By Clinton Cole,
Partner, Hartman Simons
It is a common mistake among prospective tenants to assume
they have no liability for past environmental issues at a property. As such, tenants often perform less than
adequate environmental due diligence prior to leasing a property, or they rely
on sub-standard or outdated information provided by a property owner or lender
with interests and risks far different from theirs. Under CERCLA (and similar state environmental
statutes), a tenant may be liable for past environmental releases on its leased
property. Unlike prospective purchasers,
who have historically been afforded so called “innocent purchaser” defenses if
they performed a sufficient level of environmental due diligence prior to
acquisition of the property, CERCLA did not specifically address the risks and
protections for prospective tenants. In
late 2012, EPA issued a memorandum further addressing tenant liability under
CERCLA: Revised Enforcement Guidance
Regarding the Treatment of Tenants Under the CERCLA Bona Fide Prospective
Purchaser Provision (Dec. 5, 2012), which supersedes its Jan. 14,
2009, guidance on this topic.
The 2002 CERCLA
Amendments and Continued Uncertainty for Prospective Tenants
The passage of the CERCLA “Brownfields Amendments” in 2002
provided the bona fide prospective purchaser (BFPP) definition and clarified
some potential environmental risks to prospective owners and tenants; however,
significant gaps and uncertainty remained regarding how a prospective tenant
fit into the BFPP definition. Since
2002, the BFPP status and derivative protections only applied to a prospective
tenant if the underlying property owner qualified as a BFPP (i.e., a tenant
derived its liability protection from the underlying property owner’s BFPP
status and not directly based on the tenant’s action or inaction in its due
diligence prior to leasing the property).
Hartman Simons has historically counseled prospective
tenants to conduct some level of environmental due diligence at potential lease
sites to determine whether the property owner completed an appropriate level of
due diligence prior to acquiring the property.
If the property owner completed sufficient environmental due diligence
prior to acquisition, the tenant could “piggy-back” on the owner’s BFPP status
and obtain some insulation from prior environmental issues affecting a property. If the owner did not conduct appropriate due
diligence or if the prospective tenant was conservative regarding environmental
risk, we recommended the tenant conduct its own environmental due diligence to
meet the same threshold required of a purchaser attempting to meet the BFPP
standard. Although not directly
addressed under CERCLA or the Brownfields Amendments, we believed a tenant that
met the BFPP standard would ultimately prevail on the principles of fairness
and equity if they were a truly innocent party.
Despite our confidence in that advice, EPA’s lack of
guidance and the always present specter of “strict joint and several liability”
under CERCLA created continued uncertainty for prospective tenants, especially
regarding how EPA would treat a tenant if: (1) the underlying property owner was
a BFPP at the time of acquisition but subsequently lost its BFPP status, or (2)
the owner did not qualify for BFPP status but the tenant undertook all steps to
meet the BFPP standard before leasing the property. This uncertainty created confusion for
tenants in evaluating their potential environmental risks related to the lease
of a property, and it created difficulties for environmental professionals and
attorneys in assisting those tenants in evaluating those risks and conducting
an appropriate level of environmental due diligence prior to leasing. Consequently, the end-result was often the
under assessment of leased property by prospective tenants. With EPA’s issuance of its new guidance
regarding prospective tenants at the end of 2012, it has now taken the next
step in the evolution of addressing tenant liability under CERCLA.
New Guidance
Regarding Tenants as BFPPs
As has been the case since the 2002 Brownfield Amendments, a
tenant can continue to maintain “derivative” BFPP protections through the property
owner’s BFPP status, as long as: (1) all disposal of hazardous substances at
the facility occurred prior to the owner’s acquisition of the property,
(2) the tenant does not impede the investigation or remediation of the property
by the responsible party, and (3) the owner continues to maintain its BFPP
status. In general, if the owner loses
its BFPP status, then the tenant’s derivative BFPP status is lost. Under the new EPA guidance, a tenant now has
two additional opportunities to obtain and maintain its BFPP status beyond that
general rule.
Tenant Protected if Owner Loses BFPP Status
The new guidance provides EPA regulatory discretion to allow
a tenant to maintain its “derivative” BFPP status, even if the underlying
property owner subsequently loses its BFPP status through no fault of the
tenant. The 2009 EPA guidance on this
topic introduced this concept, and EPA has further refined the requirements in
its 2012 guidance. In order to maintain
its derivative BFPP status, the tenant must meet the BFPP provisions of CERCLA,
to include:
(1) all
disposal of hazardous substances at the facility occurred prior to execution
of the lease;
(2) the
tenant provides legally required notices;
(3) the
tenant takes reasonable steps with respect to hazardous substance releases;
(4) the
tenant provides cooperation, assistance, and access;
(5) the
tenant complies with land use restrictions and institutional controls;
(6) the
tenant complies with information requests and administrative subpoenas;
(7) the
tenant is not potentially liable for response costs at the facility or
“affiliated” with any such person (other than through the lease with the owner
as further discussed below); and
(8) the
tenant does not impede any response action or natural resource restoration.
