This weeks article comes from Patrick Rowe. Patrick is a partner with the law firm of Sussman Shank LLP. He is a member of its Business Litigation and Environmental practice groups. Contact him at 503-227-1111 or prowe@sussmanshank.com.
Published in The Daily Journal of Commerce, August 13, 2010
“Risk comes from not knowing what you’re doing.” Warren Buffet.
Many persons 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 are often overlooked bargains.
In reality, armed with the proper knowledge, it is a relatively pain-free process for a potential purchaser of contaminated property to protect against liability under both federal and state law.
Federal Law
In 2002, the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA” or “Superfund”) 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 (“PPA”) with EPA. (A PPA is a legally binding agreement between the government and a prospective purchaser of contaminated property, which limits the purchaser’s liability for environmental cleanup at the property). 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 BFPP provision found in CERCLA statutes. These criteria include the following:
Pre-purchase criteria for qualifying as a BFPP:
- Pre-purchase “all appropriate inquiry”
- No affiliation with a liable party
Post-purchase continuing obligations of a BFPP:
- Taking reasonable steps with respect to hazardous substances on the property (e.g., not exacerbating existing contamination)
- Compliance with any land use restrictions and institutional controls (e.g., no use of groundwater for drinking water)
- Cooperating with governmental authorities and persons conducting any cleanup, (e.g., providing assistance and access to the property)
- Compliance 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, EPA adopted rules governing what constitutes “all appropriate inquiry.” Although a full discussion of all appropriate inquiry goes beyond the scope of this article, a key aspect includes an Environmental Site Assessment (e.g., Phase I, and possibly Phase II) by an environmental professional, 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 clean-up 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, tre;tment, 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 reasonable steps are not taken, the purchaser could lose its status as a BFPP.
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 EPA still consider entering into a PPA. In general, EPA will consider a PPA where 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.
Oregon State Law
Unlike EPA, the Oregon Department of Environmental Quality (“DEQ”) still regularly enters into PPAs. In order to qualify for a PPA, Oregon law requires:
- That the party not be currently liable for an existing release of a hazardous substance at the facility
- Removal or remedial action is necessary
- The proposed redevelopment or reuse of the facility will not contribute to or exacerbate existing contamination, increase health risks or interfere with remedial measures and
- A substantial public benefit will result from the agreement
(Under Oregon law, a substantial public benefit includes productive reuse of a vacant or abandoned industrial or commercial facility.)
The process for applying for a PPA includes:
a) submitting a deposit (usually $2,500) to cover the costs of DEQ’s negotiating and preparing the PPA (DEQ returns any excess funds; if costs exceed the deposit, the applicant must further reimburse DEQ), b) contacting DEQ to schedule an initial meeting, c) participating in the initial meeting,d) submitting an application, and e) beginning negotiations.
After the PPA negotiations are completed, DEQ provides notice to the public. The notice is published in one or more newspapers in the community of the subject property.
After the PPA is finalized, the purchaser must properly record the PPA and related documents in the appropriate County office.
DEQ estimates that, in general, it takes 8 to 12 weeks to complete a PPA. There are, of course, exceptions to this general rule.
Bottom line: if you’re in the market to purchase a property, don’t pass over contaminated properties simply because of liability concerns. Liability can be managed by following the appropriate legal procedures.