Tools For Limiting Environmental Liability

It is commonly known that federal and state Superfund laws impose no-fault cleanup liability on the current owners and operators of a site.  The law provides defenses for “innocent” or “bona fide” purchasers; that is, those who made the appropriate inquiry before buying and didn’t identify a risk that contaminants had been released, and who did not contribute to the problem.  The potential for these defenses has made Phase I and II environmental site assessments routine elements of due diligence in transactions involving real property.

But what if the Phase I or II does uncover contamination?  By definition, the prospective purchaser is no longer innocent since it now has actual knowledge.  Is there any way to avoid or limit cleanup liability attributed to ownership status?

Unfortunately, there is no way to avoid the liability.  An indemnification agreement with the seller can help, but only to the extent that the seller has assets to support the indemnity, or an insurance product can be found.  And even if there were a good indemnity, that’s only between the buyer and seller, and is not binding at all on the government.  Getting the cleanup done before the deal closes would be ideal, but there rarely is time for that in transaction settings, at least not with government oversight to ensure the work meets standards.

The good news is that everyone, including the government, recognizes this is a big problem for redevelopment of contaminated properties.  Thus, most states have adopted Prospective Purchaser Agreement (PPA) programs under which the buyer can negotiate sideboards around its cleanup liability before the purchase.  If the buyer performs the obligations under the PPA, it receives a release from liability and protection from contribution claims by third parties.

That provides even more certainty than the typical No Further Action (NFA) letter agencies issue following a cleanup, since the agencies always include a reopener clause to NFA letters if new information comes to light.  As noted in Larry Burke’s May 24 post, Oregon has further clarified the release and third-party protection elements, making the Oregon PPA program particularly user friendly.

To qualify for a PPA, (1) the buyer must show it is not currently liable (hence the requirement that the PPA must be executed before the transaction), (2) cleanup is necessary to protect people or the environment, (3) the new use of the property will not make the contamination problem worse, and (4) substantial public benefit will result.  The last element can take the form of a prescribed level of cleanup or sometimes a dollar limit, creation of new jobs or substantial redevelopment, public use of the property, or a combination.

PPAs are useful tools for limiting liability for acquiring or financing contaminated properties, worthy of consideration in the right context.  For further information on the Oregon program, see: http://www.deq.state.or.us/lq/cu/ppa.htm.