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As environmental-use restrictions have become more popular in recent years, it has become more common for sellers and buyers to need to deal with them in the context of transactions. Increasingly, buyers need to decide whether they can live with a use restriction before proceeding with a purchase. While environmental practitioners are quite familiar with such restrictions, clients frequently are not. At one end of the spectrum, the buyer’s property redevelopment plans may be part and parcel of a remediation plan for the property that includes a use restriction and the new development to be built by the buyer will serve as the control measure required by the restriction. At the other end of the spectrum, the buyer may only become aware during due diligence, or even after closing, of a restriction that prevents or significantly limits planned development of the property. Wherever the property is situated along this spectrum, it is critical that the buyer evaluate in detail how the restriction will affect their plans for the property. Use restrictions reflect the exposure reduction theory of environmental remediation. If exposure to contamination is eliminated or sufficiently reduced, according to this theory, residual contamination can remain in place and need not be actively remediated, even if the level of remaining contamination exceeds otherwise applicable remediation standards. Relying on a use restriction, rather than conducting remediation to reduce the level of contamination to attain an applicable remediation standard, typically has significant cost advantages for the party performing the remediation. As a result, many sites are remediated relying on use restrictions, and thereafter redeveloped, that otherwise would not be remediated due to the high cost of doing so. The most common examples of use restrictions are a prohibition on the use of groundwater, and a requirement for an impermeable cap over soil contamination, together with a prohibition on disturbance of the subsurface. At many properties these use restrictions are easy to implement, and do not significantly adversely affect development of the property or the property’s value. In urban areas public water is likely to be available so that there is no need to use groundwater in any event. The fact that the property sits on top of contaminated groundwater makes little difference to its use or value. Buildings, paving for parking lots and clean topsoil with landscaping, all common elements of property redevelopment, serve nicely as caps over soil contamination. Caps become problematic for the developer, however, if large-scale subsurface work is required in the very area where the residual soil contamination is located. Even where development plans fit well with the use restriction, the buyer needs to be aware that it will have the burden of explaining the need for the use restriction to lenders and future purchasers and is likely to be required to manage the property in a way that is consistent with the use restriction for as long as they own the property. For instance, whenever excavation of the subsurface occurs the buyer will need to either verify that the excavation is outside the area of residual soil contamination or manage any excavated soil consistent with the type and level of contamination it contains and re-install the affected area of the cap. State Requirements Vary Over the last 10 to 20 years most states with environmental remediation programs, including Pennsylvania and New Jersey, have come to accept exposure elimination as a remediation principle. Most specifically provide for “site-specific” cleanups or “risk-based” cleanups as an alternative to cleanups that achieve listed soil and groundwater remediation standards. Nearly all such state programs require that a plan for “site-specific” or “risk-based” cleanup be approved prior to implementation. States vary as to the details of implementation, however. In Pennsylvania, while the cleanup plan must be approved and the use restriction must be described in the cleanup plan, the actual language of the restriction need not be approved nor must recording of the restriction with the deed for the property be verified by the state. In contrast, New Jersey provides form deed restrictions, requires approval of the documents and recording with the deed and submission of periodic maintenance certificates thereafter. As an indication of the popularity of use restriction, as of September 2005 a total of 424 cleanup plans submitted to Pennsylvania pursuant to its voluntary cleanup program at least in part relied on use restrictions. Evaluate a Cleanup Despite the increasing popularity of use restrictions, many prospective purchasers assume that once they determine that a cleanup has been completed and approved, no further due diligence is necessary. On many occasions I have been told by a prospective buyer (who in many instances no doubt has been told this by their seller) something to the effect that the seller has obtained a no further action letter, so there are no environmental issues to be addressed. Unfortunately, it is not that simple. There, of course, is no way to know how often buyers proceed on this basis without consulting with environmental counsel. It is critical that the buyer evaluate how the cleanup, in particular the cleanup standard attained, any risk or exposure assumptions used and any use restrictions the cleanup relied on, will affect their planned use of the property. Otherwise the buyer may discover that the liability protection obtained based on the cleanup will not apply to the property following redevelopment or that the use restrictions relied on will interfere with the buyer’s intended redevelopment. For example, if the cleanup was performed to a nonresidential standard and the buyer is contemplating residential development, the buyer will need to conduct additional cleanup, probably at its cost, and will not have the benefit of the liability protection obtained by the seller unless it does so. Similarly, a use restriction may prevent the buyer’s plans to construct a playground, or storm water retention basin or dig a basement where a cap and residual contamination are located and excavation is prohibited, again unless additional cleanup is performed. On the other hand, if the seller and buyer have coordinated their activities, residual soil contamination will only be located in areas where the buyer plans to build slab-on-grade foundations or parking lots. Of course, in order for a buyer to account for a use restriction in its development plans, it must be aware that the use restriction is in place or is planned. It should be rare that a seller fails to inform a buyer of a use restriction the seller itself has instituted or will institute. It is not so difficult, however, to imagine a buyer who is several links down the ownership chain from the other who instituted the restriction purchasing property without knowledge of the restriction. Recording of Restrictions For this reason, use restrictions typically are included in the deed for the property. Certainly it is to the advantage of the owner who instituted the use restriction that compliance with the restriction be maintained by subsequent owners. To the extent the restriction is violated the liability protection the owner obtained based in part on the use restriction will be jeopardized and the owner will be vulnerable to remediation claims. Nevertheless, it is not uncommon for use restrictions contained in an approved cleanup plan not to make their way into the deed. Typically this occurs simply due to lack of follow-through – the people working on the cleanup plan don’t tell the people preparing the deed. As referenced above, New Jersey has addressed this problem by requiring that the Department of Environmental Protection approve the actual deed restriction as part of the cleanup plan. Many other states, including Pennsylvania, do not have such a requirement. In those states there is a real risk of buyers unwittingly acquiring property where a cleanup relying on a use restriction had been conducted and thereafter conducting activities there resulting in exposure to residual contamination. Moreover, to the extent there is uncertainty regarding whether use restrictions will be enforced property, owners may be reluctant to perform a cleanup based on a use restriction and, given the alternative of a much more expensive cleanup, may therefore decide not to perform a cleanup at all. Obviously the scenario described above would be a bad situation for all concerned, including the public. It is also easily avoidable. The National Conference of Commissioners on Uniform State Laws has drafted a Uniform Environmental Covenants Act, which provides a framework for implementation and enforcement of environmental use restrictions and eliminates any lingering uncertainty as to their enforceability. A version of the Uniform Environmental Covenants has been introduced in the Pennsylvania state legislature. It would require that Pennsylvania Department of Environmental Protection (PADEP) approve any restriction that is relied on as part of a remediation plan and give PADEP authority to enforce restrictions. It would also require PADEP to establish and maintain an environmental covenant registry. Ensuring that environmental use restrictions are disclosed and enforced should encourage private parties to rely on them still more in the future and thereby encourage more cleanups. KERMIT L. RADER is a partner in Wolf Block Shorr & Solis-Cohen’s environmental and land use practice group. His practice focuses on the environmental aspects of real estate and corporate transactions, regulatory compliance counseling and remediation issues.

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