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Who's Responsible for Costs of Cleaning Up Contamination Caused by Tenants?

Feb 13, 2015

SITUATION

  • 1990: Owner 1 buys undeveloped, pristine commercial property.
  • 1993: Construction is completed on a brand-new shopping center.
  • 1994: Owner 1 leases space in the new center to ABC Dry Cleaners for 10 years.
  • 1994 to 2004: ABC’s storage and use of hazardous chemicals during its lease cause environmental contamination to the property.
  • 2005: Owner 2 purchases the shopping center; no further contamination occurs during its ownership.
  • 2010: Owner 2 leases the space previously used by ABC Dry Cleaners to XYZ Confections for use as a candy store; XYZ doesn’t contaminate the property any further.
  • 2012: The U.S. Environmental Protection Agency (EPA) discovers contamination caused by ABC Dry Cleaners and spends $3 million for a cleanup.
  • 2014: The EPA starts a lawsuit to recover its costs.

QUESTION #1

Could Owner 1 be liable for cleanup costs?

ANSWER

Yes.

EXPLANATION

The U.S. Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), a.k.a. the “Superfund Law,” allows the EPA to clean up contaminated land and sue the parties responsible for the contamination to recover its costs. “Potentially responsible parties” (PRPs) the EPA may pursue include the land’s “owners and operators.” The rules apply to leased land.

Owner 1 no longer owns the shopping center. But because it owned the land at the time of contamination, it would be liable as an “owner” for the EPA’s cleanup costs.

QUESTION #2

Could ABC Dry Cleaning be liable for cleanup costs?

ANSWER

Yes.

EXPLANATION

ABC Dry Cleaning is no longer a tenant. But it’s on the hook because its use of hazardous chemicals during the lease caused the contamination. ABC would be liable as either:

  • An “owner”: A tenant can be considered a de facto “owner” under CERCLA if it exercises control over the property or displays other “indicia of ownership,” such as the right to sublet without the owner’s approval, the right to evict other tenants, and responsibility for paying all taxes or other rights and duties normally exercised by an owner; or
  • An “operator”: A tenant can also be liable as an “operator” of the property to the extent it generates, uses, or stores hazardous substances on the property during its lease.

QUESTION #3

Could Owner 2 be liable for cleanup costs?

ANSWER

Yes.

EXPLANATION

Potential CERCLA liability extends not just to the owners and tenants of the site at the time of contamination but those who come along afterward—even if those later owners and tenants don’t actually engage in any contaminating activities themselves. Accordingly, as the current owner of the shopping center, Owner 2 may be liable for cleanup costs under CERCLA.

The good news is that Owner 2 may have a viable defense. Explanation: Purchasers of contaminated land aren’t liable for cleanup costs under CERCLA if they can prove they were what’s called a “Bona Fide Prospective Purchaser” (BFPP). To prove its BFPP status, Owner 2 would have to show:

  • The land was already contaminated when it purchased the shopping center in 2005; and
  • It carried out appropriate environmental due diligence to determine if any hazardous substances were released before buying the property. 

QUESTION #4

Could XYZ Confections be liable for cleanup costs?

ANSWER

Yes.

EXPLANATION

The land was already contaminated when its lease began; and XYZ didn’t do anything to make the problem worse. But even though XYZ didn’t do anything environmentally unsound, as the current tenant, it may also be on the hook for cleanup costs as an “owner” or “operator.”

The good news is that XYZ may also be able to use the BFPP defense to avoid liability. There are two ways a current tenant can avoid cleanup liability for contamination that pre-dates its tenancy:

  • Derivatively via the Owner: Tenants can piggyback on the BFPP status of their owner. So if Owner 2 is able to show that it was a BFPP, XYZ would also be protected from liability as a BFPP.
  • Independently: A tenant can also be a BFPP even if the owner is not (or the owner loses its status as a BFPP through no fault of the tenant) as long as the tenant can prove that the contamination pre-dated its tenancy and that it carried out a proper environmental due diligence inquiry before leasing the property. 

WHICH OF THE PRPs ACTUALLY PAYS THE EPA’s COSTS?

CERCLA liability is “joint and several.” Translation: The EPA can recover some or all of its remediation costs from any one or combination of PRPs. Although it may sound like a legal technicality, joint and several liability has huge practical consequences because it enables the government to go after whichever PRP(s) is solvent. Thus, for example, of the four PRPs in this scenario, XYZ Confectioners is probably the least culpable. But to the extent it’s considered a PRP and the other three PRPs are insolvent, XYZ could end up footing 100 percent of the EPA’s $3 million cleanup costs.

PRACTICAL POINTERS

You can use these strategies to minimize your potential risks of CERCLA liability:

1. Conduct a Phase I Environmental Assessment before acquiring a property. You can’t make out a BFPP defense unless you can show you made what the EPA calls an “all appropriate inquiry” (AAI) into the previous ownership and uses of property before you acquire it. The EPA guidelines detail what an AAI must include, such as a site visit, records review, etc. The good news is that you can meet all of the EPA’s AAI criteria by hiring a consultant to carry out a Phase I Environmental Site Assessment of the property before you acquire it to determine if it is or may potentially be contaminated.

2. Include six key clauses in your lease. The other way to protect yourself from CERCLA liability for tenant contamination is to include six provisions in your lease, including a clause that:

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