A tenant’s performance of all appropriate inquiries (AAI)
(i.e., a Phase I) prior to leasing is not required for it to benefit from
derivative BFPP protections because this scenario assumes the owner previously
met the AAI standard when it acquired the property, which may or may not be
true.
While this guidance is helpful (especially for existing
leases), it still begs the question of exactly how a prospective tenant should determine
whether the underlying property owner met its BFPP requirements when the tenant
is typically not directly involved in that process. Relying on the property owner (or a lender)
to have met the BFPP definition is a significant risk, and a prospective tenant
must consider and evaluate that risk as part of its due diligence efforts.
Tenant Protected Independent of Owner’s BFPP Status
The more far-reaching portion of the new guidance is that a
tenant can now independently maintain its BFPP status, even if the property
owner did not meet the BFPP requirements at the time of its acquisition. This gives a tenant the opportunity to derive
its BFPP status and protections directly by completing its own environmental
due diligence instead of relying on any due diligence by the owner at the time
of acquisition. This will be a very
useful tool where it is clear the owner did not perform sufficient
investigation prior to acquiring the property, or if the owner acquired the
property prior to the January 11, 2002 (i.e., before the current BFPP definition
was codified) because EPA will treat the tenant as a BFPP in those cases
regardless of the property owner’s BFPP status.
To meet the BFPP requirements independent of the property
owner’s actions, the prospective tenant must complete AAI prior to leasing the
property and meet requirements (1) – (8) above.
EPA’s new position supports and validates our prior and on-going recommendation
that a prospective tenant concerned about CERCLA liability should conduct its
own due diligence and meet the same standard as a prospective property owner to
maximize its chances of avoiding CERCLA liability for another’s past bad acts.
Additional
Information from EPA Guidance Memorandum
As with most environmental regulatory guidance, a
prospective tenant’s coverage as a BFPP under CERCLA comes with some fine
print:
1. The guidance only applies
to sites subject to CERCLA and does not guarantee that state-specific “mini-CERCLA”
program will treat this issue the same way. Most states will follow the federal
guidance on this issue, but that is not guaranteed. In some states, the concept of a BFPP is
missing altogether from their environmental statutes. In the area of
commercial retail development, the majority of identified environmental
issues on a site will not rise to the level of federal Superfund site. Therefore, knowing and understanding how
a state will view a prospective tenant’s liability is a key consideration
in a prospective tenant determining the level of environmental due
diligence it should complete (i.e., avoiding federal liability typically
does not matter if you are still liable under the state laws).
2. The EPA memorandum is only
guidance for EPA’s enforcement and interpretation of CERCLA. EPA can revise or alter the guidance in
the future, and it does not codify or otherwise directly revise CERCLA, create
new law or rules, or create any substantive or procedural rights. However, despite those limitations, we
believe that for the near future, EPA will follow this policy when
determining whether to treat a tenant as a BFPP when determining liability
under CERCLA.
3. To qualify as a tenant
BFPP, the tenant must have leased the property after January 11,
2002. If an owner purchased
the property prior to January 11, 2002, the tenant must complete the
additional AAI requirements to obtain BFPP status.
4. Except in rare
circumstances, EPA will continue its policy of not engaging in
site-specific determinations of BFPP status (i.e., no comfort letters). It will also not entering into a so
called “prospective lessee agreement” prior to a tenant leasing a property
(i.e., the tenant cannot go to EPA and have its individual circumstances
and quality of due diligence ‘blessed’ by EPA in advance of leasing the
property).
5. EPA will now consider a
lease the same as a conveyance of title and not as a prohibited
affiliation, which would otherwise bar a tenant’s BFPP status. Under CERCLA’s “no affiliation”
provision, if the only connection between a prospective purchaser and a
responsible party relates to the conveyance of title to the property, that
creates and exception to the no affiliation rule. However, a lease does not convey title, so
prior to this new guidance, a prospective tenant entering into a lease
could not avail itself of this exclusion to the no affiliation rule, but
now it can.
6. EPA intends to look at
tenant BFPP circumstances on a case-by-case basis and use regulatory
discretion to arrive at a decision based on the new guidance; however, EPA
may decline to exercise such regulatory discretion under various
circumstances, including, but not limited to:
- if
the lease was designed to allow the landlord or tenant to avoid CERCLA
liability; - if
the tenant is potentially liable for reasons other than merely its status as a
tenant (e.g., it arranged for disposal of hazardous substances at the facility
prior to its lease); or - if
the owner does not comply with regulatory requirements or clean-up orders
relating to the leased property (and presumably tenant knew or should have
known about the owner’s non-compliance prior to leasing the property).
Conclusion
While EPA’s new guidance on tenants’ BFPP status still leaves
some questions unanswered, it provides tenants with more assurance and a road
map that allows them to conduct the appropriate level of due diligence and take
other required actions in order be treated as a BFPP under CERCLA. If you have any questions regarding this
matter or would like to discuss this guidance or environmental due diligence by
a tenant (or property owner), please do not hesitate to contact me.
Clinton Cole is a partner with Hartman Simons who focuses on all legal matters related to the investigation, permitting
and remediation of environmental concerns at commercial development
sites throughout the United States. He can be reached at (770) 303-8450 or clinton.cole@hartmansimons.com.