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By Adrian Reyna
February 22, 2024
Hazardous substance liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) can be a costly and unforeseen consequence of purchasing a property. However, purchasing parties to a real estate transaction may qualify for an exemption to CERCLA liability if they satisfy certain requirements, including conducting environmental due diligence in accordance with Environmental Protection Agency (“EPA”) regulations. When conducting due diligence as part of a real estate transaction, potential purchasers should ensure that their environmental assessments incorporate the standards necessary to qualify for exemption from CERCLA liability.
What is CERLA?
Congress enacted CERCLA on December 11, 1980. CERCLA, also known as “Superfund,” established a fund to be used for hazardous waste site clean-up and allowed for the revision of a National Contingency Plan for hazardous waste release response. More significantly for the real estate industry, CERCLA also imposes financial liability for landowners and operators of property contaminated by hazardous waste. Specifically, owners and operators of a “facility,” which among other things includes, “any building, structure, installation, equipment, pipe or pipeline…or any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located,” could be compelled to pay the following costs, including interest:
- All government costs of removal, remedial action, and/or necessary costs of response to contamination or release;
- Damages for injury to, destruction of, or loss of natural resources, including the reasonable costs of assessing such injury, destruction, or loss; and
- The costs of any health assessment or health effects study carried out under CERCLA.
Importantly, CERCLA not only imposes this liability on the current owners and operators of a facility, but also to any individual or corporation who:
- Owned or operated the facility at the time of the disposal of the hazardous substance;
- Arranged for the substance’s disposal or treatment, or its transportation for such purpose; and
- Accepted a hazardous substance for transport to a disposal or treatment facility, incineration vessel, or other site.
Because CERCLA imposes strict liability for response costs on owners and operators of facilities which accepted hazardous materials, past and present, it is possible that CERCLA liability could be imposed upon buyers and sellers of contaminated property alike. Courts have discussed situations in which liability could also be imposed upon tenants/lessees. However, there are exemptions to CERCLA liability, one of which is the Bona Fide Prospective Purchaser (“BFPP”) exemption. Parties should keep this exemption in mind during the due diligence process in any real estate transaction, and incorporate the investigative requirements into the due diligence process.
The Bona Fide Prospective Purchaser Exemption
The BFPP exemption provides statutory protection against CERCLA liability for parties who know or have reason to know about contamination on the land they plan to purchase, as long as they qualify as a BFPP and continue to meet the requirements to maintain that status after they acquire the property. To qualify as a BFPP under CERCLA (for any property purchased after January 11, 2002), a party must establish by a preponderance of the evidence that it has satisfied specified requirements. These requirements generally relate to exercising due care with hazardous substances on the property, cooperating with cleanup efforts and government response actions, and that the potential BFPP have no association with liable parties.
Pertinent here, a purchaser of a property must also make “all appropriate inquiries” into the property before acquiring it in order to qualify as a BFPP. This requirement is key in a real estate transaction. In order to qualify for the BFPP exemption and avoid potentially significant liability, the purchasing party in a real estate transaction should ensure that the due diligence they perform satisfies this requirement.
All Appropriate Inquiries
All appropriate inquiries (“AAI”) under CERCLA requires the person to evaluate the facility’s environmental conditions and potential contamination in accordance with CERCLA’s statutory requirements. Depending on the particular inquiry of AAI, some “must be conducted within one year prior to the date of acquisition of the subject property…” and others “must be conducted or updated within 180 days of and prior to the date of acquisition of the subject property.” Helpfully, EPA regulations identify industry standards, such as ASTM standards, which can be used to satisfy the AAI requirement when conducting environmental site assessments.
To that end, when contracting for an “Environmental Professional” to conduct a Phase I Environmental Site Assessment as part of due diligence in a transaction, potential purchasers should confirm with the Environmental Professional that the assessment will satisfy the AAI requirements. This can protect the purchaser and allow them to seek the BFPP exemption if anything is uncovered.
Overall, those who conduct the necessary inquiries to qualify as BFPPs, and continue to satisfy the requirements to maintain their status as BFPPs, can better avoid the potentially high costs of CERCLA financial liability.
Our team is prepared to assist you in understanding potential CERCLA implications in your real estate transactions. Please reach out to Mickey Maher at mmaher@hechtsolberg.com or Adrian Reyna at areyna@hechtsolberg.com with any questions regarding the interplay of CERCLA in a potential transaction.