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Bona Fide Prospective Tenants ...

Bona Fide Prospective Tenants – An Expanded Reading of CERCLA’s Brownfields Amendments

By Bret Stone

CERCLA[1] has long been the tool of choice for federal regulators to use as a means of forcing cleanup of contaminated properties and is rightly feared by commercial property owners due to the strict, joint and several liability that comes with it.  Although CERCLA was enacted in 1980, the protections afforded to a bona fide prospective purchaser (“BFPP”) of a contaminated site is a relatively new development created by the Brownfields Amendments.  Newer still is the concept that a tenant can benefit from these protections.

By way of background, CERCLA broadly holds potentially responsible parties (“PRPs”) liable for any release of hazardous substances into the environment.  PRPs include past or present owners and/or a past or present operators of the property.  Tenants generally become PRPs on the basis of operating at a site, though ownership status may also be imputed to a tenant where there is sufficient indicia of control of the site.  CERCLA recognizes only narrow defenses to liability.  But future liability can be avoided by a BFPP if it takes certain steps before occupancy.

As a threshold matter, one should not be thrown off by the word “purchaser” in “bona fide prospective purchaser.”  Indeed, the definition of BFPP includes “a person (or a tenant of a person).”  42 U.S.C. § 9601(40).  A tenant can attain BFPP status in two ways: (1) derivative BFPP status where the landlord is already a BFPP; and (2) direct BFPP status where the tenant attains BFPP status independently from the landlord.

Derivative BFPP status is a shortcut for tenants only where the landlord is a BFPP.  One of the requirements is that there be no connection between the tenant and the landlord (e.g., no familial, financial, or contractual relationships, other than, for instance, where the contractual relationship is the result of the lease agreement or by which the conveyance is financed).  Additionally, the tenant must prevent new releases of hazardous materials, maintain any institutional controls, and do nothing to interfere with or exacerbate pre-existing contamination.  Because the landlord would have already met the relevant BFPP provisions, a tenant seeking derivative BFPP status is not required to conduct an All Appropriate Inquiry (“AAI”)[2] when determining whether or not to become a tenant.  Thus, the tenant can forgo the expensive and time-consuming Phase I and Phase II environmental site assessments.

But, how will a tenant know and be assured that the landlord actually has BFPP status?  An evaluation by an environmental professional confirming that the landlord met the AAI standards at the time the property was acquired would assuage most concerns.  In addition, the tenant could include provisions in the lease (e.g., representations and warranties from the landlord, as well as indemnification and termination clauses) aimed at protecting the tenant should the landlord fail to possess BFPP status or lose it through landlord’s acts or omissions during the tenancy period.  The prospective tenant may also request a comfort letter from the US EPA.[3] The landlord who has conducted an AAI-based acquisition and taken necessary steps to establish themselves as BFPPs, will also have an interest in maintaining that protection.  Thus, from the BFPP landlord’s perspective, lease agreements should include provisions requiring tenants to maintain BFPP status and indemnification for failure or loss of BFPP status as a result of tenant action or negligence.

Direct BFPP status may also be attained if the landlord does not have BFPP status.  But this requires the tenant to meet BFPP provisions in CERCLA, including an AAI investigation prior to occupying the property.   Often times, however, a landlord may not wish to have such an extensive investigation conducted for fear of creating an otherwise unknown stigma for the property.  In such cases, a prospective tenant should insist on strong lease provisions concerning pre-existing environmental conditions.

So what does this all mean for a prospective tenant?  And when does it make sense to take a deeper dive into the environmental conditions potentially existing at a rental property prior to signing the lease?  As usual, the answer depends on many factors.  For instance, how long is the planned lease period?  Longer periods may present more opportunity for a latent defect (e.g., subsurface contamination) to be discovered. What types of activities are planned?  If there is no chance for releases of hazardous materials, then the argument for a tenant to establish BFPP status is stronger.  At a minimum, it makes sense to conduct a preliminary review of the public environmental database, such as provided by Environmental Data Resources, Inc. (“EDR”) as a first tier screen for known or suspected environmental issues on or near the leasehold.  Depending on the outcome of the EDR review, the prospective tenant will need to decide whether BFPP protections are necessary.  Lastly, lease provisions allocating responsibilities and best practices, as well as liability will almost always be the best form of legal protection, and should not be given short shrift in the negotiation process.

Finally, it should be noted that similar BFPP protections for tenants may be achieved at the state level as well.  For instance, the California’s Department of Toxic Substances Control (“DTSC”) will enter into a 3-way agreement granting a tenant immunity for cleanup liability as long as there is a Responsible Party (“RP”) performing the cleanup signing onto the agreement.  In such a case, DTSC would give the prospective tenant a covenant not to sue.  Such a transaction should be carefully negotiated to avoid the unintended consequence of the tenant becoming the RP.

[1] Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq.

[2] Amendments to CERCLA provide liability protections for certain property owners if they meet standards outlined in the statute, including all appropriate inquiries into present and past uses of the property, and the potential presence of environmental contamination on the property.  AAI is a standardized process for evaluating a property’s environmental conditions and assessing the likelihood of any contamination by conducting, for instance Phase I assessments consistent with ASTM E1527-13 standards.

[3] US EPA generally does not become involved with facility-specific transactions or determinations of BFPP status. There are limited instances, however, where EPA may address a tenant’s concerns at a particular property through issuance of a comfort letter or a prospective lessee agreement. Generally, a comfort letter will give assurances based on provided information that US EPA does not plan to conduct a federal response or enforcement action pursuant to CERCLA or RCRA at the subject property.

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