Buried in the omnibus spending bill signed earlier this year were amendments to the Superfund law that for the first time make clear that tenants can qualify as bona fide prospective purchasers, protected from cleanup costs from the presence of hazardous substances on a property.
The Consolidated Appropriations Act signed on March 23, 2018 included in Division N, the ‘‘Brownfields Utilization, Investment, and Local Development Act of 2018’’ (the BUILD Act).
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA, commonly referred to as Superfund), 42 U.S.C. § 9601 et seq., provides an important liability protection, including from cleanup costs, for parties who qualify as bona fide prospective purchasers (BFPPs).
The potential applicability of the BFPP protection for a tenant who leases contaminated or formerly contaminated real estate and improvements has been the subject of debate for the decades since the CERCLA’s enactment.
The cases interpreting CERCLA make clear that the mere execution of a lease does not necessarily make a tenant liable as an owner or operator under the law. But courts have recognized the uncertainty regarding the potential liability of tenants under CERCLA including because a tenant may be a responsible person as an operator and more broadly of a lack of express protection in the federal law for tenants. Understandably, a prospective tenant may wish to seek BFPP treatment in the event of a future federal CERCLA cleanup action at the leased property or to ensure its appropriate environmental stewardship of the property.
Such is a real issue when in any given year the vast majority of commercial and industrial real estate transactions are leases and not contracts of sale.
In 2002, as part of the Small Business Liability Relief and Brownfields Revitalization Act, the BFPP definition was amended to include the parenthetical phrase “(or a tenant of a person)” in the description of who can claim the BFPP defense, but there was no other direction on the treatment of tenants.
EPA issued guidance in 2012 on the treatment of tenants as BFPPs, but only provided that the tenant could derive it BFPP status through the property owner, and that status was limited to “so long as the owner maintains its BFPP status.” So while instructive, it provided little comfort to tenants.
This 2018 BUILD Act addresses the uncertainty dating to 1980, by amending CERCLA § 101(40) including by in subclause (II), by inserting ‘‘, by a tenancy, by the instruments by which a leasehold interest in the facility is created,’’ ..
And in that subsection, the term “bona fide prospective purchaser” has been amended to mean,
(ii) a person who (I) who acquires a leasehold interest in the facility after January 11, 2002; (II) who establishes by a preponderance of the evidence that the leasehold interest is not designed to avoid liability under this Act by any person; and ..”
Which has the effect of increasing the value of many properties making reuse a viable option obviating one of the longstanding criticisms of CERCLA, that the law limits redevelopment across America, allowing a tenant to avoid CERCLA liability by any of the following three means:
Establishing the landlord is a BFPP because that landlord completed the “all appropriate inquiries” as required by federal law; or establish that the landlord completed all appropriate inquiries, but later failed either with compliance or to complete additional requirements; or establish the tenant itself, as the BFPP, by completing all appropriate inquiries prior to acquiring the leasehold interest and maintaining compliance with the additional requirements, if any.
All appropriate inquiries has been determined by EPA regulation to be a Phase I Environmental Site Assessment conducted in accordance with ASTM E1527-00. Phase l ESAs will now become much more common in commercial and industrial leasing.
A tenant can now assert, without having to rely on the landlord’s status, the innocent landowner defense being protected from CERCLA liability including cleanup costs from the presence of a hazardous substances on the property.