I’m republishing a great article posted in the Oregon Daily Journal of Commerce. I’ll soon be adding information relevant to Illinois customers. If you are in any other state, let me know, and I’ll find out how your state handles this.
“Risk comes from not knowing what you’re doing.”
– Warren Buffett
Many people seeking to purchase property for commercial purposes refuse to consider contaminated properties, because they are concerned about the risk of being held liable for the contamination, or about the time and expense that may be involved in addressing the legal and technical aspects of acquiring such properties. As a result, contaminated properties often are overlooked bargains.
In reality, armed with the proper knowledge, purchasers of contaminated properties will find that it is relatively painless to protect against liability under both federal and state law.
In 2002, the Comprehensive Environmental Response Compensation and Liability Act was amended by Congress to encourage prospective purchasers to buy and redevelop Superfund and brownfield properties (i.e., properties known or suspected to be contaminated).
Prior to this amendment, purchasers of brownfields could be held liable for contamination related to the property unless they could establish that they had no reason to know the property was contaminated. This scenario created an obstacle to the redevelopment of properties that were known to be contaminated.
In order to avoid liability, the party seeking to purchase a known-contaminated property could negotiate a Prospective Purchaser Agreement with the EPA. (A PPA is a legally binding agreement between the government and a prospective purchaser of contaminated property that limits the purchaser’s liability for environmental cleanup).
The 2002 CERCLA amendments, however, allow purchasers to buy a contaminated property and avoid potential liability for existing contamination without the need for a PPA, by qualifying as a “bona fide prospective purchaser.” Therefore, in order to protect against potential federal liability for environmental contamination at a property, a purchaser needs to ensure that it qualifies as a bona fide prospective purchaser (BFPP).
A prospective purchaser of contaminated property can qualify as a BFPP by satisfying the criteria in the provision found in CERCLA statutes.
Pre-purchase criteria include:
- Pre-purchasing “all appropriate inquiry”
- Not affiliating with a liable party
Post-purchase criteria include:
- Taking reasonable steps with respect to hazardous substances on the property
- Complying with any land-use restrictions and institutional controls
- Cooperating with governmental authorities and persons conducting any cleanup
- Complying with information requests and administrative subpoenas
Of these criteria, “all appropriate inquiry” and “reasonable steps” typically pose the most significant concerns.
All appropriate inquiry refers to the requirements for assessing the environmental conditions of a property prior to its acquisition. In 2005, the EPA adopted rules governing what constitutes “all appropriate inquiry.” Although a full discussion of all appropriate inquiry is beyond the scope of this column, a key aspect includes a professional’s environmental site assessment, which includes:
- Interviews with past and present owners, operators and occupants of the facility for the purpose of gathering information regarding the potential for contamination at the facility;
- Reviews of historical sources, such as chain-of-title documents, aerial photographs, building department records, and land-use records, to determine previous uses and occupancies of the real property since the property was first developed;
- Searches for recorded environmental cleanup liens against the facility that are filed under federal, state or local law;
- Reviews of federal, state, and local government records, waste disposal records, underground storage tank records, and hazardous waste handling, generation, treatment, disposal, and spill records concerning contamination at or near the facility;
- Visual inspections of the facility and adjoining properties.
Additionally, a BFPP must take “reasonable steps” with regard to the hazardous substances on the property, including stopping a present release, preventing a future release and preventing exposure to a prior release. If such steps are not taken, the purchaser could lose its status as a BFPP.
The EPA believes that, in most cases, the 2002 CERCLA amendments make PPAs from the federal government unnecessary, because prospective purchasers need only take the steps necessary to qualify as a BFPP. Only under limited circumstances will the EPA still consider entering into a PPA.
In general, the EPA will consider a PPA when: 1, there is likely to be a significant windfall lien and the purchaser needs to resolve the lien prior to purchase, or 2, a PPA is necessary to ensure that the transaction will be completed and the project will provide significant public benefits.