Since Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA or Superfund“) 42 U.S.C.A. §§9601 – 9675, the importance of the environmental aspects of due diligence in real estate transactions has become a significant part of most commercial real estate transactions. 1 The CERCLA statute created strict liability for the costs of contamination if you happen to fall into certain defined categories. Contingent liability under CERCLA can exist for a purchaser that does not perform the required due diligence before purchasing a property.
Real estate attorneys are the captains of almost all commercial real estate transactions. The real estate attorney‘s duties can include negotiating terms, completing due diligence, obtaining appraisals, and inspections, drafting purchase contracts or leases, obtaining survey and confirming title, crafting the disclosures, setting up escrow, and finally closing. In commercial real estate transactions, real estate attorneys will usually partner with an environmental attorney to assist in the environmental due diligence prior to completion of the Purchase and Sale Agreement or Lease Agreement. Experienced environmental lawyers know that any sale that involves real property and/or a regulated business entity will carry the potential for environmental risks and liabilities. If environmental due diligence is completed early enough in the transaction, the parties can use the information to allocate any potential liability, to draft indemnities or renegotiate the terms. Depending on the client’s risk tolerance and possibly the demands of the financing entity, the real estate, and environmental attorney must decide on the due diligence required to complete the transaction.
A number of federal courts have extended CERCLA liability to include Lessees/Tenants and EPA previously issued relevant guidance to Lessees /Tenants on January 14, 2009, entitled “Enforcement Discretion Guidance Regarding the Applicability of the Bona Fide Prospective Purchaser [“BFFP“} Definition in CERCLA §101(40) to Tenants”. This EPA Guidance document was last revised on December 5, 2012. Recent legislation has now provided additional protection from CERCLA liability to Lessees /Tenants under the Brownfields Utilization, Investment, and Local Development (“BUILD Act“) of 2018 which now should be considered for leasehold interests. 2 Real estate attorneys and environmental attorneys need to be aware of these new BUILD Act protections under CERCLA for leasing transactions.
REQUIRED DUE DILIGENCE – PHASE 1 ENVIRONMENTAL SITE ASSESSMENT
CERCLA requires that the purchaser use “all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice“. See CERCLA §9601(35)(B)(i)(I) and §9601(35)(B)(ii-iii). What constitutes All Appropriate Inquiry (“AAI”) [or good commercial or customary practice] is a mixed question of fact and law subject to some debate in legal circles. This uncertainty makes potential buyers and lenders hesitant to invest in property with potential for CERCLA liability.3
The most widely accepted process for environmental due diligence for commercial real estate transactions was originally adopted and published by the American Society for Testing and Materials (“ASTM“) in 1993. The original ASTM publication “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process El 527-93“ (“Phase 1 ESA“) has been updated many times and the current version is ASTM El527-13 adopted on November 1, 2013. Completion of an ASTM El 527 Phase I ESA is generally considered the standard practice for environmental due diligence in everyday commercial real estate transactions.
The Environmental Protection Agency (“EPA“) has previously adopted regulations for performing AAI at 40 CFR Part 312 – Innocent Landowners, Standards for Conducting All Appropriate Inquiries. Originally, EPA promulgated the 40 CFR Part 312 regulations that set standards and practices for AAI on November 1, 2005 (70 Fed. Reg. 66070). In December 2013, EPA recognized that ASTM El 527-13 is equivalent to good commercial or customary practice and could be used to establish AAI in real estate transactions.
CERCLA LIABILITY SCHEME
The four types of potentially responsible parties (“PRP“) liable under CERCLA are found under §9601(20)(A) – (C):
- Owner and operator of a facility4
- Any person who at the time of disposal of any hazardous substance owned or operated any facility at which such hazardous substances were disposed of;
- Any person who by contract, agreement, or otherwise arranged for disposal or treatment or transport of hazardous substances; and
- Any person who accepts hazardous substances for transport to a facility selected by such person.
The CERCLA defenses under §9607(b) for PRP liability are very limited and difficult for any party to establish. Generally, a PRP must establish by a preponderance of the evidence that the identified contamination was caused solely by:
- An act of God;
- An act of war; or
- An act or omission of a third party other than an employee or agent of the PRP, or one in a contractual relationship existing directly or indirectly with the PRP (commonly referred to as the “Third –Party Defense“); and
- they exercised “due care” with respect to the hazardous substances; and
- they took precautions against foreseeable acts or omission of any such third party and the consequences that could foreseeably result from such acts or omissions.
- The Third –Party Defense is not available to a PRP who has a contractual relationship with a party who caused the release or has actual knowledge of a release or threatened release during their ownership and who subsequently transfers the property to another person without disclosing that information (42§9601(35)(C)).
