Law, Real Estate, and Sustainability

Is there a revival of strict environmental liability for landowners?

October 29, 2014
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Many businesses incorporate a parent/subsidiary structure to protect business assets from third-party claims and liabilities. Oftentimes, separate but related business entities hold different types of assets because of concerns over potential environmental liability.

For example, land and other valuable assets may be held by a parent corporation, while personal property on the land is owned by an affiliate company. This arrangement usually is intended to protect the parent corporation (and its assets) from liability arising from the use of the personal property on the land.

In recent years, a business entity like the parent corporation described above could seemingly avoid liability for environmental contamination by showing it was not “responsible for an activity causing a release or threat of release” of a hazardous substance into the environment. In other words, the parent corporation, a mere passive landowner, would not be held liable for any contamination caused by the affiliate company that owned and operated the personal property causing a release of hazardous substances on the land.

However, an unpublished opinion of the Michigan Court of Appeals in Department of Natural Resources v. Strefling Oil Company, issued July 29, raises serious questions about the ability of a passive landowner to avoid environmental liability in these situations. The case involved environmental contamination from leaking underground storage tanks used in the delivery of petroleum products, which were owned and operated by Strefling Oil Co. The tanks were located on three parcels of property, two of which were owned by Strefling Real Estate Investments, and the third by Ronald Strefling. A principal issue before the Court was whether SREI and Ronald Strefling, as passive landowners, were liable for the petroleum releases on the properties. Strefling Oil's liability was more certain because it owned and operated the storage tanks that caused a release.

SREI and Ronald Strefling argued that they were not “responsible for an activity causing a release or threat of release,” because Strefling Oil was the party that owned and operated the underground storage tanks. The Court rejected the argument and found that SREI and Ronald Strefling had “sufficient knowledge” about the operation of the underground storage tanks, which was sufficient to impose liability. In other words, their knowledge and familiarity about business operations — rather than any responsibility for an activity — were enough to establish liability.

This opinion raises some concerns whether a passive landowner may be held liable for environmental contamination on its property, even though the landowner does not participate in the activities or operations on the property that caused the release.  Although a majority of the Court disagreed that its conclusion was akin to imposing “strict liability” on the landowners, the dissenting judge contended that the majority improperly revived the doctrine of strict environmental liability.

One thing is assured: The opinion creates some uncertainty regarding the limits of environmental liability, including in parent/subsidiary business structures.

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