Often times businesses only worry about performing due diligence (Phase Is and Phase IIs) when they are purchasing a building, factory or land. In my experience, many tenants never think about the fact that they could inherit liability for pre-existing contamination just by leasing property. However, tenants, particularly those that are leasing industrial space, should be concerned and protect themselves accordingly.
Now, U.S. EPA has created an even larger incentive for performing proper due diligence as a tenant. On December 5, 2012, US EPA issued new guidance that expands liability protections for tenants that could be held liable for cleanup and remediation costs at leased properties.
Quick Primer on Tenant Liability under CERLCA
The environmental statute that has the most broad reaching liability for pre-existing contamination is the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)- also known as Superfund. Under CERCLA, any "owner" or "operator" can be held jointly and severally liable for cleanup costs at a site for even contamination that was present prior to their use or ownership of the property.
Tenants can be deemed an "owner" under CERCLA depending on the structure of the lease. For example, they could be deemed a de facto owner if they have control over the entire property.
Tenants could also be held liable for pre-existing contamination as an "operator" if they store or generate hazardous substances on the leased property during the term of the lease. There are varying tests for determining whether a tenant should be deemed an "operator" under CERCLA. However, any tenant utilizing hazardous substances on a leased property should be aware that they could be deemed potentially liable for pre-existing contamination.
Tenants and the Bona Fide Purchaser Defense (BFPD)
In order to encourage re-use of brownfield properties, in 2002 Congress passed the Small Business Liability Relief and Brownfields Revitalization Act. As part of the Act, Congress created the "bona fide purchaser defense" (BFPD) which allows purchasers that conduct proper due diligence and follow other requirements to purchase property with knowledge of hazardous substance contamination without incurring liability as an "owner" or "operator."
However, when the law was passed in 2002 it did not provide the same opportunities to tenants to qualify for the BFPD. The only way a tenant could qualify for the protection is if they were deemed an "owner" based upon the lease terms or if the owner already qualified for the BFPD. Tenants under traditional lease arrangements with an owner that never qualified for the BFPD fell into a gap. They simply couldn't qualify on their own for BFPD protections.
Finally, in December 2012, EPA recognized there was a gap in potential liability protection for most tenants and it issued a new guidance allowing all tenants to qualify for the BFPD if they meet certain conditions, including:
- Don't dispose of hazardous substances on the property;
- Conducts proper due diligence (known as "All Appropriate Inquires");
- Makes all legally required notices;
- Takes "reasonable steps" regarding releases;
- Cooperates with regulators;
- Complies with any use restrictions or controls designed to protect against exposure to contamination;
- Complies with administrative subpoenas and information requests; and
- Is not potentially liable for response costs or affiliated with a person who is liable for response costs at the facility.
It is worth noting that this is only enforcement discretion guidance and not statutory liability protection. This means that EPA could still file a suit against a tenant if it felt the circumstances justified such an action.
Tenants Should Consider the BFPD and Contract Provisions to Protect Themselves
Due to the large liability exposure associated with leasing property that may have had some history of use of hazardous substances, tenants should take steps to protect themselves. First, perform due diligence prior to signing the lease. Second, insist on contractual provisions that release and protect them from liability associated with pre-existing contamination. However, contract provisions still don't prevent regulators from suing you. Therefore, as a third step tenants should evaluate are the benefits of the BFPD as another means of mitigating risk.