California, like some other states, has established a fund to help owners and operators of petroleum underground storage tanks (USTs) investigate and remediate contamination emanating from USTs. The California UST Cleanup Fund requires owners of petroleum USTs to pay a per gallon fee to the fund, set at .014 cents for every gallon of gasoline sold as of January 1, 2006. This fee currently generates in excess of $180 million annually. But, the fund is not just a useful source of cash for gas station operators and owners of contaminated property, it can also help jump start a real property transaction stalled by the uncertainties surrounding environmental cleanup.

California UST Fund Requirements
California established its UST Cleanup Fund in 1989. To be eligible, a claimant must be a current or past owner or operator of the UST from which an unauthorized release of petroleum has occurred. The claimant is required to undertake corrective action as directed by a local regulatory agency, such as a regional water quality control board or local county hazardous material agency. Other eligibility conditions include compliance with state permitting requirements and agency cleanup orders.

Photo courtesy of EPA.

Reimbursement from the fund follows a priority system based on the claimant’s status. The highest priority, Class A, is reserved for residential tank owners; the second priority, Class B, is reserved for small businesses with gross receipts below $3 million; Class C is for certain businesses, nonprofit organizations and governmental agencies not meeting the criteria for Class B; and Class D is given to all other eligible claimants. By law, Class C and D claimants receive at least 15 percent of the annual funding.

Costs eligible for reimbursement include reasonable and necessary costs to perform work required by the regulatory agency to address petroleum contamination. The fund will reimburse up to $1.5 million per occurrence, less the required deductible, and primarily covers the cost of site remediation. Costs associated with the removal, repair, retrofit, or installation of USTs are not eligible for reimbursement. The fund also will not reimburse a claimant for costs that have been or will be reimbursed from another source, such as a legal settlement or insurance policy.  

California UST Fund and Real Estate Deals
Occasionally, the existence of contamination from a UST can hinder the sale of real property.  Although the parties may be able to get a general idea of the scope of the contamination, the buyer may not be interested in assuming the risk that the cleanup may be more costly than anticipated, or that the agency may require more work to be performed than the buyer believes is necessary to address the contamination.  

Conversely, the seller may not want to reduce the purchase price significantly or place a large portion of the proceeds in an escrow account in the event that the clean up costs more than the initial estimates. One possible solution afforded by the fund is to have the seller submit an application which assigns his or her rights to reimbursement to the buyer.

In April 2002, California’s State Water Resources Control Board adopted an order that allows for this assignment of rights to reimbursement from the fund. Once certain requirements are met, the assignee “steps into the shoes” of the assignor and does not need the assignor’s signature on any documents submitted to the fund, except that the assignor must continue to demonstrate compliance with federal financial responsibility requirements.

There are many ways to structure the real estate transaction, but the availability of the UST Cleanup Fund can help both parties reach an agreement. The buyer, who agrees to conduct the necessary cleanup, is protected from cost overruns by his or her ability to obtain reimbursement of eligible costs from the fund. As a result, the seller may not be required to reduce the sales price to cover unknown environmental contingencies. And, as with any regulatory program, requirements should be fully investigated before entering a transaction, but experienced counsel can use the fund to find a workable solution.

Jonathan W. Redding is chair of the Environmental Practice Group at Wendel, Rosen, Black & Dean LLP. Greggory C. Brandt is also a member of the Environmental Practice Group.