A common aspect of business is the sale or lease of property. When a property is contaminated with hazardous substances, many states now impose a duty on the seller to disclose the contamination to a potential buyer. Failure to disclose can subject the seller to liability ranging from monetary damages, liability for remediation costs, or rescission of the real estate contract. Common-law tort and contract remedies are available to buyers in all 50 states, and include negligent or intentional misrepresentation, fraud, and breach of contract or warranty. In addition, many states such as New Jersey, Connecticut and California have enacted statutes requiring sellers to disclose environmental contamination.

The New Jersey Industrial Site Recovery Act

The New Jersey Industrial Site Recovery Act (ISRA), N.J. Rev. Stat. ß 13:1K-6 et seq. (1993), requires the seller of an industrial establishment to disclose the environmental status of the property and provide for its remediation as part of the real estate transaction. The seller must attach a copy of any approved negative declaration, approved remedial action workplan, no further action letter, or remediation agreement approval to any sale or transfer agreement. A facility must meet two criteria to be classified as an industrial establishment. First, it must be engaged in operations that involve the generation, manufacture, refining, transportation, treatment, storage, handling or disposal of hazardous substances or hazardous wastes on site, above or below ground. Second, the operation must fall within a specified Standard Industrial Classification, or SIC code. ISRA's definition of hazardous substance is broader than federal law because it includes petroleum substances. Thus, ISRA would not just apply to obvious businesses such as manufacturing plants and hazardous waste disposal facilities, but would also apply to the local gasoline station with underground storage tanks or the neighborhood dry cleaner.

ISRA provides strong enforcement penalties for failure to comply with its requirements. The buyer may void the transaction or recover remediation costs and other direct and consequential damages from the seller. Furthermore, any person who provides false or misleading information to the State Department of Environmental Protection or knowingly authorizes the violation of ISRA may be liable for civil penalties of up to $25,000 per day.

The Connecticut Transfer Act

The Connecticut Transfer Act (Transfer Act), Conn. Gen. Stat. Ann. ß 22a et seq., requires disclosure of hazardous waste prior to a change in ownership. The Transfer Act covers establishments, which are defined as property that, since May 1, 1967, has generated more than one hundred kilograms of hazardous waste per month or which has recycled, reclaimed, reused, stored, handled, treated, transported or disposed of hazardous waste generated by another person or municipality. Establishments also include dry cleaners, furniture stripping industries, and auto body repair and painting shops. Under the Transfer Act a seller may submit a negative declaration to the buyer prior to the transfer, and within fifteen days after the transfer, must submit a copy of the negative declaration to the state Department of Environmental Protection ("DEP"). The declaration must state that there has been no discharge, spillage, uncontrolled loss, seepage, or filtration of hazardous waste on the property; or if there has been a release, that the seller has cleaned up any waste in accordance with procedures approved by the [DEP] commissioner. Alternatively, if any waste remains on the property, the declaration must certify that it will be managed according to state hazardous waste regulations.

The Connecticut Transfer Act provides serious penalties for noncompliance. A buyer can sue for direct and consequential damages, and the seller is strictly liable for cleanup and removal costs. Civil penalties of up to $100,000 may also be imposed for noncompliance or knowing submission of false information.

The California Hazardous Substance Account Act

The California Hazardous Substance Account Act (HSAA), CAL. HEALTH & SAFETY CODE ß 25300 (1993), which applies to the sale, lease or rental of nonresidential real property, provides that the owner must provide written notice of the propertyís condition to the buyer, lessee or renter prior to the transaction if the owner has reasonable cause to believe that a hazardous substance has been released on the property. If the owner fails to comply, he may be liable for actual damages, and may also be liable for civil penalties of up to $5,000 per violation.

Other states such as Illinois, Indiana, Iowa, Missouri, Michigan, Minnesota, Pennsylvania, and Rhode Island have adopted commercial or industrial property transfer laws which mandate disclosure of contamination. Many states have enacted similar laws which are applicable to the transfer of residential property.

Recent Cases

Recent cases illustrate the consequences to sellers or their agents who ignore the provisions of disclosure requirements. In Luginbuhl v. Hemond, 1997 Conn. Super. LEXIS 329 (an unpublished opinion), the seller/plaintiff entered into an agreement to sell a stable to buyer/defendant. The buyer discovered underground gasoline storage tanks - undisclosed in violation of the Connecticut Transfer Act - and refused to honor the sales agreementís requirements to make monthly payments, operate the stable, and diligently pursue financing to consummate the agreement. The seller sued for breach of contract, note collection and unjust enrichment. The court allowed the buyer to maintain a special defense to the suit for the sellerís failure to disclose the environmental condition of the property, and suggested that rescission of the contract was an appropriate remedy.

In Newhall Land and Farming Co. v. Mobil Oil Corp., 19 Cal. App.4th 334, 23 Cal. Rptr. 2d 377 (1993), the buyer/plaintiff was a farming company that purchased surface rights to a property upon which seller/defendant had formerly operated a natural gas processing plant. Newhall utilized groundwater from the property in its farming operations. During its use of the property, the seller had discharged hazardous wastes including petroleum by-products, volatile organic compounds, and heavy metals. This contamination was known to the seller but was not disclosed; there was no visible evidence of the contamination. When the buyer discovered the pollution, it filed suit against the seller and other former owners. The defendants filed a motion to dismiss, which was granted by the trial court. The buyer appealed, and the appellate court reversed the trial court, holding that the doctrine of caveat emptor, or let the buyer beware, did not prevent a current owner from suing predecessor owners for failure to disclose contamination on the property.

Even without a statutory requirement, failure to disclose can prove costly in some states. Consider HBN Partnership v. Schappe 191 Wis.2d 825, 532 N.W.2d 144 (1995), in which the appellate court upheld the trial courtís rescission of the contract and refund of the purchase price, based on the sellerís negligent failure to disclose soil contamination. Not only was the monetary award of $66,3109.37 in restorative damages upheld, a cause of action was allowed for misleading statements under Wisconsins false advertising statute, under which plaintiffs could also recover their costs and attorneyís fees.

The Seller's Best Protection

As is clear from the foregoing examples, non-disclosure of potential environmental problems can jeopardize property transactions and prove very costly to the seller or its agents. Sellers should educate themselves as to the law in their states, and keep in mind that full disclosure based on a thorough environmental site assessment, coupled with clear contract language allocating the risks, may be the sellerís best protection.