Buyers of real estate and their professional advisors are all too familiar with the Phase I Environmental Site Assessment (ESA). Born out of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §§ 9601, et seq. (commonly known as the Superfund law), the Phase I ESA is a report prepared during a potential buyer’s due diligence.
For years, potential buyers would often walk away from contaminated properties because of CERCLA’s harsh liability—liability is strict (without fault) and joint and several (any one party can be liable for all). Mere ownership of contaminated property is a basis for liability under CERCLA. For many years, an owner’s best chance to escape liability was the “innocent landowner” defense, which requires an owner to show a lack of knowledge of the contamination after a diligent, pre-acquisition inquiry into the environmental condition of the property. If a potential buyer is presented with a Phase I ESA report identifying contamination, the potential buyer would obviously have knowledge, and thus would be unable to assert an “innocent landowner” defense. Such was the story of CERCLA for over two decades.
The 2002 brownfield amendment
In 2002, CERCLA was amended to protect from liability knowing buyers of contaminated properties (“brownfield” sites) interested in pursuing redevelopment. Buyers who agreed to manage and mitigate the risks of the contamination identified during the pre-acquisition due diligence are now defined as “bona fide prospective purchasers” and are not liable. To obtain this “bona fide” defense, there are eight requirements (see 42 U.S.C. § 9601(40)) that an owner must meet and maintain:
- All disposal of hazardous substances at the property must have occurred prior to acquisition.
- The buyer must have made “all appropriate inquiries” into the previous ownership and uses of the property. This means that the buyer’s due diligence should include a complete and properly prepared Phase I ESA.
- The buyer must be sure to provide all legally required notices with respect to the discovery or release of hazardous substances.
- The buyer must exercise “appropriate care” with respect to the hazardous substances by taking reasonable steps to (a) stop any continuing release, (b) prevent any threatened future release, and (c) prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance.
- The buyer must cooperate with all governmental personnel authorized to conduct response actions or restoration activities, including providing access to the property.
- The buyer must comply with and not impede the effectiveness of any institutional controls and land use restrictions required in connection with any response action.
- The buyer must comply with any governmental information requests related to the contamination.
- The buyer must not be affiliated with any person who is potentially liable for the contamination.
Since 2002, federal courts have had the opportunity to analyze “bona fide prospective purchaser” defenses asserted by landowners, and the courts have provided some useful guidance. Two lessons can be gleaned from the courts’ decisions.
Lesson 1: Phase I ESAs must be strictly compliant with EPA regulations
The buyer must make “all appropriate inquiries” before acquiring the property. This means that the buyer’s Phase I ESA report must comply with the EPA’s regulations (see 40 C.F.R. § 312, Subpart C) which include, among other things, requirements that the report be prepared by a qualified environmental professional, that current and past owners, operators, occupants, and employees be interviewed, that historical property and government records be reviewed, that a site walk-through and inspection be performed, and that consideration be given to any specialized knowledge the buyer may have and whether the purchase price reflects a discount which could be indicative of contamination.
Attorneys often counsel their clients that a detailed review of Phase I ESA reports for strict compliance with EPA’s regulations is essential. This type of thorough review and high standard for Phase I ESA reports is important because adverse parties, and the courts, have shown a willingness to use the slightest of mistakes or inadequacies as a basis to challenge an owner’s “bona fide” and non-liable status. The importance of engaging competent environmental professionals cannot be understated.
Lesson 2: A post-acquisition environmental plan for addressing contamination is essential
The buyer must exercise “appropriate care” with respect to the contamination on the property. In this regard, the courts have looked at whether owners of contaminated properties took “reasonable steps” to stop a continuing release, prevent a future release, and protect people and the environment from exposure. The question then is what is unreasonable.
The failure to promptly clean up and remove known areas of contamination after acquisition has been found unreasonable. The failure to maintain an engineered barrier that restricts access to contamination (e.g., a crushed rock cover) has been found unreasonable. Removing a building, but leaving the contaminated soil beneath it in place has been found unreasonable. In one case, a redevelopment contractor ruptured a previously unknown underground storage tank, releasing approximately 20 gallons of petroleum. The contractor mixed the contaminated soil with clean soil at the site and used the material as fill, which a court found not only unreasonable, but to actually be a new disposal event that occurred after the acquisition.
The best way for an owner to defend the appropriateness of its post-acquisition care is to preemptively develop a post-acquisition environmental plan that clearly identifies any continuing obligations necessary to address any contamination, and then to implement and document compliance with that plan.
The 2002 brownfield amendment to CERCLA has shown some success in advancing the redevelopment of contaminated properties by relieving responsible buyers of CERCLA liability. The most important things buyers can do to obtain and guard their “bona fide” status are to perform pre-acquisition due diligence, including a Phase I ESA that is thorough and in compliance with EPA regulations, and to develop and implement a post-acquisition environmental plan that sets forth the appropriate care for any contamination.
Matthew E. Cohn is an officer at Greensfelder, Hemker & Gale, P.C., in Chicago. He focuses his practice on all aspects of environmental law, including litigation, environmental due diligence, and counseling on regulatory compliance. He can be reached at [email protected]