Rogers Towers: Lender’s Protection When Foreclosing on Contaminated Property


Lenders often hold an “indicia of title” on property as a security interest for a loan. If the buyer has defaulted on the loan and contamination exists on the property, the decision to foreclose can be difficult. However, before making that decision, lenders should consider the limited protections provided by both the federal government and the State of Florida. Those protections include the federal secured creditor exemption or defense (the “Exemption”), limiting lender liability if the lender meets certain conditions. In addition, although not created specifically for lenders, the Florida Brownfield Redevelopment Program should be considered by a lender evaluating the costs that would be incurred to address contamination on foreclosed property.

The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), enacted in 1980, created strict liability for owners or operators of property on which hazardous substances had been disposed. To provide some relief to lenders, CERCLA was amended to add the Exemption. A lender is not considered an “owner or operator,” and thus not liable for cleanup of contamination even if it forecloses on the property, as long as the lender did not participate in the management of the property and acts to divest itself of the ownership at the “earliest practicably, commercially reasonable time, on commercially reasonable terms,” taking into account market conditions and legal and regulatory requirements.

Florida followed the federal lead by creating a new defense for sites contaminated with petroleum or petroleum products. Pursuant to Florida law, a lender who did not cause or contribute to the discharge, holds indicia of ownership primarily protect a security interest, and, after foreclosure, acts to divest the assets at the earliest possible time, is not liable for cleanup of contamination. Again, all relative facts and circumstances must be considered.

Because federal and state protections operate differently and address different pollutants, a lender should consider conferring with the appropriate regulatory agency before completing foreclosure. By definition under CERCLA, a “hazardous substance” does not include petroleum or petroleum products. Thus, federal law does not provide protection from liability for those contaminants. Conversely, the Florida defense only applies to petroleum or petroleum product. Unlike CERCLA, other Florida statutory provisions fail to exempt lenders from non-petroleum contamination.

Since the Exemption only allows a lender, under appropriate circumstances, to avoid liability, lenders should, prior to foreclosure, compare costs of cleanup to the value to obtained for the property. A lender may be able to reduce the effective costs of cleanup by taking advantage of the Florida Brownfield Redevelopment Program. Under that program, once the property has been determined eligible, any costs incurred that are “integral to site rehabilitation” are eligible for a 50% tax credit. There is a market for such tax credits, typically at 80% to 90% of value. However, because of a $2,000,000 annual cap on the tax credits that may be awarded, there may be a delay of a year or more before receiving the tax credit certificate from the state.

As noted above, a lender should anticipate that a regulatory agency dealing with the lender as the property owner property may be reluctant to acknowledge the Exemption or determine that the property is eligible for the Brownfield Redevelopment Program. Learning of the agency’s position only after the lender has obtained ownership will create significant legal issues; a lender should consider confirming, prior to foreclosure, the requirements it must meet if it forecloses on the property. Regulatory agencies are more apt to consider alternatives when the lender has not yet completed the transfer of ownership. Otherwise, the agency does not have a basis for a claim against the lender. Thus, working with the lender may at least result in some cleanup. Otherwise, as too often happens, a lender will be surprised to learn that an agency is unwilling to agree that the lender does not have any, or only reduced, liability.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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