The word “Eureka!” can be defined as “expressing triumph.” Unfortunately this definition cannot be applied to the Uniform Environmental Covenants Act (UECA), which was the 2003 effort of the National Conference of Commissions on Uniform State Laws (NCCUSL). UECA has developed into a national trend that has been adopted by several states. This act formalized a public reporting and enforcement process that could have a negative influence not only on whether a developer will purchase land, but also on whether an environmental insurance carrier will insure sites that are subject to such covenants.

The word “covenant” is defined in property law as an agreement between two or more persons entered into in writing and under seal, whereby either party promises to perform or give something to the other, or to abstain from the performance of certain things. But “covenant” takes on a vastly different meaning in the environmental development world. Merging the property law concept with environmental risk has created an “Environmental Covenant.” In other words, the promise described above would relate to environmental promises that can lead to activity and use limitations, such as prohibitions on a particular use due to contamination being left in place.

UECA’s Model Covenant
UECA is based on the realization that “risk-based cleanups are an important tool in the nation’s effort to remediate contaminated property.” UECA provides clear rules on how state and federal agencies can create, enforce and modify a valid real estate document (i.e. environmental covenant) to restrict the use of contaminated real estate. The basic policy is to ensure that real property-based land-use controls remain intact and enforceable as long as necessary to protect human health and the environment. Since the covenant is in perpetuity, UECA effectively avoids the argument that the document is a personal contract that does not bind future owners.

A major driver for UECA’s enactment was to override certain common law obstacles, which include having the covenant survive tax lien foreclosure, adverse possession and marketable title statutes. It is important to note that foreclosure of a tax lien cannot invalidate an environmental covenant, which is a departure from traditional priority rules.

The UECA model covenant formalizes and publicizes the use of institutional and engineering controls as remedies. While such remedies have been around for some time, active enforcement of these remedies has not. Also, the public, specifically future owners, may not realize that the state agencies allowed contamination to be left in place, which creates a disclosure issue. So, UECA attempts to address these two gaps.

The model version of UECA makes institutional and engineering controls run with the land, and such controls can only be terminated under Sections Five and Nine of the act. UECA removes the lack-of- privity concept in contract law by doing so. Section Four of UECA clarifies that a state agency must execute the environmental covenant in order for it to be valid, and it must contain a brief description of the contamination contained on the property.

More important, UECA does not provide any authority for a citizen’s suit to enforce the covenant. Under Section 11, a civil action for injunctive relief for violation of an environmental covenant may be maintained by: 1) a party to the covenant; 2) the agency; 3) any person to whom the covenant expressly grants power to enforce; or 4) a person whose interest in the real property may be affected by the alleged violation of the covenant. The parties to the covenant typically are the owner, the holder (who is the grantee of the covenant if different than the owner) who is authorized to enforce the covenant under Section 11 and the applicable state agency. (Note: Some states are prevented from owning a real property interest.)

Ohio Version
In December 2004, Ohio became the first state to enact its own version of UECA. The state’s General Counsel Office said it needed a statute that would ensure the enforceability of land-use controls. Although the Ohio Solid Waste Act and the Ohio Voluntary Cleanup Act authorized use of land-use controls, neither statute addressed enforcement issues. Without clear enforcement authority, it was unclear whether the instruments would survive a legal challenge. While the model UECA applies to environmental response projects, Ohio included non-remedial actions under the definition of environmental response projects, which is different from the model version.

Effect on Prospective Buyers
Some UECA proponents say that UECA will spur development. However, if an unsophisticated developer is now made aware of previous contamination left in place, they may not be so inclined to buy the property. Conversely, for those sophisticated owners who have conducted their environmental due diligence at the state environmental agency public records office, they would have already been aware of the property’s status and would perhaps purchase the property anyway.

Effect on Tenants
UECA does not appear to address the obligations of tenants who operate at sites subject to environmental covenants. Since UECA appears to address “owners,” it would appear to be incumbent upon the owner to make the tenant contractually obligated to him/her via the lease to comply with any activity or use limitations imposed by an environmental covenant. Since tenants may not perform a title search to determine what use limitations may be of public record, the tenants may not be aware of the situation unless these use limitations are spelled out in the lease. This means the tenant could unwittingly breach the environmental covenant.

Effect on Environmental Insurance Carriers
For the majority of environmental insurance carriers, who underwrite at “a moment in time” (i.e. at policy inception), it will be business as usual. There may exist environmental covenants at the binding date. However, the insurance carrier will underwrite accordingly based on who is required to maintain the controls. If controls are in place, carriers may or may not take that fact into consideration by covering or excluding the known contamination left in place. The bottom line is that the existing pollution conditions may be reopened by the regulatory agency. In this case, it would make no difference whether the owner complies with the environmental covenant or not.

Conclusion
Although its drivers and positives disclosure and enforcement have made UECA a burgeoning national trend, it’s questionable whether these environmentally covenanted sites will become more marketable to prospective buyers whose liability potential could be enhanced. It also remains to be seen whether such a law, which formalizes how we should leave contamination at a site, will create a separate national trend of leaving contamination in place more often.

Brett McGovern is assistant vice president of XL’s Insurance’s Environmental unit in Exton, Penn.

UECA At-A-Glance
Key positives of UECA:

• Disclosure of an environmental covenant in public records. Due to UECA, contamination disclosure is so nice it will be done twice. Although environmental due diligence in state environmental agencies would likely reflect the disclosure on the public record, it will now be public record at the county courthouse. While many believe that such knowledge or definitive disclosure will spur redevelopment, tagging a site with a scarlet “EC” in the public records may be cause potential buyers to pause and perhaps for good reason.
  
• Enforceability of the covenant. Given the structure of the covenant, multiple parties, including applicable state agencies, will be able to enforce it.

Key negatives of UECA:

• Notice to any other persons the agencies requires. If abutting property owners fall into the category of those who must be given notice, this could possibly have a negative effect on those seeking such covenants. If a covenant holder is leaving contamination in place at a property, he/she may not wish to disclose that to a neighbor who might have an adverse reaction towards the covenant holder.
  
• Delay in crafting an acceptable environmental covenant among parties. Given that certain deed restrictions were not recorded in the past, it appears that interested parties will not receive a “No Further Action” letter from the applicable state agencies until the state approves the wording of the covenant, thereby creating another administrative step for backlogged agencies.
  
• Prospective buyers are now patently responsible for controls. Liability protection for prospective buyers was not the goal of UECA. Buyers will need to rely on other applicable laws to determine how UECA works in concert with brownfield protection laws. In fact, such buyers will now be “on the hook” for maintaining the terms of the environmental covenants.