Buying a Property with a CREC? What You Should Know About Your Ongoing Obligations.

A Controlled Recognized Environmental Condition (CREC) is a relatively new property classification introduced in ASTM’s Standard Practice for Phase I Environmental Site Assessments (known as ASTM E1527-13).  In this standard the CREC is defined as “resulting from a past release of hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority where hazardous substances or petroleum products are allowed to remain in place.”  In other words a CREC is a condition where some hazardous materials have been left to be.

The CREC classification is subject to the implementation of required controls, either institutional (such as property use restrictions, activity and use limitations) and/or engineering (physical) controls. The property owner must agree to maintain these controls throughout its ownership as “Continuing Obligations” (CO).  The purchaser’s Environmental Site Assessment (ESA) that identifies CRECs must also identify the CO that are required of the prospective buyer.

In order to make the sale and development of properties with a CREC attractive to developers, the EPA has created specific requirements through the Brownfield Program for Redevelopments for a Bona Fide Prospective Purchase (BFPP) identity.  BFPP status removes liability for the contamination as long as the buyer maintains the established continuing obligations. This programs allows property transfers and developments to take place with clearly defined and ostensibly minimum risk.

Institutional Controls – What Are They?

Institutional controls are legal or customary (in other words, non-physical) restrictions that can be applied to the use of the property.  The New York State Department of Environmental Conservation has created a list of these, which includes:

• Deed Restrictions may impose a variety of limitations and conditions on the use of property such as future uses of the property, the use of groundwater, or how soils are managed. For example, a property may be prohibited from residential use.

• Site Security includes non-engineering security measures such as security guards. Note that a fence is categorized as an engineering control.

• Local Permits are special permits that outline specific requirements that must be met before an activity can be authorized (i.e. groundwater use, building, etc.).

• Zoning Restrictions can be exercised by local governments to specify land use for certain areas.  For example, a local government could prohibit residential development in an area of contamination.

• Deed Notices are non-enforceable, informational documents filed in public land records that alert anyone searching the records to important information about the property. They might contain Activity and Use Limitations (AUL).

• Public Health Advisory Warnings, which are usually issued by public health agencies (either at the federal, state or local level) provide notice to potential users of land, surface water, ground water, or other natural resources of some existing or impending risk associated with their use.

Implementing Engineering Controls – What are the Options?

Engineering controls are physical elements that isolate hazardous materials for protection of human health and the environment.  They have been developed through the US EPA Brownfields program to be used as part of a cleanup remedy to allow real estate transactions and improvement to take place even with remaining contamination.  The EPA has a list of engineering controls, including:

• Capping in place with concrete, asphalt or clean fill in order to prevent exposure of the contamination to the environment.

• Active or passive depressurization to prevent vapors from migrating from subsurface contamination into buildings.

• Other “stationary” engineering controls include security barriers and fencing, solidification/stabilization (mixing the contaminated material with concrete) and leachate collection systems (draining fluid contaminates offsite for collection.)

• In addition, remedial actions such as ground water pump and treat systems, soil vapor extraction systems, and monitored natural attenuation may continue beyond the change in use or redevelopment of a property. In these cases, long-term stewardship similar to those used with engineering controls will be required and can be incorporated into institutional controls such as environmental covenants.

How a BFPP Might be Applied to a Property Acquisition?

The specific requirements for the BFPP program being applied to the Brownfield program for redevelopment of contaminated properties were developed by the EPA in the early 2000s. At the time I was working with a due diligence firm, where I had a real estate advisory client focused on pension funds.  This particular project was for the acquisition of a regional shopping center in the Southwest known to be on top of a historic plume of Tri-Chloromethane (which was created by an aerospace company about a mile away).

To make a long story short: Being a pension fund the advisory group’s client needed extremely strong evidence that they would not ever be held liable. An EPA representative sent a memo clarifying the basis by which a prospective purchaser could avoid liability.  The memo titled “Interim Guidance Regarding Criteria Landowners Must Meet in Order To Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent landowner Limitations on CERCLA Liability”, included a list of required institutional controls.  This included “compliance with land use restrictions”, and “taking reasonable steps with respect to hazardous substances affecting a landowner’s property”.  No engineering controls were required of the purchaser, but there are 7 pages of required continuing obligations. I can’t be sure but I suspect this may have been one of the earliest BFPP transactions.

What are Continuing Obligations for the Buyer?

During a real estate transaction, the buyer is responsible for all of the Continuing Obligations established as part of the original response action.  These include the Institutional and Engineering controls. ASTM E2901-11 Standard Guide for Activity and Use Limitations is the guidance document for these.

In general, the continuing obligations include taking reasonable care to 1) stop any existing releases, 2) prevent any future releases, 3) prevent any human or natural resource exposure to previously released hazardous materials 4) not dispose after acquisition (moving soil on site is considered disposal) 5) comply with land use restrictions established as part of the original response action (by the original entity that did the cleanup) 6) provide full cooperation, assistance, and access to persons authorized to conduct response actions and 7) cooperate with information requests and provide any notice of discovered releases.

The due diligence on a property with a clean-up history needs careful study as information on continuing obligations may not be readily available.  In order to adequately protect against liability, those involved in the transaction of a property with a CREC are wise to work with a quality consultant who understands all risks and requirements pertinent to the deal.