Summary
Lender liability - Cover Report: Commercial Real Estate - Industry Overview
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Extract
Avoiding the quagmire.
There are several steps lenders can take to avoid the black hole of liability for cleaning up contaminated property.
DURING THE LAST DECADE, FINANCIAL INSTITUTIONS have faced a growing problem from loans involving contaminated commercial real estate. Even when due care and abundant caution are taken, financial institutions may find themselves either holding contaminated property with little or no net worth, or without recourse for a loan default because the collateral is contaminated. The presence of contamination raises issues of the lender's liability and questions about the lender's obligations and opportunities with regard to the property. The so-called lender liability rule until recently provided a measure of protection for a financial institution by insulating it from some liability when it foreclosed upon contaminated commercial property. But that rule was invalidated by the U.S. Court of Appeals for the D.C. Circuit in Kelly v. EPA. Even before the appeals court ruling, the rule only provided protection from a small portion of potential environmental liability. Given these facts, lenders seeking to minimize their exposure to environmental problems must take a new tack. They must understand their exposure under the applicable state and federal statutes and common law, as well as plan and implement a program to minimize that exposure at each juncture of the process of loan application, issuance and repayment. This article examines options for addressing these issues, in particular: * Screening commercial property pledged as loan collateral. * Offering practical steps for ensuring viability of collateral during the life of a loan. * Revealing liability exposure as well as reporting and cleanup obligations of lenders obtaining title to contaminated property. * Obta...See the full content of this document
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