Buried in the 800-plus pages of the Consolidated Appropriations Act, 2018, is a change broadening the bona fide prospective purchaser (BFPP) defense for tenants under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Now, a tenant can assert the defense if the tenant leases the property after Jan. 11, 2001; completes a Phase I environmental site assessment prior to lease commencement; and then complies with the additional criteria of the BFPP defense after lease commencement.
The defense previously was available to a tenant only in limited circumstances, although the U.S. Environmental Protection Agency (EPA) issued a policy for exercising enforcement discretion where a tenant completed a pre-lease Phase I and then followed the additional BFPP defense criteria after lease commencement. While many non-residential tenants perform Phase I environmental site assessments before leasing property, in many instances this is simply for diligence purposes. With this new change, the Phase I takes on the same importance for a tenant as for a purchaser, including strict compliance with one of the applicable ASTM Phase I standards.
PHASE I ENVIRONMENTAL SITE ASSESSMENTS
The Small Business Liability Relief and Brownfields Revitalization Act (Brownfields Act) signed into law by President Bush on Jan. 11, 2002, amended CERCLA to help stimulate the redevelopment of brownfields. One of the requirements was for the EPA to develop its own Phase I environmental site assessment criteria called "all appropriate inquiries" (AAI). On Nov. 1, 2005, EPA published its AAI rule. The AAI rule specifically provided that a then-new version of the ASTM “Phase I Site Assessment Process Standard” E 1527-05 (2005 ASTM Standard) could be used to meet AAI. Since the AAI rule went into effect, most Phase I environmental site assessments followed the 2005 ASTM Standard and then the later 2013 standard. Another standard, E2247-16, is permitted for use in examining forestland and rural property. For more information on the ASTM Phase I standards, see EPA Deletes 2005 ASTM Phase I Standard as Approved Due Diligence Option Effective October 6, 2015, and EPA Approves Use of Updated ASTM Phase I Standard for Forestland, Rural Property.
BONA FIDE PROSPECTIVE PURCHASERS UNDER THE BROWNFIELD ACT
With the enactment of the Superfund Amendments and Reauthorization Act (SARA) amending CERCLA in 1986 came the "innocent purchaser defense." This allowed a potential purchaser to buy property after performing a Phase I environmental site assessment, provided no concerns for releases of hazardous substances were identified. If a potential concern were found, then a purchaser had to either walk away from the purchase or understand that, upon closing, the purchaser would become an owner or operator under CERCLA and liable for the contamination on the site. This materially impeded the purchase and redevelopment of brownfields in particular. The BFPP defense was meant to help alleviate this issue. In very simplistic terms, the BFPP defense allows a purchaser to conduct AAI and to purchase property with knowledge of hazardous substance contamination without incurring liability as an owner or operator. Many purchasers, though, do not focus on the additional requirements beyond AAI that must be met to maintain BFPP status.
A BFPP originally was defined in the Brownfields Act as “a person (or a tenant of a person)” that acquires ownership of a facility after the release of the hazardous substances and after Jan. 11, 2002, who has (a) conducted “all appropriate inquiries” into the previous ownership and uses of the property, and (b) meets the following additional requirements:
- Hazardous substance disposal on the site occurred before the acquisition.
- Provide all legally required notices regarding the release.
- Provide full cooperation, assistance and access to those conducting response actions.
- Comply with institutional and engineering controls and do not impede their effectiveness.
- Comply with governmental requests for information and subpoenas.
- The tenant in question is not already liable; is not affiliated with a responsible party “(other than a contractual, corporate or financial relationship that is created by the instruments by which title to the facility is conveyed or financed or by a contract for the sale of goods or services)”; and is not simply the reorganized entity of a responsible party.
- Exercise appropriate care with respect to the hazardous substances found — stop any continuing release, prevent threatened future releases and prevent exposure.
This led to a couple of ways that a tenant could qualify as a BFPP. The first was if the tenant’s landlord qualified as and remained a BFPP. The second manner was if the tenant in essence had acquired so much control under the lease that it equated with a purchase. Additionally, EPA provided guidance saying it would exercise enforcement discretion under CERCLA with respect to a tenant who completed AAI prior to lease commencement and continued to comply with the requirements for the BFPP defense thereafter. For more information on these matters, see EPA to Exercise Broader Enforcement Discretion Regarding Tenants as Bona Fide Prospective Purchasers Under CERCLA.
TENANTS AS BFPPS UNDER THE Consolidated Appropriations Act, 2018
The revised definition of BFPP under CERCLA allows a tenant three paths to establishing the BFPP defense, provided that the tenant acquires a leasehold interest in the facility after Jan. 11, 2002, such lease is not designed to avoid liability under CERCLA by any person, and any one of the following:
- Landlord as a BFPP — If the landlord completes AAI and maintains compliance with the additional requirements as a BFPP then the tenant may assert the defense.
- Landlord was a BFPP — If the landlord completes AAI and qualifies as a BFPP, but later fails to maintain the compliance with the additional requirements, then the tenant may assert the defense if the tenant has maintained the additional requirements.
- Tenant as a BFPP — If the tenant completes AAI prior to acquiring the leasehold interest and maintains compliance with the additional requirements, then the tenant may assert the defense.
The change allowing tenants to assert the BFPP defense upon completing Phase I environmental site assessments and following the additional requirements of the BFPP defense is an incredibly important liability protection under CERCLA and makes tenants less dependent on their landlords to be BFPPs. It also gives a tenant, who previously benefited only from “enforcement discretion” by EPA, an actual defense to liability asserted by EPA and third parties who may bring action against the tenant. While many non-residential tenants perform Phase I assessments before leasing property, in many instances this is simply for diligence purposes. With this new change, the Phase I takes on the same importance for a tenant as for a purchaser, including strict compliance with one of the applicable ASTM Phase I standards.