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Federal Clean Up Relief for Small Businesses

April 2002

On January 11, 2002, President Bush signed new brownfield legislation which will provide important benefits to small businesses. These significant changes include limiting liability for small businesses under the federal superfund law as well as protecting innocent owners of contaminated real estate from clean up liability. These changes represent some of the most significant changes for the liability provision of the federal superfund law since its enactment in 1980.

Small Business Liability Relief
The new federal legislation provides liability relief for small businesses in the following areas. First, there is a new exemption for companies that generate small amounts of waste which were sent to landfills before April 1, 2001. Companies that generate or transport less than 110 gallons of liquid waste or less than 200 pounds of solid waste, which are delivered to a landfill, are generally exempt from clean up liability under superfund law.

Secondly, a new municipal solid waste exemption provides protection for small business that generate municipal solid waste. In general, any of the following who generate waste which is comparable to household waste and collected as part of a normal municipal solid waste collection service is exempt from clean up costs at a landfill:

  • An owner, operator, or leasee of residential property;
  • A business entity that employed on the average not more than 100 full-time employees during the past three years and is a small business concern within the meaning of the Small Business Act; or
  • A tax exempt entity under §501(c)(3) of the Internal Revenue Code which employs not more than 100 employees.

Finally, the Environmental Protection Agency is specifically authorized to reduce expedited settlement amounts for companies that are otherwise responsible for clean up liability based upon a limited ability to pay.

Real Estate Ownership Liability Limitations
Under clean up laws, a significant concern for owners of real estate is that they can be liable for existing contamination on their property as a result of ownership whether or not they caused the contamination. Certain new safe harbor protections are provided in the new federal legislation recently signed by President Bush to limit this ownership liability. First, there is a new exemption for owners of contaminated property where the source of contamination is located adjacent to their properties. Under this new exemption provisions, these adjacent property owners have an exemption from liability if they take reasonable steps to prevent on-going releases after the contamination is discovered. In order to take advantage of this exemption, the owner of an adjacent contaminated property must have conducted an appropriate inquiry into the history of the site, did not discover contamination, and had no reason to know that the property was contaminated at the time they acquired the property.

In the event the owner fails to meet this due diligence standard, the owner can nonetheless qualify for a more limited contiguous contaminated property exemption if it qualifies as a "bona fide prospective purchaser" or BPP. In order to qualify for the BPP exemption, contamination at the property must have occurred before the person acquired the property. In addition, the BPP must have made all appropriate inquiry into the previous ownership of the property. If contamination is discovered by such inquiry, the BPP must notify the appropriate agency of its discovery and takes reasonable precaution to prevent future releases.

Although there is an exemption for a BPP, the ownership interest in the contaminated property is subject to a lien in favor of the government to the extent of unreimbursed clean up costs. However, the government lien in favor the government is only to the extent that the fair market value of the property has been enhanced as a result of clean up costs expended by the government at the contaminated property.

Federal Brownfield Funding
There are also significant increases in Federal funding available for brownfield sites. The new funding grant program will be in excess of $250 million. Generally speaking, grants will be available to eligible entities (primarily local units of government) for assessment activities (generally not to exceed $200,000) and remediation costs (not to exceed $1 million) per eligible site. An eligible local unit of government that receives a grant can use the grant to provide assistance for the remediation of brownfield sites in the forms of loans to owners and site developers.

In addition, recipients of grants or loans may use a portion of the grant or loan to purchase environmental insurance for assessment or remediation of sites. This is an important new development given the emergence of environmental remediation insurance as a liability hedging device that is becoming more prevalent in real estate transactions. EPA is required to establish criteria for ranking grants by using ten factors in determining priority ranking for grant applicants. Given the significant budget deficits in Wisconsin, it is likely that these federal grants will become important new tools to enhance brownfield development in the state of Wisconsin.

The new federal legislation is over 30 pages long, and contains many other technical provisions. The full legislation should be reviewed to consider application to any future transactions. In any event, this legislation will provide some important new liability enhancements and should be considered by small business owners and real estate developers in Wisconsin as part of their strategy for managing environmental risks.

Arthur J. Harrington is a lawyer at the law firm of Godfrey & Kahn where he concentrates his practice in environmental and energy matters.

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