Source: http://www.lexology.com, February 7, 2014
By: Lynn T. Manolopoulos and Keith Baldwin, Davis Wright Tremaine LLP
We all know that environmental laws impose heavy liability on businesses that release environmental contaminants into the air, soil or water. The family business is not immune to such liability. In fact, many multi-generational family businesses have owned or operated on family real estate for decades. Many have done business for generations without really questioning their environmental compliance. They may also have leased properties they own to businesses that cause contamination and as the owner of that property, the liability may fall to the family.
The consequences can be disastrous. Family net worth can be wiped out by one large environmental claim and/or remediation costs. Inter-generational family relationships can be eroded or permanently destroyed.
Here’s an example: A family corporation has owned a suburban strip mall since the 1940’s. A long-term tenant has operated a dry cleaner in the mall for many years. Environmental consciousness and environmental laws were very different during the early and mid-20^th century from what they are now. Dry cleaners, gasoline stations, and other consumer businesses thought nothing about the release of cleaning fluids and petrochemicals into the soil. Often these chemicals were discharged to a sewer but since many sewers leak, the chemicals found their way into the soil. The family is sitting on an asset that could become a liability if environmental controls and monitoring were not performed regularly. Releases of contaminants into the soil and ground water might still be occurring. The family may think its tenant will be liable and that the lease provides protection but that will only be true if the tenant has the funds and/or insurance to pay for the cleanup. Often finding historical insurance policies (specifically, those issued before 1986) is the key step in securing funding for future cleanup costs.
If the family real estate has been offered as collateral for bank financing of the business, very often the bank will have required a Phase I environmental survey of the property. That will provide a measure of comfort, though not a guarantee of compliance. But if no environmental survey has been done, the possibility of environmental claims is unknown. Investing in a Phase I now may provide useful information that will allow the family to evaluate and manage environmental issues well in advance of any plans to sell the property or use it for future financing.
What can the family do to protect its legacy? It should begin by evaluating the current status of the property by obtaining a Phase I survey. It should investigate the actions of its tenants by visually inspecting the premises and evaluating whether there are current releases of contaminants into the soil, water, sewers or storm sewers. It should consider installing monitoring points for early detection of future releases. It should consult with environmental advisors, including an environmental lawyer, to determine what other actions the family might take to protect its assets.
In environmental matters, it doesn’t matter that you don’t mean to release contaminants or that you aren’t aware of the law. Environmental laws impose liabilities on those who release contaminants as well as those who own the land or the buildings.
Now is a good time to protect your business and your family legacy by reviewing your environmental compliance program.