The Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund, creates strict liability for the cost of contamination if you fall into certain categories. If you fall into one of the four broad categories, you are considered a potentially responsible party. To become a potentially responsible party, in regards to lessees, you must fit at least one of the four categories. In this instance it is the owner and operator of the facility (42 U.S.C. § 9607(a)).
The term “facility” is broad. In summary, it includes any building, structure, installation, equipment, storage container, or any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located.
Because of the structure of CERCLA, there is no defense that someone else did it. Neither does it matter that it was contaminated decades ago. For example, if you buy a site and someone in the chain of title contaminated the property, you are liable.
Over time, contaminated property lingered. No one would buy it, fearing that with ownership comes liability. These orphaned properties were a blight degrading neighborhoods and communities. Because of the lack of attention to the properties, they became known as brownfields.
In 1986, CERCLA was amended by enactment of the Superfund Amendments and Reauthorization Act (SARA) which introduced the “innocent purchaser defense.” In a nutshell, if a potential buyer took certain steps in purchasing the property, the buyer could be relieved of CERCLA liability.
While one may become an innocent purchaser, there was no such defense for a tenant. This is important because a tenant could be considered an “operator” of a property and can therefore hold liability if the owner could not respond financially or even sometimes cannot be found.
The term operator was defined by the Supreme Court in U.S. v. Bestfoods as:
"[A]n operator is simply someone who directs the workings of, manages, or conducts the affairs of a facility. To sharpen the definition for purposes of CERCLA’s concern with environmental contamination, an operator must manage, direct, or conduct operations specifically related to pollution, that is, operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations.”
However, it must be noted that it is not the actual exercise of being an operator. It is having the authority to manage, direct, or conduct operations specifically related to pollution. Therefore, a tenant can be held liable as “operator” under CERCLA § 107(a)(2) if it had “authority to control operations or decisions involving the disposal of hazardous substances at the Site” whether or not it exercised that authority, according to Nurad Inc. v. William E. Hooper & Sons Co. But courts have found that under CERCLA, “owner” liability may be extended to a lessee … when the lessee participates in the disposal of hazardous wastes. U.S v. South Carolina Recycling and Disposal Inc.
Lease Language Matters
In determining whether a tenant is to be considered an owner under CERCLA, the terms of a lease are evidence for a court to determine liability. For example:
“A broadly worded indemnification clause in real property lease, providing that tenant will indemnify landlord from liabilities asserted against landlord for work on or use or maintenance of demised premises, demonstrated clear intent to transfer all liability to tenant, although no specific reference to environmentally based liability was made, and indemnity provisions effectively transferred liability under the … CERCLA to tenant where tenant’s liability arose from its use of property and there was no evidence tending to show any fault on part of landlord (42 U.S.C. § 9607(e)(1)),” a federal district court ruled in In re Hemingway Transport, Inc.
To qualify for the innocent landowner defense, a potential purchaser has to follow certain steps. First, the buyer must perform a Phase I environmental site assessment that doesn’t include sampling, just a collection of facts. Over the years, the issues of what should be included in a Phase 1 assessment somewhat varied from one environmental professional to another based on their own thought process, the practice in the local community, and even the state. At some time, the process and content of a Phase 1 assessment coalesced, but there was no standard by which the EPA would say that the Phase 1 is adequate for the purpose of providing the innocent landowner defense.
Effective Dec. 30, 2013, the EPA approved a rule to satisfy the issue of all appropriate inquiries. It stated that to satisfy those requirements, the use of the American Society for Testing and Materials including the document known as Standard E1527 – 97, titled, “Standard Practice for Environmental Site Assessments: Phase 1 Environmental Site Assessment Process,” will suffice.
The standard lays out the requirements for a Phase 1 Environmental Site Assessment which should look for Recognized Environmental Condition (REC), i.e., the presence or likely presence of any hazardous substances in, on or at a property that may be due to a release to the environment or conditions which may pose a material threat of a future release. Performance of an adequate Phase 1 is considered to be what is called all appropriate inquiries.
The elements of the Phase 1 assessment are:
- site inspections;
- interviews with persons who have knowledge about the site;
- reviews of historical sources look for recognized environmental condition;
- consideration of “commonly known” information;
- consideration of “degree of obviousness of contamination” such as staining, odors, etc.; and
- assessment of vapor encroachment and intrusion.
If the Phase 1 assessment raises concerns that the potential purchaser finds unacceptable, then they could either walk away from the purchase or understand that upon closing, it would become an owner or operator under CERCLA. But what about a potential tenant who may be considered an owner or operator? If they buy the property with the contamination, they couldn’t avail themselves of the innocent landowner defense.
Purchasers Can Protect Themselves
Obviously, if the potential purchaser decides to buy the property but wants to make sure that the innocent landowner defense can be relied on and become what is known as a bona fide prospective purchaser, the purchaser has to be able to prove by preponderance of evidence that at least meets various criteria including:
- a showing that hazardous substances occurred before the person acquired the facility;
- the buyer met the obligations of all appropriate inquiries;
- all legally required notices regarding the discovery or release of any hazardous are made;
- the buyer exercises appropriate care with respect to hazardous substances found at the facility by taking reasonable steps to stop any continuing release, prevent any threatened future release, and prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance;
- the person provides full cooperation to the agency with jurisdiction;
- the person is in compliance with any land use restrictions established or relied on in connection with the cleanup and does not impede the effectiveness or integrity of any institutional control (such as a land use description employed in connection with the cleanup);
- the person complies with any request for information from the agency with jurisdiction; and
- the person is not potentially liable, or affiliated with any other person that is potentially liable through either any direct or indirect familial relationship or any contractual, corporate, or financial relationship.
