By Jones Osborn II

By now, everyone is well aware of the enormous liabilities that can result from owning or operating contaminated real property. It doesn't matter who caused the problem--if you owned or operated the property while it was in a contaminated condition, you can be fully liable for the cost of the clean-up. Lessees can also be liable for the clean-up of property they occupy as a tenant, unless they are physically excluded from the area of the contamination. This is especially true of long-term lessees.

Clean-up costs can easily run to the tens or hundreds of thousands of dollars, and sometimes into the millions. Don't think the government won't pursue you if you're not the guilty party--because it will. The government is not interested in fairness, it is interested in getting the money from somebody--anybody--to clean up the contamination.

There is a defense to this potential liability that many purchasers of real property have relied upon. It is called the "innocent purchaser" defense, and it provides that if a purchaser is "innocent" he isn't liable for contamination he didn't cause. To be innocent under the law, it's not enough to be innocent of causing the contamination. One must also have made a reasonable investigation of the property before purchasing it, and the investigation must have indicated that the property was clean. This, of course, is one of the reasons everyone has a phase one environmental assessment done when purchasing property.

So what's wrong with this defense? Plenty.

First of all, it only applies as a defense against the Federal Superfund law and the State counterpart (the Water Quality Assurance Revolving Fund). There are many other laws where the "innocent purchaser" defense does not apply at all, and many of these laws can impose liabilities as great as Superfund. The innocent purchaser defense is also no defense against tort claims by private parties.

Second, even if you do establish a good innocent purchaser defense, it cannot be used by others once the problem becomes known. Therefore, you will probably never be able to sell the property or borrow money against it.

Third, the defense is limited. For example, if your investigation turned up only a small trace of a contaminant which could be easily removed, and it later turns out there was a lot more that was missed, the defense is of no benefit.

Fourth, if the company doing the environmental assessment misses something it should have found, you lose your innocent purchaser status. In other words, the negligence of the company performing the assessment can be attributed to the owner.

Arizona has passed a law expanding this defense under certain circumstances. This law provides that an owner or lessee of property is not liable under the Arizona Superfund law if underground contamination seeps under his property from adjacent property, as long as he had no part in causing the contamination. However, this law affords no protection from federal statutes or from many types of state claims and claims by private persons. As a result, while this expansion of the defense is helpful, it is of limited usefulness.

Conclusion. What this means is that a buyer or lessee should never assume he is protected just because his environmental assessment comes up clean. He can still have catastrophic legal exposure if contamination is later found on or under the property. To minimize that exposure the buyer or lessee must have a thorough phase one assessment done by a competent firm, and must follow up with a phase two assessment if there are any indications at all of potential contamination. If there is a problem, have the seller cure it before you buy or lease the property. Even then, there is always the risk of liability if contamination should later be discovered.