Effective July 1, 2016, buyers of industrial and commercial properties in Kansas may qualify for a Certificate of Environmental Liability Release (CELR) under the state’s new Contaminated Property Redevelopment Act. This liability release for pre-existing contamination is important for prospective purchasers of industrial and commercial properties by helping to facilitate those transactions and allow the buyer to avoid state cleanup responsibility. But not only buyers benefit, as sellers can also demonstrate a framework that allows the transaction to proceed and maximize the property value without the buyer or seller taking on unnecessary risk if the proper steps to obtain the CELR are followed.
Historically, prospective purchasers seeking to avoid cleanup liability have sought to qualify for one of the three separate CERCLA All Appropriate Inquiries defenses (e.g., the Innocent Landowner, Contiguous Property Owner, and the Bona Fide Prospective Purchaser) by conducting a Phase I Environmental Site Assessment. Because, however, these AAI defenses are self-implementing, the lack of an affirmative agency approval injects uncertainty which has limited their flexibility and utility. And while “comfort letters” – informal letters from the Kansas Department of Health and Environment (KDHE) to the prospective buyer in connection with the scope of cleanup liability – have been a common tool utilized to help close the uncertainty gap, the new CELR mechanism serves to formalize this process and provide assurance to prospective purchaser of the protections they are actually receiving.
In July 2016, KDHE issued guidance regarding how a buyer can obtain the liability release and limitations associated therewith. Specific requirements include for example:
- the buyer is not the party responsible for the contamination nor has caused or exacerbated the contamination on the property;
- the buyer has not provided indemnification or release of environmental liability to any other party regarding contamination at the property; and
- certain sites are not eligible (i.e., radon, lead-based paint, asbestos, funding eligibility under the state tank or dry-cleaner program, a site listed or proposed under CERCLA and the National Priorities List).
If the property is eligible, the buyer must agree to various future obligations, such as providing access to KDHE, not exacerbating any of the contamination, and related institutional controls including notice to future owners. One of the benefits of the program is that the Act specifies that KDHE will make a determination and issue the release within 15 days of a complete CELR application submittal. Bear in mind, however, that although KDHE and EPA have a Memorandum of Agreement in place regarding state oversight and assistance on certain contaminated sites in Kansas, the CELR does not provide an explicit release to federal cleanup liability.
Buyers and sellers of industrial and commercial properties should carefully consider the proper role of adequate environmental due diligence and the use of the new CELR to mitigate and manage environmental risk.