In order to streamline this process and to give some consistency in interpretation of the various issues involved, the Small Business Liability Relief Act and Brownfields Revitalization Act amendments were added to CERCLA in 2002. The ammendment altered CERCLA’s liability scheme and engender a “safe harbor” for redevelopment Brownfields. Most importantly, the bill provided for liability protections for innocent purchasers and bona fide prospective purchasers. To qualify for these protections, an entity must satisfy the all appropriate inquiries standards and other criteria.
Tenants Can Become Bona Fide
But what about tenants?
In 2009, the EPA provided some help to a prospective tenant by issuing guidance providing for two ways a tenant may be a bona fide prospective purchaser. Such guidance is not considered law, and the defense is at the discretion of the EPA. The guidance document, “Enforcement Discretion Guidance Regarding the Applicability of the Bona Fide Prospective Purchaser Definition in CERCLA Section 101(40) to Tenants,” provides that the EPA will exercise enforcement discretion against tenants in the following categories—a tenant whose lease gives sufficient indicia of ownership to be considered an “owner” or a tenant of an owner who is a bona fide prospective purchaser.
Tenants obtained real protection on March 23 with the signing by the president of the Consolidated Appropriations Act of 2018, which included the Brownfields Utilization, Investment, and Local Development (BUILD) Act of 2018. The BUILD Act:
- provides additional protections, resources and incentives to both public and private brownfield redevelopments;
- encourages the development of renewable energy and energy-efficiency projects on brownfield sites; and
- amends several provisions of CERCLA.
Importantly for tenants, Section 5 of the BUILD Act extends the definition of a bona fide prospective purchaser to include lessees who meet the applicable criteria. However, the bill also states:
“With respect to a facility, in any case in which the ownership or operational control held by a person is established by a tenancy or lease, the person shall be considered to be a bona fide prospective purchaser only if the person establishes by a preponderance of the evidence that the tenancy or lease is not designed to avoid liability under this Act by any” potentially responsible party.
BUILD Act Gives Tenants Options
By amending 42 U.S.C § 9101(40), the BUILD Act adds language to the statute that creates two options for tenants to use in proving a bona fide prospective purchaser defense.
First, a tenant can assert the defense by showing that the property owner/landlord satisfied all the elements needed to establish and keep the defense. This derivative bona fide prospective purchaser defense can be sustained by the tenant even if the landlord subsequently loses the landlord’s entitlement to the defense, so long as that loss was not the result of anything the tenant did or failed to do (42 U.S.C. § 9101 (40)(A)(i)).
Second, a tenant can now establish its own direct bona fide prospective purchaser defense, by performing its own all appropriate inquiries before signing the lease or occupying the property, and then continuing to meet the same post-occupancy due care and cooperation conditions as are required of property owner/landlords (42 U.S.C. § 9101(40)(A)(ii)).
The amendments also clarify the issue of “contractual relationship” such as a lease. Under CERCLA, a person who is “affiliated with” a potentially liable party cannot claim bona fide prospective purchaser status, and a person can become “affiliated with” a potentially liable party simply by entering into a contract with that party. The original bona fide prospective purchaser section of CERCLA specifies that being named in a property’s title transfer or financial security documents (i.e., deeds, mortgages, deeds of trust, etc.) does not create an “affiliated with” relationship to others in the property’s chain of title. The BUILD Act adds tenancies and leases to the types of contractual relationships that are excluded from creating an “affiliated with” status. This means tenants who establishes their own bona fide prospective purchaser defense will not be disqualified from asserting that defense, and so itself become potentially liable for cleanup work at a property, just because the tenant signs a lease with a potentially liable landlord (42 U.S.C. § 9101(40)(B)(viii)(I)(bb)).
While there may be area or structures that are leased and are not likely to have a hazardous substance issue, the lessee may wish not to expend the time and effort to seek to be a bona fide prospective purchaser. However, where the area or structure is likely or is known or suspected of having contamination, it would be prudent for the potential lessee to perform the necessary due diligence if the owner has not already done so. If the owner has done the work necessary to establish a bona fide prospective purchaser defense, the prudent potential lessee should ask for those documents and have them reviewed by an environmental professional and an attorney to ensure that the bona fide prospective purchaser status is secure.
Steven Hoch is a member in Clark Hill’s Los Angeles office. He has more than 40 years of experience with both federal and state environmental laws and regulations in the context of permitting, regulatory proceedings, litigation, enforcement actions, water supply, public policy formation, and advice. His work includes contamination of land and ground and surface water. Steven has critical experience in the areas of environmental law and the federal and state Safe Drinking Water Acts, Title 23, water supply, and the mechanics of water distribution.
The opinions expressed here do not represent those of Bloomberg Environment, which welcomes other points of view.