Fairness in Allocating Cleanup Costs Between Buyers and Sellers of Real Property

When real property is sold without a clear allocation of potential environmental cleanup costs, a court trying to allocate those costs in a litigation looks to a variety of “equitable” factors to reach a fair allocation.  In Trinity Industries, Inc. v Greenlease Holding Company (3d Cir. September 5, 2018), the Court examined “value of the property” as a fairness factor, that is, in addition to examining which party caused which part of the mess, the Court examined the extent to which the buyer should pay more because as owner of the property it benefits from the cleanup.

While the trial court’s equitable allocation primarily examined which parties’ activities caused more of the remediation costs, the trial court reduced the amount owed by Greenlease (the former owner and operator) by 10% to take into account the fact that Trinity (the current owner) would benefit more from the remediation, as remediation would enhance the value of the property.  The Third Circuit reversed that finding because “the record did not contain any evidence concerning the fair market value.”  The court recognized that an equitable allocation should take the change in fair market value into consideration because otherwise the allocation of costs could create an unintended windfall for the current owner.  The problem with the trial court’s decision, however, was the lack of evidence.  The allocation was, thus, returned to the trial court, where the record may be reopened so that evidence of fair market value could be provided.

The decision means that parties litigating allocation issues need to provide evidence of each aspect of their proposed allocation.  It is not enough to simply argue that there must be an increase in value.  Experts can and do provide such evidence.  The broader lesson of the decision, however, is that parties to the purchase and sale of industrial property can avoid years of costly litigation if they take the time to work out an allocation of future environmental liabilities.