Bar News - September 20, 2013
Environmental, Natural Resources & Utilities Law: Tenants’ Liability for Contaminated Property
By: Mark E. Beliveau and John M. Formella
Since 2002, attorneys advising on transactions in which contaminated property is being leased have often advised clients to conduct all appropriate inquiry, on the belief that the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) Bona Fide Prospective Purchaser (BFPP) or other landowner liability protections could be available to avoid traditional owner or operator liability under federal law. Two EPA guidance documents issued in 2009 and 2012 (the latter superseding the former) support that view.
The US Supreme Court has indicated that, under CERCLA, operator liability is a narrower concept than owner liability. The practical implication of this distinction is that while tenants might escape liability as operators, because of their actions or lack thereof, such tenants must still worry about whether they might fall within the broader scope of CERCLA’s owner liability.
Under CERCLA Tenants Can Be Owners
CERCLA imposes strict liability for contamination upon four broad classes of “potentially responsible parties,” including a property’s owner. Because CERCLA liability is joint and several, an owner can be held liable for the entire cost of cleanup, even where other parties contributed to the contamination.
In Commander Oil Corp. v. Barlo Equip. Corp., 215 F.3d 321 (2nd Cir. 2000), the Second Circuit confirmed that tenants could be subject to owner liability if they had the “requisite indicia of ownership vis-a-vis the record owner to be de facto owners.” The court avoided laying out a clear-cut definition of “de facto ownership,” but provided the following non-exclusive factors to consider: (1) the length of the lease term; (2) the landowner’s ability to determine how the property is used; (3) whether the landowner has early termination rights; (4) whether the tenant has a unilateral ability to sublet; (5) the tenant’s responsibility for payment of taxes, assessments, insurance, etc.; and (6) the tenant’s responsibility for structural and other repairs.
Congress revised CERCLA in 2002 to provide liability protection to “bona fide prospective purchasers.” The “BFPP Exclusion” is available to a “person (or a tenant of a person),” who acquires ownership of a property after Jan. 11, 2002, and can establish the existence of certain threshold and ongoing requirements.
While the statutory liability for owners and operators under New Hampshire RSA 147-B is substantially similar to federal law, there is no comparable BFPP protection. In addition, the NH Supreme Court has not interpreted “owner” to include a lessee, though it is reasonable to conclude that the court would look to federal case law for guidance on that issue.
The lack of a BFPP defense aside, there are some protections under New Hampshire law for owners, for which tenants may also qualify. For example, under the New Hampshire Brownfields Program (RSA 147-F), an eligible person who cleans up a contaminated property receives a covenant not to sue, and this protection is extended to a tenant, as long as the tenant is not otherwise liable for the contamination.
EPA Guidance Expands BFPP Protection
As for tenant protections pursuant to federal law, the EPA in its 2009 guidance described the liability risk for tenants under Commander Oil and stated that it intended to not enforce against tenants with sufficient “indicia of ownership,” as long as the tenant met the statutory BFPP requirements.
In its 2012 guidance however, in an effort to broaden the field of tenants who can benefit from BFPP status, EPA extended BFPP protection to tenants who simply meet the BFPP requirements, regardless of whether they have sufficient “indicia of ownership” to be an owner under CERCLA. Thus, these tenants can take advantage of the BFPP defense if they entered into their lease after Jan. 11, 2002, and can show that all of CERCLA’s BFPP provisions are satisfied as follows: (1) all disposal of hazardous substances at the facility occurred prior to execution of the lease; (2) the tenant conducted “all appropriate inquiry” prior to execution of the lease; (3) the tenant provides legally required notices; (4) the tenant takes reasonable steps with respect to hazardous substance releases; (5) the tenant provides cooperation, assistance, and access; (6) the tenant complies with land use restrictions and institutional controls; (7) the tenant complies with information requests and administrative subpoenas; (8) the tenant is not potentially liable for response costs at the facility, nor is it “affiliated” with any such person; and (9) the tenant does not impede any response action or natural resource restoration.
The EPA reiterated in its 2012 guidance that, in certain circumstances, a tenant can also derive BFPP status from the landowner without independently satisfying BFPP requirements. The tenant’s derivative BFPP status will endure as long as the landowner remains a BFPP, all disposal of hazardous substances occurred prior to purchase, and the tenant does not impede remedial action.
If the landowner loses BFPP status, the tenant does as well. However, a tenant who loses derivative BFPP status may still be treated as a BFPP by EPA, if that tenant satisfies the BFPP provisions identified above, with the exception of all appropriate inquiry. In the context of lost derivative BFPP status, the EPA does not expect a tenant to have conducted all appropriate inquiry as the landowner would have already done so.
Additional Considerations for Tenants
Despite the strong potential for a BFPP defense, tenants should keep in mind that BFPP protections are self-implementing, meaning EPA generally will not issue comfort letters or assist tenants with obtaining BFPP status. Additionally, because it will be difficult for a tenant (or its lawyer) to know whether the landowner has satisfied and continues to satisfy all BFPP criteria, thereby allowing the tenant to enjoy derivative BFPP status, tenants should take steps to independently meet all of the BFPP requirements.
Tenants should also consider whether it is appropriate to add terms to the lease providing that the landowner will take all actions necessary to discharge the landowner’s “continuing obligations,” so that the landowner will be the first line of defense in any assertion of CERCLA responsibility. In addition, it’s important to note that BFPP status does not provide a defense to liability imposed under other federal law (e.g., RCRA) or New Hampshire law.
Finally, tenants must be aware that EPA’s guidance is not binding on the courts, which will be the final arbiter of what liability protections tenants have under federal law.
Mark Beliveau has been practicing environmental law for 30 years in New Hampshire. He is a partner at Pierce Atwood LLP in its Portsmouth office.
John Formella is an associate in Pierce Atwood’s environmental and business practice groups.
Kenneth Gray, partner at Pierce Atwood, also contributed to this article.