Eminent Domain and Environmental Contamination

By James D. Brusslan

Introduction

From the anticipated O’Hare expansion to other public projects, the City of Chicago and others will condemn large parcels of private land in the next several years. Some land will undoubtedly contain hazardous materials. This article explains how Illinois law addresses contamination in eminent domain proceedings. As compared to voluntary real estate transactions, the Illinois Eminent Domain Act strictly limits consideration of environmental issues in determining the sales price. Evidence is allowed only as to the cost of correcting environmental violations. The Act strikes a fair balance between landowners who must involuntarily relinquish their land and the interests of the public.

Environmental Issues in Voluntary Real Estate Transactions

Although Illinois industrial and commercial properties often contain some contamination, many neither are unsafe nor violate the law. Prior owners commonly disposed of the hazardous materials before the 1970s, when legislatures first enacted most environmental laws. The contamination is frequently deeply buried or shielded by impermeable structures, such as concrete floors. No law affirmatively requires the owners to remove the materials.

Nonetheless, under the federal Superfund law, and its state equivalent, the government has broad authority over virtually any contaminated property. The government may, among other things, order the cleanup of even a threatened release of even de minimis quantities of the hundreds of substances defined as hazardous. Due to the ever-present Superfund threat, environmental issues play a significant role in many real estate transactions. In arriving at a mutually agreeable purchase price, the parties consider such factors as the risks of Superfund or third party liability, indemnification, environmental insurance and the purchaser’s anticipated use of the property.

Often prospective purchasers will demand that the seller satisfy Illinois EPA’s voluntary Site Remediation Program. Under this program, IEPA has issued remediation objectives based on a site’s use (ie., residential, commercial or industrial). If the voluntary cleanup meets the objectives, the agency issues a "no further remediation" letter, which essentially guarantees that the government will not order further remediation. In other real estate transactions, the parties merely reduce the purchase price to reflect the risks of future remediation, or place a portion of the sale price in escrow to cover any potential future costs.

Eminent Domain Law in Illinois

Section 7-119 of the Eminent Domain Act governs the admissibility of evidence in eminent domain proceedings. Unlike voluntary transactions, section 7-119 allows courts to consider evidence only as to the narrow issue of violations of environmental laws or regulations.

"Evidence is admissible as to:

(2) any unsafe, unsanitary, substandard or other illegal condition, use or occupancy of the property, including any violation of any environmental law or regulation; and

(4) the reasonable cost of causing the property to be placed in a legal condition, use or occupancy, including compliance with environmental laws and regulations."

Section 7-119 adds that "[s]uch evidence is admissible notwithstanding the absence of any official action taken to require the correction or abatement of any such illegal condition, use or occupancy."

In 1994, the Illinois Appellate Court, Third District, confirmed that section 7-119 "does not permit the admission of environmental remediation costs at an eminent domain proceeding unless the trial court has found the presence of an underlying illegal condition to justify such costs." The court reasoned that reducing the price on environmental grounds would violate the due process rights of owners of condemned property. A landowner would be forced to bear the entire remediation expense, and could lose its statutory rights to seek reimbursement from other parties responsible for the contamination.

In 1997, as part of separate legislation permitting municipalities to clean abandoned buildings, the Illinois legislature amended subsection (4) of section 7-119 of the Act to allow evidence showing violations of any environmental law or regulation and the reasonable cost of compliance. The City of Chicago has made the misleading statement that the revision allows "evidence of environmental impairment to be included in determining the fair price due a property owner." Whatever the drafters of the 1997 revision may have intended, neither the legislative history nor the language of the revision alters the 1994 Illinois court ruling. If a condemning agency is unable to identify an environmental violation or unsafe condition, regardless of how polluted the site is, the Eminent Domain Act bars from consideration any contamination evidence.

Laws in Other States

Though only a handful of state courts have addressed the issue, most disagree with Illinois and freely admit costs of environmental remediation. The Connecticut Supreme Court reasoned that, as with voluntary real estate transactions, any contamination is relevant to the fair market value:

Excluding contamination evidence, as a matter of law, is likely to result in a fictional property value -- a result that is inconsistent with the principles by which just compensation is calculated. It blinks at reality to say that a willing buyer would simply ignore the fact of contamination, and its attendant economic consequences, including specifically the cost of remediation, in deciding how much to pay for property.

Courts in California, Kansas, Tennessee, Florida, Georgia and Colorado concur.

By contrast, courts in Iowa and Michigan have barred from eminent domain proceedings all evidence of environmental remediation costs. Both courts pointed out that the condemning body is free to file a separate action to recover its cleanup costs. A Michigan court cited the Uniform Condemnation Procedures Act (UCPA), which authorizes courts to hold in escrow portions of the compensation as security for future remediation costs. The court concluded that an escrow provision would be unnecessary if the UCPA contemplated that environmental issues would be resolved during condemnation. The Michigan court added that it is virtually impossible for experts to prospectively determine the impact of contamination on a property’s fair market value. An Iowa court ruled that in the absence of a finding of liability in a state-initiated environmental enforcement action, it would be unfair to force a landowner to assume any remediation costs.

The Illinois Eminent Domain Act Strikes a Reasonable Balance

In many cases, the cost of removing contamination can exceed the value of the property. The Illinois Eminent Domain Act diminishes the chances of an owner losing its business, without compensation, solely due to contamination caused by others. By the same token, nothing in the Act prevents condemning bodies from cleaning the site and pursuing a future cost reimbursement action, even against the landowner. In that separate proceeding, the government’s cleanup costs will be known, and the landowner will have the opportunity to seek to share any liability with other responsible parties.

The Illinois Eminent Domain Act forces landowners to take financial responsibility for environmental violations. This makes sense, as landowners should always be accountable for complying with the law. On the other hand, the Act protects owners from incurring remediation costs which, in the absence of condemnation, they may never have to assume. Although it removes an important factor present in voluntary real estate transactions, the Act strikes a reasonable balance between the interests of condemning bodies and landowners who are forced to surrender their property.