FEBRUARY ISSUE: Law & Policy–No Free Pass
- Feb 19, 2015
The nation’s dwindling supply of undeveloped urban land has prompted investors to focus on the redevelopment of brownfields. In 2002, Congress sought to facilitate this by passing amendments to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). One such amendment created a new protected status for the brownfield developer—the so-called “bona fide prospective purchaser” (BFPP).
Prior to this, if a site purchaser discovered contamination during its due diligence but ultimately elected to acquire the property, it was, in essence, charged with knowledge of the situation and deemed to assume the liabilities that might follow under CERCLA’s strict liability rules. It was better to bury your head in the sand than to fully understand the property you were purchasing.
The BFPP protections changed that by affording a developer protections from CERCLA liability as long as the developer satisfies certain requirements. From the perspective of the U.S. Environmental Protection Agency (EPA), the BFPP provisions have “dramatically altered the Superfund liabilities landscape for landowners.”
While this is generally true, case law in the ensuing years has revealed some unfortunate uncertainties in the law that have been traps for well-intentioned developers.
To qualify for BFPP protections under CERCLA, the following conditions, among others, must be satisfied :
■ All disposal of hazardous substances at the property must have occurred before the purchaser acquired the site;
■ The purchaser must exercise appropriate care with respect to hazardous substances found at the site 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; and
■ The purchaser must not be potentially liable, or affiliated with any other person that is potentially liable, for CERCLA response costs at the site through any direct or indirect familial relationship, or any contractual, corporate or financial relationship (other than a contractual, corporate or financial relationship 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), or as a result of a reorganization of a business entity that was potentially liable.
All disposal must pre-date a developer’s acquisition of a subject site. Contrary to intuition, “disposal” in this instance does not mean the first introduction of hazardous substances to the property. Rather, if a purchaser later redevelops property where contaminants were previously discharged, the mere exacerbation of the contamination may constitute disposal.
In a 2011 case in Michigan, the court held that a purchaser was not a BFPP because it had earlier removed a concrete cap on the subject property and allowed rainwater to infiltrate the soil and cause further dispersal of contaminants that pre-dated its acquisition. As such, disposal is not limited to affirmative introduction of contamination to the site. It may also apply to more passive activities that commonly occur in a redevelopment project.
The purchaser must also exercise appropriate care with respect to hazardous substances at the property. In a 2003 guidance document, the EPA stated that it does not believe Congress intended to create the same types of obligations on a BFPP as are required of a CERCLA-liable party (for instance, removal of contaminated soil). But the EPA also noted that Congress did not intend to allow a landowner to ignore the potential dangers that are associated with hazardous substances on its property. In essence, “appropriate care” lies somewhere in the middle.
In a 2013 ruling, the U.S. Fourth Circuit Court of Appeals held that a developer did not exercise appropriate care when it failed, for two years after its purchase of a property, to cap or otherwise remove certain sumps where hazardous substances were stored when the related above-ground structures were demolished. The developer also failed to properly safeguard the site from dumping of hazardous wastes and failed to maintain a crushed-stone cap across the site intended to prevent disturbances of underlying contaminated soil. The court concluded that the purchaser did not exercise “appropriate care,” and it lost its BFPP defense.
Conversely, in a 2010 case, a U.S. District Court in California concluded that a purchaser had exercised appropriate care when it removed source contaminants from certain underground storage tanks, even though it subsequently left the tanks in the ground and uncovered for as long as two years after its purchase.
Avoiding Affiliation with the Potentially Liable
A BFPP must also not have any contractual, corporate or financial relationship with a potentially liable party. In a U.S. District Court ruling in 2010, the lower court in Michigan held that a buyer’s agreement to indemnify and release its seller from liabilities for known contamination, and the buyer’s subsequent urging of the EPA not to prosecute its seller for CERCLA liabilities (presumably because the buyer would then have to indemnify the seller for it), constituted an improper affiliation resulting in a loss of BFPP status.
Because indemnities and releases are so widely used in real estate transactions, the development community was alarmed by the lower court’s ruling. The EPA even appeared to be surprised by the ruling, and thereafter issued guidance on the topic, underscoring that the BFPP provisions already specify that the contractual relationship created by the conveyancing documents (for instance, the deed) will not result in a disqualifying affiliation.
The EPA then (unilaterally) expanded this exception for conveyancing documents, noting that it “does not intend to treat (as disqualifying affiliations) certain contractual and financial relationships (e.g., certain types of indemnifications or insurance agreements) that are typically created as part of the transfer of title, although not part of the deed itself.”
Although the EPA’s guidance in this respect does afford some comfort to developers that customary contractual arrangements will not disqualify them from BFPP status, the guidance is not binding on the courts. Until Congress clarifies the language, uncertainty will remain.
In sum, BFPP protections are highly valuable and have spurned redevelopment of brownfields. However, judicial decisions make it clear that obtaining and then maintaining BFPP status may be more difficult and costly than might be expected.
Michael Hamilton is a real estate and finance partner in the Los Angeles office of DLA Piper L.L.P. (US). You can reach him at email@example.com.