INNOCENT LANDOWNER DEFENSE
In 1986, Congress passed the Superfund Amendments and Reauthorization Act (“SARA”). SARA added a new type of Third –Party Defense known as the Innocent Landowner Defense. Congress added that defense in an odd way: it defined the previously undefined phrase ” contractual relation” – a phrase key to the applicability of the Third-Party Defense – and then set out certain circumstances in which that definition would not be met. Cal. Dept. of Toxic Substances Control v. Westside Delivery, LLC, 888 F.3d 1085 (9th Cir. 2018).
Indeed, it was through the definition that Congress added the Innocent Landowner Defense “Congress intended the [innocent-landowner] defense to be very narrowly applicable, for fear that it might be subject to abuse.” Carson Harbor Village, Ltd. v. Unocal Corp., 270 F.3d, 863, 883 (9th Cir. 2001). A typical private purchaser who buys property contaminated by a previous owner or possessor is entitled to the Innocent Landowner Defense only if the purchaser bought the property without actual or constructive knowledge of contamination. 42 U.S.C. §9601(35)(A)(i). That is, the purchase must be “truly innocent.“ PCS Nitrogen Inc. v. Ashley II of Charleston LLC, 714 F.3d 161, 185 (4th Cir. 2013).
In order to establish the Innocent Landowner Defense, the purchaser must show, by a preponderance of the evidence that:
- A party other than the purchaser is the sole cause of the release of the hazardous substances;
- Some other party is a liable party under CERCLA §9607(a);
- The purchaser did not actually know about the presence of the hazardous substance at the time of acquisition;
- The purchaser undertook “all appropriate inquiry” (“AAI”) when the purchaser acquired the property; and
- The purchaser exercised due care once any hazardous substance was discovered. See CERCLA §§9607(a–b), §9601(35)(A). See also M & M Realty Company v. Eberton Terminal Corp., 977 F.Supp. 683, 687 (M.D.Pa . 1997)
Leasehold interests may also be PRPs under CERCLA and be required to participate in the cleanup of contaminated property.
- CERCLA ” owner” liability may be extended to a lessee...when a lessee participates in the disposal of hazardous wastes. Lentz v. Mason, 961 F.Supp. 709, 715 (D.N.J. 1997) (citing United States v. South Carolina Recycling and Disposal, Inc., 653 F.Supp. 984, 1003 (D.S.C. 1984), ajf’d in part, rev‘din part sub nom., United States v. Monsanto, 858 F.2d 160 (4th Cir. 1988). Courts have held that “[c]ertain lessees[/sublessors] may have the requisite indicia of ownership vis-a-vis the record owner to be de facto owners and therefore strictly liable. Commander Oil Corp. v. Barlo Equipment Corp., 215 F.3d 321 , 330 (2d Cir. 2000); see, e.g., Delaney v. Town of Carmel, 55 F.Supp.2d 237, 258-59 (S.D.N.Y. 1999) (“[T]he owner of a leasehold of a CERCLA facility may be liable as an owner of that facility.” ); United States v. A&N Cleaners & Launderers, Inc., 788 F.Supp.1 31 7, 1332-34 (S.D.N.Y. 1992); South Carolina Recycling, 653 F.Supp. at 1002- 03.
- Courts have reasoned that in CERCLA the term “owner” extends beyond the record owner to anyone possessing the requisite degree of control over the property. A non exclusive list of factors that courts should consider concerning Lessees /Tenants include:
- whether the lease is for an extensive term and admits of no rights in the owner/lessor to determine how the property is used;
- whether the lease cannot be terminated by the owner before it expires by its term;
- whether the lessee has the right to sublet all or some of the property without notifying the owner;
- whether the lessee is responsible for payment of all taxes, assessments, insurance and operation and maintenance costs; and
- whether the lessee is responsible for making all structural and other repairs. See United States v. Union Corp., 259 F.Supp.2d 356, 384 (2003).
TENANTS WHERE THE OWNER IS A BFPP – THE OLD PACKAGE
The current Bona Fide Prospective Purchaser (“BFPP”) definition in CERCLA §9601(40) applies to a “person (or a tenant of a person),” thereby providing that a tenant may derive BFPP status from an owner who satisfies the BFPP criteria. The tenant remains a BFPP and is protected by §9607(r) from CERCLA liability as long as the owner maintains its BFPP status and: (1) all disposal of hazardous substances at the facility occurred prior to acquisition, as provided by §9601(40)(A); and (2) the tenant does not impede the performance of a response action or natural resource restoration, as provided by CERCLA §9607(r)(l). As long as the owner maintains compliance with the BFPP criteria, the tenant who has derived BFPP status does not have any independent duty to carry out those responsibilities (such as conducting AAI). However, if the owner loses its BFPP status whether by its own action or inaction or that of the tenant, in the EPA’s view of CERCLA’s provisions, the tenant generally would no longer be a tenant with derivative BFPP status.5
BENEFITS OF THE BUILD ACT OF 2018 – A NEW WRAPPER
The BUILD Act has now created a third potential path for Lessees/Tenants to establish a BFPP defense, and thereby avoid CERCLA liability, provided that the tenant’s lease at the property began after January 11, 2002 and that the lease is not specifically designed to avoid CERCLA liability by any person.
