United States: Avoiding Liability For Someone Else’s Mess When Buying Commercial Property:The Innocent Purchaser Defense To CERCLA Liability

Congress enacted CERCLA (The Comprehensive Environmental Response, Compensation, and Liability Act) in 1980 because then-existing laws were inadequate to respond to the problems raised by hazardous waste produced and abandoned in the past. While the perceived problem of contaminated sites in this country was large at the time of CERCLA’s passage, further study revealed the problem’s staggering proportions. A hastily drafted piece of legislation, rushed through Congress after minimal debate following the presidential election of 1980, CERCLA is now generally viewed as a failure. However, in spite of CERCLA’s overly broad reach and costly obligations, it is still "on the books" and is vigorously enforced by the Environmental Protection Agency.

Essentially, CERCLA allows the federal government to recoup its "Response Costs" from "potentially responsible parties" ("PRPs") incurred as result of remediating commercial and industrial "facilities" where it has been determined that there has been a "release or threatened release" of "hazardous substances". Additionally, private parties are also entitled, and in fact encouraged, to implement remedial action under CERCLA. These parties may thereafter sue to recover their Response Costs.

The inherent problem with CERCLA, as asserted by United States Senator Smith in 1994, is that "...risk assessment in clean ups are based on unrealistic, worst-case risk scenarios that ultimately lead to overly expensive remedies. We need to address the issue of ‘how clean is clean?’. Often times, striving to clean the last ounce of pollution has little environmental benefit but increases costs significantly." Likewise, also in 1994, United States Senator Baucus suggested that, "[t]he problem is that Cadillac remedies rob resources from sites where health threats are real and they delay all clean ups".

Within CERCLA’s framework there exist four classes of individuals who are PRPs, one of those classes consisting of the "current owner or operator of the facility". (A "facility" can be any commercial or industrial property if deemed to be contaminated with hazardous substances by the EPA). There are two affirmative defenses to this CERCLA liability: (1) the "Third-Party Defense" and (2) the "Innocent Landowner Defense".

Pursuant to the Third-Party Defense, a defendant is not liable if it establishes that the release or threatened release was caused solely by "an act or omission of a third party, other than an employee or agent of the defendant, or than (sic) one whose act or omission occurs in connection with a contractual relationship, existing directly or indirectly with the defendant . . . if the defendant establishes that (a) he exercised due care with respect to the hazardous substance concerned (the "Due Care Requirement") and (b) he took precautions against foreseeable acts or omissions of any such third party (the "Precautionary Requirement")".

The Innocent Landowner Defense (also known as the "Innocent Purchaser Defense") is actually a special case of the Third-Party Defense. In 1986 Congress created an exception to the "no contractual relationship" requirement of the Third-Party Defense, thereby making it available to some landowners who acquired the relevant property after the disposal or placement of hazardous substances occurred. To qualify as an "Innocent Landowner" under CERCLA, one must have undertaken "all appropriate inquiry into the previous ownership and uses of the property, consistent with good commercial or customary practice" at the time of transfer. "Good commercial or customary practice" is not defined in the statute, and the relevant legislative history is vague, indicating that "a reasonable inquiry must have been made in all circumstances, in light of best business and land transfer principles."

In deciding whether a defendant has complied with this standard, courts consider a number of factors, including: (1) any specialized knowledge or expertise the defendant has; (2) whether the purchase price indicated awareness of the presence of a risk of contamination; (3) commonly known or reasonable information about the property; (4) the obviousness of the presence of contamination at the property; and (5) the ability to detect such contamination by appropriate inspection. Landowners who meet these "good commercial or customary practice" requirements of CERCLA will not be found to be in a "contractual relationship" with the party responsible for the release of hazardous substances at the property. However, to obtain the protection of the Innocent Landowner/Purchaser Defense, the landowner must also meet the Due Care and Precautionary Requirements of CERCLA.

The Due Care Requirement, also undefined in the statute, has been interpreted as mandating that a defendant demonstrate it took necessary steps to prevent foreseeable adverse consequences arising from the pollution on the site. The Precautionary Requirement is satisfied by taking precautionary action against the foreseeable actions of third parties responsible for the hazardous substances in question. Both the Third-Party Defense and the Innocent Landowner Defense are affirmative defenses, requiring the defendant to prove each of the required elements by a preponderance of the evidence. A defendant’s failure to meet its burden on any one of the required elements precludes application of the defense. The Third-Party Defense applies only where a totally unrelated third party is the sole cause of the release or threatened release of a hazardous substance.

This imposition of strict liability solely on the basis of property ownership does something other than cause handlers of dangerous substances to be responsible for the hazards they create. It transfers the costs of the national problem of remediating abandoned contaminated sites onto the shoulder of individuals involved in real estate transactions, many of whom have never violated any environmental regulation, thereby negating Congress’ intention of making those responsible for causing contamination pay for its remediation. Additionally, the government’s access to the highly technical information necessary to identify contamination is often superior to that of the ordinary landowner. Rather than preventing blameworthy defendants from escaping liability, shifting the burden of proof to defendants merely helps insure that the government will recoup its Response Costs at the expense of imposing liability upon some individual defendants who caused no harm but are unable to prove it.

The bottom line is this: prior to purchasing any commercial or industrial property it is advisable that one hire a reputable environmental consulting firm in order to have it conduct what is known as an "environmental audit", also known as an "environmental investigation" or "phase I inspection". Environmental audits can be quite expensive. One Florida environmental auditing firm, for example, charges $3,500 per acre for its audits, and possibly more, depending on the characteristics of the site. Additionally, investigation imposes delays on the transfer of property, and can trigger reporting or remediation obligations that would not have been incurred if the contamination had not come to light to begin with.

An uncertain chance of qualifying for the Innocent Purchaser Defense may be seen as insufficient to justify these costs and risks; however, an environmental audit done by a reputable firm is the most prudent step toward qualifying for the Innocent Purchaser Defense, thereby affording one the best chance at avoiding CERCLA liability when purchasing commercial or industrial property. Additionally, the purchaser may contractually agree with the seller to have the seller incur the expense of having the environmental audit conducted as a precondition of the sale. In the event that the seller refuses or the audit uncovers significant environmental contamination, the prospective buyer can then make an informed decision to avoid purchasing the property altogether.

As is obvious, there exist both pros and cons regarding whether or not one should have an environmental audit performed. However, on balance, it is probably advisable to err on the side of caution by having one done prior to purchasing any commercial or industrial property.