have the technical expertise necessary to discover the presence of environmental hazards. Nevertheless, they are presumed by the public to have special knowledge about real estate, so real estate professionals must be aware of possible hazards and where to seek professional help.
The most appropriate people on whom a real estate professional can rely for sound environmental information are scientific or technical experts. Environmental auditors (or environmental assessors) are scientific or technical experts who can provide the most comprehensive studies. Developers and purchasers of commercial and industrial properties (and even purchasers of some agricultural and residential properties) often rely on an environmental assessment that includes the property’s history of use, a current-use review, and an investigation into the existence of reported or known contamination sources in the subject area that may affect the property. Testing of soil, water, air, and structures can be conducted, if warranted.
Not only do environmental experts detect environmental problems, they can usually offer guidance about how best to resolve the conditions. Although an environmental audit or assessment may occur at any stage in a transaction, they are most frequently a contingency that must be satisfied before closing.
IN PRACTICE
An environmental assessment and accompanying tests conducted by an environmental consultant can take time. The real estate professional should be aware of the time required and encourage the prospective property buyer to contact the environmental consultant as soon as it is known that such tests are needed, either before an offer to purchase is made or as a contingency in the offer. In some cases, the need for such an assessment may be enough to convince a prospective buyer to avoid the property entirely.
Environmental site assessments
An is often performed on a property to show that due care was exercised in determining whether any environmental impairments exist. The assessment can help prevent parties from becoming involved in contaminated property and work as a defense to liability. It is often requested by a lending institution, developer, or a potential buyer. The assessment is commonly performed in phases, such as Phase 1 or Phase 2. A Phase 1 ESA is requested first to determine whether any potential environmental problems exist at or near the subject property that may cause impairment. A Phase 2 ESA includes soil, water, and other testing, and is performed if warranted. There are no federal regulations that define what an environmental assessment must include, but the American Society for Testing and Materials (ASTM), an international organization, has established standards that have been adopted by many states. Go to www.astm.org for more information.
Environmental impact statements
A federally funded project requires that an be performed. The statement details the impact the project will have on the environment. It can include information about air quality, noise, public health and safety, energy consumption, population density, wildlife, vegetation, and the need for sewer and water facilities. Increasingly, these statements are also being required for private development.
Disclosure of environmental hazards
Most state laws address the issue of disclosure of known material facts regarding a residential property of one to four units. In some states, real estate professionals may be liable if they should have known of a condition, even if the seller neglected to make the disclosure. Very few states require disclosure of environmental issues with commercial and industrial property. Real estate professionals specializing in these properties should emphasize to prospective buyers the importance of professional environmental audits in the absence of required disclosures.
