Burgeoning state regulations, upcoming federal guidance and new environmental auditing standards may make vapor intrusion a significant environmental concern for commercial property owners, buyers, developers and lenders. While this is not a new issue, enhanced scrutiny may place vapor intrusion at the crux of commercial real estate transactions. Fortunately, there are steps counsel can take to prevent it from becoming a major issue.
Vapor intrusion refers to a process in which contaminants in the soil or groundwater beneath a building enter the structure with air that moves from the subsurface through cracks or crevices in the basement or lower floors. Typically, this only happens with volatile chemicals such as those associated with gasoline (i.e., benzene) or dry cleaning (i.e., TCE/PCE). Over time these contaminant vapors can accumulate and increase to what environmental agencies consider hazardous levels, especially in newer, more airtight buildings. Vapor intrusion can be dangerous, and in the most extreme example, houses in Hartford, Ill., have exploded due to gasoline vapor contamination. In a more typical setting, however, it is uncertain whether vapor levels present more than a theoretical risk.
New and existing regulations
Since 1998, most state environmental agencies have generally considered buildings to present a physical barrier to exposure from contamination and have approved numerous remediations that left contamination in place under buildings. In such instances, state agencies have issued many No Further Remediation (NFR) letters. But the new concern regarding vapor intrusion may undercut the validity of those NFRs. Renewed concern has led states, such as New York, to reopen sites with existing NFRs to determine if the prior remedial work was sufficient to protect against vapor intrusion. While the Illinois Environmental Protection Agency (IEPA) has said that it will not revoke NFRs, and even if addressing vapor intrusion becomes a regulatory requirement, there is no guarantee that they will not do just that.
Numerous state agencies are proposing new vapor intrusion regulations or guidance documents. For example, after years of wrangling with stakeholders in the business and environmental community and the EPA, the Illinois Pollution Control Board revised its remediation regulations to include vapor intrusion as an additional pathway to be addressed to obtain an NFR. The revised rules describe a number of ways the pathway can be eliminated or considered remediated, some of which would allow contamination to remain in place but require commitments not to construct in the area of the contamination. The EPA is expected to issues guidance on vapor intrusion this winter which may complicate implementation of existing regulations and guidance.
Implications for commercial real estate transactions
While the regulatory landscape remains unsettled, the impact it will have on commercial real estate transactions is even more uncertain. For example, the IEPA has issued many NFRs in settings where there is contamination beneath buildings; however, these NFRs do not address vapor intrusion, thereby potentially exposing future owners to liability. In addition, recent standards for environmental audits allow auditors to identify the potential for vapor intrusion based on very little evidence, resulting in far more site assessments involving physical sampling for vapor intrusion, which adds to the complexity and expense of the assessments.
If the sites reflect vapor intrusion as a potential concern, buyers and their lenders will demand further investigation and require remediation of properties. Sellers will encounter the increased costs of sampling and remediation, as well as possible lawsuits from tenants or employees alleging harm from vapors. Development plans may also need to be reworked if a building cannot be located above contamination or requires air handling systems to reduce the impact. Lenders may require that new vapor intrusion-specific NFRs be obtained before closing, or insist upon additional collateral or guarantees. In general, these issues add time and expense and require a sound strategy in order to finalize a deal.
Closing the deal
It is important for owners, buyers, developers and in-house counsel to explore all options to protect themselves from environmental liability, regardless of whether an NFR covering vapor intrusion can be obtained. For example, buyers should conduct due diligence in compliance with all appropriate inquiry rules to identify potential issues and to obtain “innocent purchaser” or “bona fide purchaser” protections from liability as an owner of a contaminated site. They should also require that the seller indemnify them, and back up that indemnity via escrow funds, hold backs, letters of credit, bonds or environmental insurance policies. Conversely, sellers should craft limited indemnities and explore the most cost-effective financial assurance mechanisms that will satisfy buyers and lenders.
Despite the regulatory uncertainty, myriad legal and technical issues are already becoming the new reality in commercial real estate transactions. In this context, it is critical for counsel to be well informed about changing vapor intrusion regulations in closing the next deal.