Restore, Reuse, Revitalize That Prime Real Estate!
06 Sep 2016
Given the scorching hot real estate market in Denver, those looking for prime commercial real estate are finding “brownfields”, properties with actual or perceived contamination, more attractive than they once were.
In 1980, Congress passed the most onerous of liability schemes imposed by environmental laws: the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Its two main goals were seemingly simple: (1) to enable EPA to respond efficiently to uncontrolled or abandoned hazardous waste sites, and (2) to hold responsible parties liable for the costs of the cleanup. Yet the scheme also imposed strict, joint and several liability on certain parties. Without regard to culpability, present or former landowners, operators at the time of disposal, any transporter of hazardous substances to a facility and anyone who arranged for disposal or treatment of hazardous substances at a facility could be liable for 100 percent of any cleanup necessary. An unintended fall-out of this landowner liability was a chilling effect on redevelopment of these brownfields. Despite being a “good corner” or prime commercial real estate, these properties sat undeveloped for decades for fear of costly liability.
The game-changer? The 2002 Bona Fide Prospective Purchaser (BFPP) defense. This affirmative defense allows an owner (and now, a tenant) to protect itself from liability if specific steps are followed pre- and post-purchase. Importantly, this defense is only useful for owners (or BFPP tenants) – it does not apply to operators managing hazardous waste. And to assert this defense, an owner must have purchased the property after January 11, 2002. Purchases before this date are categorically excluded.
So, is it safe to go back in the water? The answer is yes, but to obtain maximum liability protection, read on. There is a troublesome scarcity of case law on this defense to clarify things, but what little we know is that even if you qualify as a BFPP don’t expect a parade – or frankly anything from the state or federal government congratulating you on your ability to raise this defense. The BFPP defense is self-actualizing, you will not receive confirmation that you have met the elements for a BFPP defense. Instead, it comes in quite handy if the government attempts to hold a landowner liable for contamination found on one’s property.
Be careful, courts have held that a prospective owner must comply with all eight pre- and post-purchase requirements by a preponderance of the evidence. And as we’ve seen in the principal case law, if a buyer cannot prove every single element, it is not entitled to the BFPP defense and becomes a responsible party for the cleanup that it didn’t cause.
Who wins? The market is ripe with opportunities for the right person, but you should consider the impact of environmental due diligence on any purchase transaction, lease, access agreement or indemnification. Given the considerable lack of case law interpreting the BFPP defense, here are considerations that should be made prior to entering into a transaction, but beware of the gray areas.
The Three Pre-Purchase Requirements
First, the disposal of a hazardous substance must have occurred prior to purchase. This is the cornerstone of the defense – that you did not cause the contamination on property. Watch out, though, a BFPP can easily lose its defense post-purchase by causing an effective “disposal” of previously known contamination simply by disturbing it. For instance, a new purchaser may unwittingly begin development activities such as site grading, demolition, or redevelopment prep and cause the release of contaminants – in fact even inactivity could constitute a “disposal’ if you fail to maintain a remedial sump, for example.
Second, a prospective purchaser cannot be “affiliated” with the prior owner. Affiliation is defined very broadly but consider these examples as definitive: contractual, corporate, direct familial, or indirect familial relationships are all taboo. Case law has expanded this provision, finding that if a prospective purchaser indemnifies a prior owner for cleanup, this could mean that the new owner and prior owner are “affiliated” and the new owner cannot assert a BFPP defense.
Finally, a buyer must conduct “all appropriate inquires” prior to purchase. To do this, the buyer should obtain an American Society for Testing and Materials (ASTM) Phase I Environmental Site Assessment (Phase I). This report is non-invasive and mainly includes review of federal, state, tribal and local government records, visual on-site and adjoining property inspection, and interviews with past and present owners. To be valid, the Phase I must be done within one year of purchase, and certain aspects must be updated within 180 days of purchase.
In 2013, the standards for a Phase I changed, providing a much clearer definition of what constitutes a recognized environmental condition (REC) and explicitly distinguishes between RECs that may require cleanup, and RECs that are controlled or the remedy is complete. Vapor migration risks are also now included, all of which can help the buyer evaluate costs and third party liability claims. It is also important to understand what is not in the report. Because there is no invasive sampling, risk factors such as asbestos, mold, wetlands or indoor air quality are not assessed. Of course a buyer can request that its consultant recommend “next steps” based upon the RECs; however, no recommendation is required. For instance, often a Phase II is recommended to establish baseline conditions or gather more substantive information. But such recommendations can be dicey because the Phase I itself can be considered a “reasonable step” the BFPP must follow – therefore if your report erroneously states or overreaches on its recommendations, that may end up being the standard by which the property owner is held. Generally, the best way to handle this is to have the environmental professional verbally discuss next steps with the purchaser or the purchaser’s attorney, and let the Phase I speak for itself. The new Phase I costs a bit extra, and will take longer to complete, but a prospective buyer will gain valuable information to help manage and allocate risks.
The Five Post-Purchase Requirements
The last 5 steps include post-purchase obligations to: provide all legally required notices if the owner discovers or releases hazardous substances at the property; take “reasonable steps” (see above) to stop any continuing release, prevent any future release, and prevent any exposure to a hazardous substance; comply and assist with any response actions; comply with institutional controls and land use restrictions; and comply with any requests for subpoenas.
Given the extent of these obligations post-purchase, it’s a good idea for property owners to maintain solid relationships with local governments. Keep in mind, the government may actually serve as a witness at trial where you are asserting a BFPP defense!
If the property owner can assert a BFPP defense, tenants are automatically protected as well. However, even if an owner is not a BFPP, a tenant can assert the BFPP defense if the tenant satisfies the elements above prior to execution of the lease and also abide by the statutory requirements during their tenancy.
A prospective purchaser who intends on asserting a BFPP defense will need additional legal guidance before, during and after the deal. And an owner must keep up to date on the changing regulations in order to maintain its BFPP status.
Rebecca L. Almon is an environmental attorney at Ireland Stapleton Pryor & Pascoe, PC. She helps companies across the country in all aspects of environmental regulation including federal, state and local permitting, compliance and enforcement matters. What is written here is intended as general information, and is not to be construed as legal advice.