Don’t Get Stuck With the Bill: Understanding CERCLA Liability in Property Transactions

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is a federal statute that establishes requirements for cleaning up vacant and improved properties that have been contaminated with hazardous substances. Enacted in 1980 in response to concerns about widespread contamination within the chemical and petroleum industries, CERCLA continues to play a central role in environmental liability and cleanup responsibility today.

With this in mind, investors seeking to acquire properties that are contaminated (or that may be contaminated) need to be very careful to ensure that they do not get stuck with the bill. CERCLA imposes broad liability for past and present owners, and while investors can shield themselves from CERCLA liability, doing so requires a proactive approach guided by an experienced California environmental compliance lawyer.

3 Key Aspects of Environmental Liability Under CERCLA

Before discussing the ways investors can mitigate their risk of environmental liability under CERCLA, we must first examine the liability risks themselves. As the Environmental Protection Agency (EPA) explains, there are three key aspects to CERCLA liability:

1. Retroactive Liability Under CERCLA

Under CERCLA, present owners of contaminated properties can be held liable for contamination that occurred not only before they acquired the properties at issue, but also before Congress enacted CERCLA in 1980. This means that investors can potentially be on the hook for decades’ worth of contamination-related costs, including costs related to forms of contamination that have long since been proscribed by federal law.

The risk of facing retroactive liability makes thorough due diligence essential. In particular, investors must ensure that they conduct all appropriate inquiries (AAI) into potential environmental contamination concerns. Not only is this essential for informed decision-making, but it is essential for securing protection as a bona fide prospective purchaser (BFPP), as discussed in greater detail below.

2. Joint and Several Liability Under CERCLA

CERCLA provides that all potentially responsible parties (PRPs) can be held jointly and severally liable for the costs of cleaning up contaminated properties. This means that while EPA can seek to hold each PRP partially liable, it can also seek to hold a single PRP fully liable for the costs of cleaning up a contaminated property—and this is true regardless of the PRP’s level of involvement (if any) in the contamination.

Joint and several liability applies whenever “the harm caused by multiple parties cannot be separated.” Under CERCLA, PRPs that can be held jointly and severally liable include not only previous owners who are responsible for a property’s original contamination, but also current owners who may or may not need to take steps to prevent further environmental harm.  

3. Strict Liability Under CERCLA

The third key aspect of environmental liability under CERCLA is that the statute adopts the principle of “strict liability.” This means that negligence is not required for cleanup liability to apply for current owners and operators of a contaminated property, and that party can face liability under CERCLA regardless of whether there is any nexus to the contamination at issue. If a party previously owned or operated a contaminated property, that party is jointly and severally liable if contamination migrated from one place to another on the property during that party’s tenure (migration is generally considered a “release” under CERCLA).  Because contamination almost always moves in the subsurface, there is almost always a release at any given time of past ownership and operation.  Therefore, most prior owners and operators are essentially strictly liable, even if not legally so.

As you can see, there are various ways that unsuspecting investors can unknowingly assume cleanup costs when acquiring properties contaminated with hazardous substances. Avoiding this highly undesirable outcome involves working with experienced legal counsel who can help you leverage the protections that are now available.  

Avoiding Liability Under CERCLA: Leveraging the 2002 Amendments

For investors that are considering purchasing properties that are (or that may be) contaminated with hazardous substances, it is possible to avoid liability under CERCLA by leveraging the protections implemented by the CERCLA amendments enacted in 2002. Under the 2002 CERCLA amendments, investors can sidestep potential cleanup liability through three primary means:

• Bona Fide Prospective Purchaser (BFPP) – The bona fide prospective purchaser (BFPP) exemption allows investors to purchase properties that they know are contaminated without incurring potential cleanup liability under CERCLA. There are several steps involved in securing BFPP status, and, crucially, investors must continue taking steps to maintain their BFPP status on an ongoing basis. With that said, securing (and maintaining) BFPP status can be well worth it, and many investors today rely on the BFPP exemption to acquire contaminated properties.
• Contiguous Property Owner (CPO) – The contiguous property owner (CPO) exemption is similar to the BFPP in many respects. However, there is one key difference: Prior knowledge of a property’s contamination (or having reason to know of a property’s contamination) is disqualifying for protection as a CPO. As a result, for investors seeking to protect themselves proactively, going through the process of establishing BFPP eligibility will generally be necessary.
• Innocent Landowner Defense – Investors that unknowingly acquire a contaminated property (and that do not have reason to know they are acquiring a contaminated property) may also qualify for the innocent landowner defense. As EPA also explains, “[t]he 2002 CERCLA amendments clarified the ‘innocent landowner defense’ to require the landowner to meet a set of continuing obligations similar to what is required of BFPPs.” Among other things, this means taking adequate steps to ensure that the existing contamination does not result in future releases.

While these are among the primary means that investors can use to shield themselves from cleanup liability under CERCLA, this list is by no means exhaustive. There are several additional steps that investors can (and generally should) take to ensure that they are both making informed decisions and mitigating their liability exposure to the fullest extent possible. By taking a proactive approach to managing their environmental liability risk, investors can feel confident moving forward, and they can ensure that they are prepared to deal with EPA effectively if necessary.

Request a Call with a California Environmental Compliance Lawyer at Bick Law LLP

If you would like to know more about how investors can manage their environmental liability risk when acquiring contaminated (or potentially contaminated) properties, we invite you to get in touch. To speak with an experienced California environmental compliance lawyer at Bick Law LLP in confidence, call us at 949-432-3500 today.