Legal Update: EPA Issues Revised Enforcement Guidance To Address Leaseholder Concerns About Contaminated Property
Environmental Law Update
In December 2012, the U.S. Environmental Protection Agency (EPA) issued a much-needed guidance which discusses the applicability of the bona fide prospective purchaser (BFPP) provision under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) to certain tenants who lease contaminated or formerly contaminated properties.
The Revised Enforcement Guidance Regarding the Treatment of Tenants Under the CERCLA Bona Fide Prospective Purchaser Provision (“Guidance”) supersedes EPA’s prior January 14, 2009 guidance, which provided limited BFPP protection to tenants who had sufficient indicia of ownership. The revised Guidance addresses how the EPA intends to exercise its enforcement discretion to broaden the application of the BFPP protection. In doing so, it provides further direction to tenants given the recognized uncertainty regarding the potential liability of tenants under CERCLA.
Section 107(r)(1) of CERCLA provides liability protection for owners or operators of property that meet specific criteria, known as BFPPs. The specific criteria for BFPP protection is set forth in Section 101(40)(A)-(H) of CERCLA. The Guidance outlines the EPA’s intent to use its enforcement discretion to extend these BFPP protections to a broader class of tenants. The Guidance expressly applies to two types of tenants: tenants who lease from owners with BFPP protection, and those who do not.
Based on the EPA’s view of CERCLA provisions, tenants can derive BFPP status where the owner of the property maintains BFPP protection itself. However, if that owner loses its BFPP status, the tenant would also lose its derivative protection. In addition, it may be difficult for a tenant to know with certainty whether the owner has qualified for and continues to maintain BFPP status. As such, the EPA notes that tenants with derivative BFPP status may need to evaluate independently whether the BFPP criteria are being met in order to assess their own status as a BFPP. The Guidance also explains that EPA may extend BFPP protection to such tenants who lose their derivative status through no fault of their own, provided that those tenants themselves meet the BFPP criteria. There are eight basic criteria that must be satisfied: (1) all disposal of hazardous substances occurred before the lease was executed; (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; and (8) the tenant does not impede any response action or natural resource restoration.
The Guidance extends this protection even further, providing that a tenant can obtain BFPP liability protection independent of the status of the property owner. Where the owner is not a BFPP, the EPA may still exercise its discretion to treat a tenant as a BFPP where the tenant itself (1) executed its lease after January 11, 2002, (2) meets all of the eight BFPP criteria listed above, and (3) conducted all appropriate inquiries (AAI) into the previous ownership and uses of the facility prior to the execution of the lease. The “all appropriate inquiries” requirement can currently be met by complying with EPA’s Final Rule on AAI, available at 40 C.F.R. § 312, which incorporates ASTM E 1527-05, the method for conducting a Phase I Environmental Site Assessment. It should be noted that a new ASTM standard is currently being drafted, which if finalized, may impact the AAI requirement.
In addition to expanding the protection available to tenants, EPA has also provided three new model letters addressing site-specific "comfort" or status letters for tenants involved in renewable energy projects on contaminated properties, including a model letter where the state is the lead regulatory agency.
Originally published in the Real Property Law Section E-Bulletin (February 2013 Edition)