I. INTRODUCTION
In 2005, the Nebraska Legislature adopted the Uniform Environmental Covenants Act (UECA). Codified at Neb.Rev.Stat. § 76-2601 et.seq., the law provides a set of uniform standards and procedures governing the creation, recording, enforcement, modification, and termination of activity and use restrictions imposed by federal and state agencies in remediation projects that are intended to bind future land owners.
The UECA was developed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) working in cooperation with numerous other groups and organizations involved in the clean-up and management of contaminated properties. The UECA is designed to promote the use and reuse of contaminated properties by eliminating much of the confusion and uncertainty currently surrounding environmental covenants.
To take advantage of the UECA, lenders need to appreciate when and how environmental covenants affect mortgage interests in real property. In addition, in cases in which environmental covenants take priority over mortgage interests, or lenders elect to voluntarily subordinate their interests to environmental covenants, lenders need to develop policies for working with property owners and governmental agencies to promote the marketability and value of properties affected by environmental covenants.
II. APPLICABILITY OF THE UECA
The UECA applies whenever a federal or state regulatory agency approves an environmental response project (a plan or work performed for environmental remediation of contaminated real property) pursuant to which an environmental covenant (imposition of activity and use limitations) is created. Activity and use limitations are restrictions or obligations binding current and future property owners to implement institutional or engineering controls needed to control the migration of regulated substances through the environment and restricting activities or uses of property that may interfere with the integrity of remedial actions or expose users of real property and the public to health and safety risks.
III. ESTABLISHING COVENANTS
To create enforceable covenants, the UECA requires the creation of an instrument, stating that the instrument is an environmental covenant that has been executed pursuant to the UECA, which contains: (1) a legally sufficient description of the real property subject to the covenant; (2) identification of every holder (grantee of an environmental covenant); (3) a description of the activity and use limitations; (4) the signatures of the federal or state agency which has approved the environmental response project, every holder of the covenant, and the fee simple owner of the property subject to the covenant; and (5) identification of the name and location of any administrative record regarding the environmental response project reflected in the environmental covenant.
An environmental covenant, any amendment or termination of the covenant, and any subordination agreement must be recorded in every county in which any portion of the real property subject to the covenant is located. In addition, a copy of the recorded covenant must also be provided to the Department of Environmental Quality if the Department has not signed the covenant. The Department must then make available to the public, a listing of all recorded covenants which have been provided to the department.
Beyond the basic contents required of an environmental covenant, the instrument establishing the covenant may contain other information, restrictions, and requirements agreed to by the persons who signed the covenant, including any: (1) requirements for notice following transfer of a specified interest in real property subject to the covenant or a change in its use; (2) requirements for periodic reporting describing compliance with the covenant; (3) rights of access to the property granted in connection with implementation or enforcement of the covenant; (4) a brief narrative description of the contamination and remedy, including the contaminants of concern, the pathways of exposure, limits on exposure, and the location and extent of the contamination; (5) limitations on amendments or termination of the covenant; (6) rights of the holder in addition to its right to enforce the covenant; and (7) rights to enforce granted to any person.
IV. DURATION AND MODIFICATION OF ENVIRONMENTAL COVENANTS
An environmental covenant that complies with the UECA runs with the land and is perpetual unless it is: (1) by its terms limited to a specific duration or terminated by the occurrence of a specific event; (2) terminated by consent; (3) terminated by the agency signing the environmental covenant if the agency determines that the intended benefits of the covenant cannot be realized, by a court, under a doctrine of change circumstances, or an action in which all parties authorized to consent to the termination of an environmental covenant have been given notice; (4) terminated by foreclosure of an interest that has priority over the environmental covenant; or (5) terminated or modified in an eminent domain proceeding in which (a) the agency that signed the covenant is a party to the proceeding; (b) all persons authorized to consent to the termination of the environmental covenant are given notice of the pendency of the proceeding; and (c) the court determines, after hearing, that the termination or modification will not adversely affect human health or the environment.
V. LEGAL IMPACT OF ENVIRONMENTAL COVENANTS
The UECA clarifies that any person may be a holder of a covenant, including a current or prior property owner, a mortgagee, a land conservancy, or a state or local agency. The UECA also specifies the circumstances under which covenants may be assigned to new holders and clearly allows covenants to impose affirmative obligations upon land owners.
The UECA does not authorize a use of real property that is otherwise prohibited by zoning, by law other than the act regulating use of real property, or by a recorded instrument that has priority over the environmental covenant. An environmental covenant may prohibit or restrict uses of real property which are authorized by zoning or by law other than the UECA.
VI. MODIFICATION/TERMINATION OF ENVIRONMENTAL COVENANTS BY CONSENT
The UECA requires consent for the voluntary termination or amendment of an environmental covenant to be obtained from: (1) the agency that approved the covenant; (2) the current owner of the fee simple of the real property subject to the covenant, unless waived by the agency; (3) each person that originally signed the covenant, unless the person waived in a signed record the right to consent or a court finds that the person no longer exists or can be located or identified with the exercise of reasonable diligence; and (4) the holder of the covenant.
VII. ENFORCEMENT OF ENVIRONMENTAL COVENANTS
The UECA authorizes civil actions for injunctive or other equitable relief for violations of an environmental covenant. An enforcement action may be initiated by: (1) a party to the covenant; (2) the agency that approved the covenant; (3) any person to whom the covenant expressly grants power to enforce; (4) any person whose interest in the real property or whose collateral or liability may be effected by the alleged violation of the covenant; or (5) a municipality or other unit of local government in which the real property subject to the covenant is located. The UECA expressly provides that holders of interests with priority over environmental covenants are not affected by the environmental covenant unless the person that owns the priority interest subordinates that interest to the covenant. The UECA further provides that no person with a prior interest is required to subordinate that interest to an environmental covenant or to agree to be bound by the covenant. While holders of interest in real property with priority over environmental covenants may subordinate their interests to the covenants, the UECA provides that while such a subordination affects the priority of that person’s interest, it does not by itself impose any affirmative obligation on the person with respect to environmental covenants.
VIII. FINANCIAL INSTITUTION CONSIDERATIONS
The creation or existence of environmental covenants pertaining to real property used as collateral for a loan should be thoroughly considered by a financial institution. Risks associated with real property subject to an environmental covenant should be considered when making loans as the cost of compliance could adversely impact the borrower’s financial condition. In cases in which the financial institution holds a mortgage/deed of trust with a priority over an environmental covenant, the lender should determine whether it is prudent to subordinate its interest to the covenants or retain its existing priority status. Property subject to an environmental covenant can certainly be made more marketable through remedial actions. The financial institution should also consider any risks and delays which may result if foreclosure of an interest in which the lender maintained priority serves to terminate an environmental covenant. Also to be considered in the decision making process is the fact that federal and state agencies may refuse to limit or release owners of real property from clean-up related obligations unless certain prior interests, including holders of liens, are subordinated to the environmental covenant.