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Morris Manning & Martin, LLP

Environmental Concerns Associated With Financing & Owning Commercial Properties

Over the last fourteen years, a myriad of environmental laws have been passed which dramatically impact the potential liability for owners of and lenders on commercial properties. These laws first appeared within the federal framework with the passage of RCRA (the Resource Conservation and Recovery Act) in 1976 and CERCLA (the Comprehensive Environmental Response Compensation and Liability Act) in 1980. These laws, particularly CERCLA, established on the federal level a scheme of strict liability (liability without fault) which could be imposed on, among others, owners and operators of contaminated properties. Suddenly, a property owner faced virtually unlimited liability for costs associated with the cleanup of contamination caused by a tenant on his property. Similarly, while CERCLA did include a secured creditor exemption, subsequent court decisions (in particular the Fleet Factors decision in Georgia) threatened to include within this liability framework lenders who pursuant to remedies under their loan documents sought to preserve the value of or realize on contaminated collateral.

With the passage of time, individual states entered the environmental arena through passage of their own laws and regulations. In Georgia, such laws included among others the Georgia Underground Storage Tank Act and the recent Hazardous Site Response Act (HSRA), Georgia's version of CERCLA. The net effect of these federal and state laws is the creation of an environmental minefield through which owners of and lenders on commercial property must traverse. The slightest misstep can result in exposure which dramatically exceeds the value of the collateral. Similarly, the owner or lender is frequently faced with two diametrically opposed positions: (i) maintain the value of the property or realize on this value; and (ii) avoid taking actions which create liability under the environmental laws described above.

Prudent practices do exist whereby a sophisticated owner or lender may preserve the value of his property or collateral, yet avoid or minimize the exposure described above. These practices, however, do result in additional costs associated with the property, both at the time the transaction occurs and on an ongoing basis thereafter through monitoring. All owners and lenders should be familiar with these procedures. However, to understand fully the importance of these practices, it is first necessary to examine briefly the most significant environmental laws applicable to a property owners and lenders in Georgia and the ramifications of falling within the scope of their impact.

The two principal federal statutes which regulate hazardous substances and hazardous wastes are CERCLA and RCRA. CERCLA imposes strict liability upon defined categories of potentially responsible parties. Such parties include:

  1. the present owner and operator of a facility from which there has been a release of a hazardous substance (whether or not they caused the release);
  2. the owner and operator of the facility at the time of disposal or release;
  3. anyone who arranges for the disposal or treatment of hazardous substances or who arranges with a transporter for disposal of hazardous substances; and
  4. an owner of a facility with knowledge of a spill or release of hazardous substances who sells or transfers without disclosing.


Significantly, CERCLA does not regulate releases of petroleum products.

RCRA, known as the "cradle to grave" statute, regulates the generation, handling, storage, treatment, transportation and disposal of the category of substances identified as hazardous wastes. RCRA requires waste generators to determine whether the waste they generate is hazardous and, if so, to manage it in accordance with the regulations. Generators must track the hazardous waste by use of a manifest system from the time it leaves the site or facility until it reaches the ultimate disposal site. Hazardous wastes can only be disposed of at properly permitted treatment or disposal facilities. Underground storage tanks are also regulated under RCRA along with petroleum products. 

A "secured creditor" exemption is included within CERCLA and purports to immunize from liability lenders who otherwise would be liable as "operators" or "owners" due to their efforts to realize on their collateral. The exemption applies to "any person who, without participating in the management of a facility, holds indicia of ownership primarily to protect his security interest in the facility." Immediately after its passage, questions began to arise regarding the scope of the secured creditor exemption, in particular the level of involvement which a lender could have with a borrower without incurring liability as an "operator." Cases prior to Fleet Factors established that a lender's involvement in financially related issues, such as monitoring the loan, inspecting the collateral, refinancing the loan, or providing limited financial advice, would not void the exemption. The courts consistently held that a lender would not be liable unless and until: (i) the secured creditor foreclosed on contaminated property; or (ii) the creditor has become active in the day-to-day management of the borrower's facility.

The Fleet Factors decision changed that analysis. The court stated:

  • . . a secured creditor may incur . . . liability, without being an operator, by participating in the financial management of a facility to a degree indicating a capacity to influence the corporation's treatment of hazardous wastes. It is not necessary for the secured creditor actually to involve itself in the day-to-day operations of the facility in order to be liable . . . Nor is it necessary for the secured creditor to participate in management decisions related to hazardous wastes. Rather, a secured creditor will be liable if its involvement with the management of the facility is sufficiently broad to support the inference that it could affect hazardous waste disposal decisions (emphasis added)


United States v. Fleet Factors Corporation, 901 F.2d 1550 (11th Cir. 1990).

Suddenly, as a result of Fleet Factors, lenders legitimately feared that the mere monitoring of a borrower's financial condition or engaging in workout discussions with a borrower might trigger CERCLA liability. While subsequent decisions in other circuits held that liability was triggered not by what rights a lender might have under his loan documents, but rather what rights a lender actually exercised, even in that respect the lender's hands were significantly tied with regard to efforts to preserve and realize upon contaminated collateral.

In 1992, in response to Fleet Factors, the Environmental Protection Agency (EPA) promulgated a rule which sought to specify the range of permitted activities lenders could undertake and still qualify for CERCLA's "secured creditor" exemption. The rules allowed lenders, without incurring CERCLA liability, to foreclose on contaminated properties, to police and service loans, to engage in workout discussions and to otherwise work with borrowers with contaminated collateral. Unfortunately, in February of this year the United States Court of Appeals in the District of Columbia Circuit invalidated the EPA rule. Fleet Factors thus remains alive and well in Georgia as the standard under which a lender's actions will be judged in determining liability for contaminated properties.

