🔒CT takes first steps to reforming derided Transfer Act

Q&A talks with Pamela K. Elkow, a partner at Stamford law firm Carmody Torrance Sandak & Hennessey LLP, about the Transfer Act, a controversial state statute that has had a major impact on the commercial real estate market.

Q. The state’s Transfer Act has received a lot of attention this year but has long been a thorn in the side of the commercial real industry. Can you briefly explain what it is?

A. In short, the Transfer Act requires the seller of an ‘establishment’ — which can be real property or a business — to determine whether there has ever been a spill at the parcel prior to selling. If there has not, or the spill has already been cleaned up or doesn’t need to be, the seller files one of two forms with the Department of Energy and Environmental Protection (DEEP) and can move forward with the transaction.

If the seller is unsure of a previous contamination, or didn’t clean up a previous issue, then either the seller or the buyer must agree to investigate the parcel and clean up any contamination that is found.

A property qualifies as an ‘establishment’ and must comply with the Transfer Act if: On or after Nov. 19, 1980, more than 100 kilograms of hazardous waste was generated (i.e., created) in any one month, with some exceptions; hazardous waste generated at a different location was recycled, reclaimed, reused, stored, handled, treated, transported or disposed of, or; on or after May 1, 1967, dry cleaning, furniture stripping or vehicle body repair was conducted on-site.

Q. Why has it been controversial?

It’s been controversial for a few reasons. First, it is atypical. Only one other state has a similar ‘transfer law.’ So, anyone from out of state must be educated about the Act, and buyers or investors in Connecticut know that most other states do not have similar requirements.

The Act was originally adopted in 1987 to protect buyers, but today, environmental due diligence is commonplace. Buyers do it, lenders require it. Federal and some state statutes provide liability protection for buyers who perform ‘all appropriate inquiry’ before buying a property. As a result, the Act is perceived by many as having morphed from a statute intended to protect buyers to the DEEP’s primary remedial program.

The program is also controversial because it is tied to the sale of real property or a business, not to actual contamination. The Act applies only when a property or business is transferred, and it only applies to certain properties. Because the definition of ‘establishment’ is so broad, many low-risk properties are pulled into the Act, regardless of whether there is a known issue.

Furthermore, because the Act requires a sale, many owners of high-risk or contaminated properties simply mothball the property to avoid the Act and avoid investigation and cleanup.

Lastly, the requirements for the investigation to determine whether a spill has happened are extensive and entail investigating all areas of a parcel where a spill may have happened, regardless of whether there is evidence of a spill or not.

The fact that the costs for investigating and remediating can be significant, and are often unknown at the time of the sale, is a significant disincentive to buying these properties.

Q. State lawmakers agreed to several reforms of the Transfer Act this year. What are they and how will they impact the commercial real estate market?

A. Public Act 19-95 created several new exceptions to the definition of ‘establishment.’ The generation of waste solely as a result of tenant cleaning out the premises, or someone shutting down a business is exempt. In addition, a single instance of generating more than 100 kilograms of hazardous waste is also exempt.

These changes will eliminate the need to comply with the Act for many low-risk properties. These were not businesses that generated hazardous waste on a regular basis but were doing the right thing by properly disposing of materials when no longer needed.

The goal is to remove a disincentive to investing in commercial property in Connecticut, by removing the burdens of investigating a low-risk site to prove that no spills have ever occurred.

Q. Prior to this new law, how often did commercial real estate deals get impacted by the Transfer Act?

A. All the time. If the property is an establishment, the effort to investigate is extensive and time-consuming. Lenders are concerned about loaning on property that is perceived as environmentally challenged. Even if it turns out that the property was not an ‘establishment,’ the exercise of investigating the history of the property can derail a transaction and discourage buyers or lenders.

Q. Do these changes go far enough in reforming the law in the eyes of the real estate community?

A. Not yet. There are still issues to be addressed, like the definition of ‘transfer,’ which is convoluted. It is defined as ‘any change in ownership,’ with 28 exceptions. In addition, on large multi-occupant sites where only one tenant is an ‘establishment,’ the entire property is now subject to the Act.

Q. Do you expect the law to face further reforms in the next few years?

A. Yes. PA 19-95 required the General Assembly to create a task force to suggest further changes before the next session; it is led by the chairs of the Commerce Committee, Sen. Joan Hartley and Rep. Caroline Simmons. The task force has already met and begun discussions on next steps, but would welcome suggestions from those impacted by the Act.