- Establish their landlord as a BFPP by proving that the landlord completed the AAI/ASTM E1527 Phase I ESA as defined by the CERCLA and EPA regulation and guidance;
- Establish that their landowner completed AAI/ASTM E1527 Phase I ESA as defined by CERCLA and EPA guidance, but later failed either with compliance or to complete additional requirements (such as remediation or documentation); or
- Establish the tenant themselves as the BFPP by completing the AAI/ASTM E1527-13 Phase I ESA prior to acquiring leasehold interest and maintaining compliance with the additional due care requirements.
Under any of the three above provisions, the Lessee/Tenant can assert the Innocent Landowner Defense.
CERCLA requires that the purchaser use “all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice“. Leasehold interests may also be PRPs under CERCLA and be required to participate in the cleanup of contaminated property. Completion of an ASTM E1527 Phase I Environmental Site Assessment is generally considered the standard practice in everyday commercial real estate transactions and is accepted by EPA regulations. To avoid CERCLA liability, Lessees/Tenants need to work with the real estate and environmental attorneys to perform the proper due diligence and complete the requirements of ASTM El 527–13. Under the new provisions of the BUILD Act of 2018, the Lessee/Tenant can follow three methods to avoid CERCLA liability including:
- Establish their landlord as a BFPP by proving that the landlord completed the AAI/ASTM E l 527 Phase I ESA as defined by the CERCLA and EPA regulation and guidance;
- Establish that their landowner completed AAI/ASTM El 527 Phase I ESA as defined by CERCLA and EPA guidance, but later failed either with compliance or to complete additional requirements (such as remediation or documentation); or
- Establish the tenant themselves as the BFPP by completing the AAI/AST M E1527-13 Phase I ESA prior to acquiring leasehold interest and maintaining compliance with the additional due care requirements.
It is important to consider the old package in addition to the new wrapper provided in the BUILD Act of 2018 to assist Lessees /Tenants to avoid CERCLA liability!
The author, Jerry D. Worsham II, is a shareholder with the Cavanagh Law firm. He is licensed in Arizona, New Mexico, Texas and the District of Columbia and has been a “Recognized Environmental Specialist” by the New Mexico Board of Legal Specialization since 2000. Mr. Worsham has an extensive practice in environmental compliance and natural resource development. His experience includes: approvals and permits for natural resource development ; litigation defense on numerous cases involving the Comprehensive Environmental Response , Compensation and Liability Act (CERCLA); Climate Change including comment on issues and regulation development ; compliance with the Resource Conservation and Recovery Act (RCRA); civil and criminal liability defense on environmental matters; ASTM Phase I and Phase II Environmental Site Assessments coordination; emergency incident responses; Prospective Purchaser Agreement negotiations; creation of Conservation Easements ; and due diligence associated with mergers , acquisitions and initial public offerings. Mr. Worsham reviews and comments on federal, state and local laws, rules and regulations on a regular basis and represents clients before federal and state environmental agencies.
1. CERCLA or Superfund is an extremely complicated statute and it has acquired a well-deserved notoriety for vaguely drafted provisions and an indefinite, if not contradictory, legislative history. See Amoco Oil Co. v. Borden, Inc., 889 F.2d 664, 667 (5th Cir. 1989).
2. The BUILD Act of 2018 is part of H. R. 1625 Consolidated Appropriations Act, 2018.
3. The burden of proof for establishing a defense to CERCLA liability lies with the person seeking to qualify for the liability protection. See United States v. Domenic Lombardi Realty, Inc. , 290 F.Supp .2d 198 (D.R.I. 2003).
4. The term “ owner or operator “ do es not include a person, who, without participating in the management of a facility, holds indicia of ownership primarily to protect his security interest in the facility. For clarification of the security interest exclusion, see EPA ‘ s rule on lender liability under CERCLA, 57 Federal Register 1 8344 (April 29, 1992).
5. Because the BFPP protection is self-implementing – by the owner asserting that status – as a practical matter it may be difficult for a Lessee/Tenant to know with certainty whether the owner has qualified for and continues to maintain BFPP status. Thus, Lessees/Tenant s with derivative BFPP status may need to evaluate independently whether the BFPP criteria are being met in order to assess their own status as a BFPP.