State laws also create potential liability for environmental concerns. Georgia's Underground Storage Tank Act imposes upon "owners and operators of UST systems" compliance obligations (including installation of leak detection systems and removal of tanks taken out of service) and liability for cleanup costs associated with releases from such systems. The statute is significant in that it provides the primary basis for liability attached to the release of petroleum products.

Perhaps most far-reaching in terms of the implications for owners and lenders is the new Georgia Hazardous Site Response Act ("HSRA"), O.C.G.A. § 12-8-90 et. seq. HSRA and its accompanying rules dramatically alters the method in which Georgia regulatory agencies deal with environmentally contaminated properties. In addition to incorporating the "strict liability" framework imposed upon "owners" and "operators" under CERCLA, HSRA also imposes certain notification and disclosure requirements, including:

  1. A requirement to notify the EPD of certain releases of hazardous wastes, substances or constituents (as those terms are defined in HSRA);
  2. A provision for listing on a Hazardous Site Inventory all properties where a release of a "reportable quantity" has occurred; and
  3. A requirement that, if corrective action is required at a property listed on the inventory, the owner of that property must insert notations on any property transfer documents (including deeds and leases) stating that the property contains "hazardous waste, hazardous constituents or hazardous substances regulated under state law" and file in the county real property records an affidavit containing the same statement.


The impact of these requirements on a property owner is dramatic. The notation requirement, once inserted in a deed or other transfer document, becomes part of the chain of title for that property, as does the affidavit. Similarly, the Hazardous Site Inventory is listed in the real property records of each county. Accordingly, these requirements, if applicable to a property, permanently and irrevocably impair the market value of that property. 

Inclusion on the Hazardous Sites Inventory is not limited solely to large industrial sites. A number of strip shopping centers are listed on the current inventory due to releases by drycleaners of drycleaning solvent into the soil and groundwater. Also, even if no corrective action is required by the Georgia Environmental Protection Division ("EPD"), the property will not be removed from the Hazardous Sites Inventory unless remediation is accomplished to specified levels set forth in the regulations. In some situations, cleanup is required to levels approaching background (naturally occurring), which can be cost prohibitive. Therefore, the property owner must determine whether the cleanup costs necessary to accomplish removal of the site from the inventory will exceed the impact on the market value of the property caused by inclusion on the Hazardous Sites Inventory.

As is evidenced by the statutes and legislation described above (which are not exclusive), the current environmental laws create the potential for an owner or lender to incur significant liability associated with contamination of properties. However, as noted earlier, there are certain standard practices which can minimize the overall level of exposure while allowing the owner to preserve the value of the property and the lender similarly to maintain and realize on the value of its collateral. Those practices include:

  1. Insert environmental compliance and hazardous waste indemnification provisions within any lease or loan document. One should ensure such provisions should survive the termination of the lease or the satisfaction of the loan.
  2. Include "permitted use" provisions within leases and loan documents which allow for the use of hazardous substances only if approved by the lender or landlord and then only on certain conditions.
  3. Ensure that the lender or owner is provided with copies of all general liability policies maintained by the tenant or borrower. Frequently, particularly with older policies, the policies do not effectively exclude losses due to environmental contamination and thus may provide a source for recovery of damages caused by such contamination even if the tenant or borrower is insolvent.
  4. With regard to any tenant who is using approved hazardous substances on the property, the owner should ensure proper permits are obtained and proper disposal practices are pursued by the tenant of such hazardous substances by obtaining copies of all manifest or other documents evidencing proper disposal practices.
  5. Provide in the lease and loan documents that improper and unauthorized release of hazardous substances constitute an immediate default of the loan or termination of the lease. This allow for a lender or owner, where a borrower or tenant is engaged in improper disposal practices, to obtain possession of the property on a more expedited basis and thereby halt disposal practices.
  6. Exercise discretion with regard to leases or loans with parties who employ hazardous substances within their operations. Ensure that such tenants or borrowers have detailed records of onsite contaminants (called Material Data Safety Sheets) and have a record of proper disposal practices. Also ensure that the potential impact in the event of a release is minimal (for example, avoid allowing use of hazardous substances on premises which border residential areas or surface waters when cleanup standards in the event of a release are much more stringent).
  7. Never acquire a commercial property without a thorough environmental assessment to determine whether contamination exists on the property.
  8. While a lender should not allow de minimus contamination to override legitimate business opportunities associated with realizing on the collateral, the lender should ensure that it has accurately quantified the exposure associated with he contamination prior to exercising remedies which may result in the lender being liable. If a lender knows or expects that collateral is contaminated, that lender should obtain, prior to foreclosure, an extensive assessment of the extent of the contamination and the likely cleanup costs associated with such contamination including third parties who may be affected. This allows the lender to make a reasonable business decision as to whether the value of the collateral exceeds the costs and liability associated with the potential environmental liability.
  9. Any owner should closely monitor the ongoing practices of a tenant using hazardous substances. Yearly compliance audits are recommended. Should a release occur, that owner will be potentially liable and thus there is no incentive for "ignorance" in this regard.
  10. Conversely, a dilemma exists as to whether an owner should on his own initiative conduct subsurface testing to determine whether his property is contaminated. No requirement exists under the Georgia HSRA provisions to affirmatively conduct testing of the property. Other than to stop the continued spread of the contaminant plume, no real incentive exists to perform such testing since it only reveals damage which has already occurred. If testing is performed and contamination is discovered, the notice, inventory and deed notation provisions may be invoked.


Implementation of these practices can help minimize the risks with contaminated or potentially contaminated properties.