Five Steps to Help Buyer Obtain CERCLA Liability Protection

By J. Michelle Hickey, Of Counsel, Pircher, Nichols & Meeks: How do you obtain protection from contamination liability for your building? Read on.

The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) imposes joint and several liabilities on owners and operators of real property regardless of fault.  Purchasers of property, even those that have reason to know of contamination on the property, may be able to obtain protection from such liability by conducting “all appropriate inquiries” (“AAI”) and meeting other requirements.  Unfortunately, many purchasers falsely believe that they need not be actively involved in the AAI process, even gladly handing over control to another party.  Such practice can leave a purchaser with a Phase I report that does not adequately identify or address environmental concerns and provides no CERCLA liability protection.  Such risk can be reduced by taking the following simple steps.

Negotiate control of the Phase I process:  A purchaser is the party that will ultimately have to rely on the Phase I report to claim CERCLA liability protection and may need such report to obtain financing or to lease the property.  Accordingly, if feasible, a purchaser should hire the Phase I environmental consultant.  Hiring such consultant gives the purchaser the ability to shape the final Phase I report, including discussing any preliminary conclusions.  The purchaser does not want another party in the position to influence the environmental professional’s judgment on such important issues as determining what conditions rise to the level of a “Recognized Environmental Condition” (“REC”) and what, if any, Phase II work is required to address such REC.  Finally, by hiring the consultant, the purchaser is able to negotiate important contract terms, including terms concerning the scope of work, liability of the consultant, disclosure obligations, and insurance.  If it is not feasible to hire the consultant directly, the purchaser should negotiate the ability to discuss the conclusions of the Phase I report with the consultant and to review the consultant’s underlying contract and scope of work.

Make sure the purchasing entity is covered by the Phase I report:  Phase I reports may be completed prior to determining (or even forming) the actual entity that will purchase the property.  Addressing the Phase I report to the purchasing entity or obtaining a reliance letter, however, is necessary to safeguard such entity’s ability to claim CERCLA liability protection in the future.

Make sure that an environmental lien search has been conducted:  The AAI standards require that the purchaser obtain an environmental lien search.  Since many environmental consultants do not include the environmental lien search as part of the Phase I scope of work, this prerequisite to obtaining CERCLA liability protection is often missed.  Accordingly, the purchaser must either include the search in the consultant’s scope of work or otherwise obtain such search.

Provide information requested by the environmental consultant:  The environmental consultant usually asks the purchaser to provide information regarding any discount in the purchase price due to environmental conditions and the purchaser’s specialized knowledge of conditions and operations at the property.  This request for information can be confusing to a purchaser since the purchaser often does not have such information.  However, the AAI standards require that the purchaser independently inquire about such topics.  Accordingly, the purchaser should provide such information if within its possession or confirm that it does not have any specialized knowledge and is not aware of any discount in the purchase price due to environmental conditions.  If the purchaser does not, the consultant will likely note the failure to disclose in the Phase I report, casting doubt on whether the purchaser met its duty to independently conduct the above inquiries.

Make sure that the Phase I report is not too old:  The AAI standards require that interviews, records searches, and inspections used in the Phase I report be conducted no more than 180 days prior to purchase.  Often the Phase I report itself is dated weeks or even months after the interviews, records searches, and inspections were conducted, leading the unwary to believe the report falls within the 180-day rule when it does not.

Although not exhaustive, the above simple steps will further ensure that the purchasing entity has met the AAI requirements and can obtain CERCLA liability protection if needed.