Vapor Intrusion Standard Lessens Liability Issues

MBA (5/2/2008 ) Murray, Michael
A new vapor intrusion standard will likely provide lenders with better environmental due diligence procedures on potentially contaminated properties and properties that once received a clean slate.

Industry analysts said prior to ASTM International's approval of ASTM E 2600-08, the “Standard Practice for Assessment of Vapor Intrusion into Structures Involved in Real Estate Transactions,” approved on March 1, environmental professionals had no consistent method to efficiently screen properties in different states for vapor intrusion conditions and avoid situations that could put individuals at risk.

The ASTM standard appeared when state officials became concerned that some environmental sites were closed—meaning that no further remediation was necessary—only to realize that there was an ongoing source of contamination possible through inhalation.

Vapor intrusion can be on any commercial real estate property if there is a source and a means of entry into the property. In the past few years, environmental professionals determined that contamination sources, including groundwater, could produce vapors that would migrate through soil up to the surface and into structures.

"It may have been cleaned up to levels for safe drinking water or soil, but the vapors actually created problems that, a lot of times, were not considered when people were doing clean up," said Derek Ezovski, managing director at Environmental Data Resources Inc., Milford, Conn.

Some of those "volatile chemicals" near buildings, including petroleum and hydrocarbons are typically present at gas stations and dry cleaners, Ezovski added.

“Those are the two most common culprits when it comes to vapor intrusion,” he said.

The screening for vapor intrusion could lead to a comprehensive investigation—possibly costing thousands of dollars—or mitigation through a protective and more cost-effective “passive vapor migration system” or implementation of a “vapor barrier.”

“Depending on what it is and where it is, it really does run the whole spectrum,” Ezovski said. “Obviously, if it is a real bad situation, there are different levels of clean up.”

For lenders, most vapor intrusion problems would likely arise prior to a loan closing rather than post closing, particularly because of more stringent environmental laws passed in the last 20 years, said Bernard Brown, president of Insurance Advisors LLC, Stamford, Conn.

"Did they know about the source of the potential vapor and take steps to mitigate it or not? That's the real critical point—the origination," Brown said.

Abbi Cohen, partner at the Philadelphia law office of Dechert LLP, said vapor intrusion can affect lenders through liability, collateral damage and reputational risk. She said ASTM E2600-08 is an attempt to provide a "commercially reasonable standard to investigate and potentially mitigate vapor intrusion."

"Lenders have broad statutory liability protection with respect to the Federal Superfund statute and most state superfund statutes,” Cohen said. "If we are talking about contamination on a property from a release of hazardous substances—even contamination that can result in vapor intrusion—arguably lenders who manage their conduct in compliance with such lender liability protections can be insulated from Superfund liability for such releases."

"The issues are similar to other environmental issues," Ezovski said. "The lender only has liability if they own the property or if they get, somehow, actively involved in the management of the property. It typically becomes a bigger issue, much like other due diligence, where it could create a condition on the property that would make the property worthless or potentially create an issue for the borrower. If [an owner] had an environmental issue that they had to spend money on, that could impact their ability to repay the loan."

For property owners, "most general liability policies exclude any type of environmental risk," Brown said. "A number of the [insurance] policies will include liability for [property owners] when tenants sue the owner because of vapor intrusion," he added.

If the vapor intrusion came from a third party location, it is likely that the tenants could sue the third-party owner without liability insurance and still have a settlement, Brown said.

However, whether outside of the property or not, vapor intrusion could also incur negative reputational effects from a lender’s involvement in real estate transactions with environmental issues, particularly properties perceived to have risks to human health and are not minimized through statutory protections, Cohen noted.

"If contamination does give rise to a vapor intrusion concern with respect to structures on the property, landlords and/ or property owners also may have to be concerned about a potential health risk that they may not have previously considered," Cohen said. "Although [landlords or property owners] may not be responsible for the contamination giving rise to the vapor intrusion issue and may even have a claim against the responsible party, as a practical matter the landlord or property owner may have to mitigate an unacceptable health risk to property occupants."

A poll conducted by EDR showed that lenders, property owners and environmental professionals are now eager to apply the ASTM standard practice for vapor intrusion screening. More than half of environmental professionals—51.5 percent—said their clients asked them about vapor intrusion and nearly one-third of respondents—29.5 percent—had an internal training program on vapor intrusion.

“In many cases, a standard is designed to screen out properties as much as it is to indicate where there is a problem,” Ezovski said. “With the standard, they have eliminated the potential environmental issues.”