EPA published the Revised Enforcement Guidance Regarding the Treatment of Tenants Under the CERCLA Bona Fide Prospective Purchaser Provision ("Guidance") to assist tenants in qualifying for the Bona Fide Prospective Purchaser ("BFPP") defense to CERCLA liability approximately one year ago on December 5, 2012. This Guidance provided much needed clarification of whether and how tenants may independently qualify for the BFPP defense under CERCLA. The one year anniversary of this Guidance is a good time to assess how environmental due diligence practices have changed for prospective tenants prior to entering into a lease.
Tenants are often unaware that a tenant can become liable for pre-existing contamination on leased property in certain circumstances. CERCLA makes both owners and operators of property responsible for paying for cleanup of hazardous substances on their property. 42 U.S.C. § 9601 et seq. A tenant with actual control or the authority to control hazardous substances on the property can become an "operator" under CERCLA and incur liability for cleanup costs under CERCLA. Nurad v. Wm. E. Hooper & Sons, Co., 966 F.2d 837 (4th Cir. 1992).
One defense to CERCLA liability is the BFPP defense. CERCLA defines BFPP to include "a person (or a tenant of a person)" acquiring ownership of a facility after January 11, 2002. 42 U.S.C. § 9601(40). By this definition, CERCLA allows tenants to obtain derivative BFPP status where the owner of the leased property has established and maintains BFPP status. Through derivative BFPP status, a tenant can rely on the landlord's BFPP defense. The landlord must have established its BFPP defense prior to purchase of the property. To establish the BFPP defense, the statute requires a prospective owner to conduct the following pre-purchase and post-purchase steps:
- all disposal of hazardous substances occurred before purchase
- buyer purchased property after January 11, 2002;
- buyer performed all appropriate inquiry into ownership and uses before acquisition (current regulations provide that a Phase I Environmental Site Assessment conducted under ASTM standard E1527-05 is sufficient); and,
- buyer is not otherwise potentially liable or affiliated with any person who is potentially liable.
Post-Purchase or Continuing Steps:
- after purchase, buyer continues to exercise appropriate care (reasonable steps) for known hazardous substances on the property by: ◦stopping continuing release;
- preventing threatened future release;
- preventing or limiting exposure to previous releases;
- buyer continues to meet its responsibilities after purchase by: ◦complying with land use restrictions and Institutional Controls;
- exercising appropriate care (reasonable steps);
- cooperating with authorities;
- complying with information requests and administrative subpoenas; and,
- providing legally required notices.
A tenant seeking to establish the BFPP defense through the landlord should conduct due diligence prior to entering into a lease to check that the landlord met the pre-purchase steps and continues to meet the post-purchase steps outlined above. A key pre-purchase step is the Phase I Environmental Site Assessment. A tenant's due diligence should include obtaining a copy of the landlord's Phase I and reviewing the Phase I to make sure it meets the all appropriate inquiry standard. As set forth above, EPA regulations provide that a Phase I Environmental Site Assessment conducted under ASTM standard E1527-05 is sufficient. EPA has recently proposed accepting the new ASTM standard E1527-13 and is currently reviewing comments on the proposed acceptance of the new standard. In EPA's notice, EPA provides that it intends for both ASTM E1527-05 and ASTM E1527-13 to satisfy the all appropriate inquiry standard. Prospective owners and tenants should continue to check for a final EPA notice prior to finalizing a Phase I.
A tenant may also establish the BFPP defense independently from the owner of the property. The Guidance provides that EPA intends to exercise its enforcement discretion to allow a tenant to establish BFPP status independent of the landowner's status. Obtaining independent BFPP status will give the tenant more control over its defense and may be necessary where the landlord is not willing to share the landlord's Phase I with the tenant or where the tenant's due diligence shows that the landlord may not qualify for the BFPP defense.
The BFPP steps for a tenant require that:
- all disposal of hazardous substances at the facility occurred prior to execution of the lease;
- the lease was executed after January 11, 2002;
- the tenant conducted all appropriate inquiry prior to execution of the lease (current regulations provide that a Phase I Environmental Site Assessment conducted under ASTM standard E1527-05 is sufficient);
- the tenant provides legally required notices;
- the tenant takes reasonable steps with respect to hazardous substance releases;
- the tenant provides cooperation, assistance, and access;
- the tenant complies with land use restrictions and institutional controls;
- the tenant complies with information requests and administrative subpoenas;
- the tenant is not potentially liable for response costs at the facility or “affiliated” with any such person; and,
- the tenant does not impede any response action or natural resource restoration.
As with the BFPP for a landowner, the key step in establishing a tenant's independent BFPP defense is obtaining a Phase I prior to entering into the lease. As set forth above, current EPA regulations provide that a Phase I Environmental Site Assessment conducted under ASTM standard E1527-05 is sufficient but EPA has issued a proposed notice to accept ASTM standard E1527-13. EPA's notice provides that EPA intends for both ASTM E1527-05 and ASTM E1527-13 to satisfy the all appropriate inquiry standard in the near future, but prospective owners and tenants should continue to check for a final EPA notice prior to finalizing a Phase I.
Even though the EPA Guidance is now a year old, most prospective tenants seem unaware that a tenant has the right to obtain an independent BFPP defense. Relying on the landlord's Phase I may not be sufficient in all instances. Even where the landlord has established the BFPP defense prior to purchase, the landlord could lose the BFPP defense in the future by failing to comply with the post-purchase steps. A prospective tenant can establish greater control over its defense to environmental liability by obtaining an independent Phase I and establishing its own BFPP defense.