New Legislation Encourages Developers to Clean Up Brownfields

By Patrick O`Hare

Enacted in 1980, the Comprehensive Environmental Response, Compensation, and Liability Act imposed liability for the release of hazardous substances on four categories of potentially responsible parties, or PRP: the owner or operator of the facility at which the release occurred; the owner or operator of the facility at the time of the disposal of the hazardous substance; any person who arranged for the disposal of the hazardous substance at the facility; and any person who transported the hazardous substance to a facility.

This liability provision discouraged developers from purchasing contaminated property. Therefore, many brownfields in choice locations remained undeveloped over the years, as few developers were willing to risk the cost and responsibility of environmental cleanup.

However, last December the U.S. Congress enacted the Small Business Liability Relief and Brownfields Revitalization Act, which provides developers with an incentive to clean up brownfields. The Bona Fide Prospective Purchaser defense now offers commercial real estate developers and owners a means of recovering the costs of environmental cleanup, which should encourage redevelopment of many brownfield sites.

What Is a BFPP? A bona fide prospective purchaser is a person (or tenant of a person) who acquires ownership of a facility after Jan. 11, 2002, and is able to establish all of the following.

• All disposal of hazardous substances occurred before the BFPP acquired the property.

• The BFPP conducted an appropriate inquiry into the previous ownership and uses of the facility “in accordance with generally accepted good commercial and customary standards and practices.” By January 2004, the Environmental Protection Agency will issue a regulation establishing the standards and practices necessary to satisfy the requirements for an appropriate inquiry. Until then, a BFPP can satisfy the requirement by conducting a phase I environmental site assessment consistent with the procedures prescribed in American Society for Testing and Materials standard E1527-97. Since a deviation from this standard could jeopardize the BFPP defense, BFPPs must use only those environmental consultants who follow the ASTM standard strictly.

• The BFPP complied with all release reporting requirements. Most state and federal environmental laws have their own release or discharge reporting requirements, and failure to report a release under any statute could jeopardize the BFPP's defense. Eventually the industry may persuade the EPA to develop a consolidated report to satisfy this requirement, so purchasers inadvertently do not lose their BFPP defense by overlooking one of the many reporting requirements.

• The BFPP exercised care with respect to the hazardous substances. At a minimum, the act requires a BFPP to stop any continuing release, prevent any threatened future release, and prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance. This appropriate care standard appears to require less than a complete cleanup, but how much less will not be determined until the EPA issues its regulation.

• The BFPP cooperates, assists, and provides access to persons that are authorized to conduct environmental remediation activities, or response actions, on the property.

• The BFPP complies with any land use restrictions established as part of the response action.

• The BFPP complies with any EPA requests for information under CERCLA.

• The BFPP is not already potentially liable for response costs at the facility or affiliated with any other PRP through any direct or indirect familial, contractual, financial, or corporate relationship.

Other Provisions To ensure that BFPPs are not unjustly enriched by any EPA response actions, the act creates a lien on a BFPP's facility. The lien applies in those cases where the EPA has conducted a response action that increased the fair market value of the facility. The amount of the lien will not exceed the increase in fair market value attributable to the response action at the time of sale or other disposition of the property. To avoid the windfall lien, the BFPP may agree to provide the EPA a lien on other property owned by the BFPP or to provide some other assurance of payment.

The act also creates a separate defense for the owners of contiguous properties that are affected by the migration of contaminants from an adjacent parcel.

To qualify for this defense, the owner must demonstrate that it did not cause, contribute, or consent to the release or threatened release; is not otherwise potentially liable or affiliated with any other person that potentially is liable for response costs through any direct or indirect familial, contractual, corporate, or other financial relationship, or the result of a reorganization of a business that potentially was liable; made an appropriate inquiry at acquisition and did not know or have any reason to know the property was contaminated; and generally complies with the other requirements for the BFPP defense. If a contiguous property owner did know or should have known that the property was contaminated, it still may qualify if it satisfies the BFPP requirements.

The act also states that an owner of contiguous property that is contaminated solely by subsurface migration ordinarily shall not be required to conduct groundwater monitoring or to install groundwater remediation systems.

Finally, the act authorizes the EPA to issue an assurance that it will not initiate an enforcement action against a qualifying contiguous property owner and to grant the property owner protection against a cost recovery or contribution action.

The last two protections apply only to CERCLA liability. Although this contiguous property owner provision codifies an existing EPA policy, such codification should be an incentive for property owners that may have been reluctant to develop property that had been contaminated by an offsite release.

Forthcoming EPA Regulation When developed, the EPA's regulation will require the following:

• the results of an inquiry by an environmental professional;

• 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 title documents, area photographs, building department records, and land use records, to determine previous uses and occupancies of the real property;

• searches for recorded environmental cleanup liens against the facility;

• reviews of 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 of adjoining property;

• specific knowledge or experience on the part of the BFPP;

• relationship of the purchase price to the value of the property, if the property were not contaminated;

• commonly known or reasonably ascertainable information about the property; and

• the degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect the contamination by appropriate investigation.

This fall, the EPA is issuing guidance on implementation of the act and developing a regulation announcing the policies and procedures necessary to constitute appropriate inquiry. As in all regulatory programs, the details of the guidance and regulations will determine just how much of an incentive the act provides for the development of contaminated property, but it is unlikely those details could create any further disincentive than now exists.

Patrick O`Hare is a resident in the Environmental Group at Reed Smith LLP in Richmond, Va. Contact him at (804) 344-3433 or pohare@reedsmith.com.