United States: Brownfields Revitalization — A Misnomer

By Kalyn J. Johnson and Kristin L. Parker

On January 11, 2002, President George W. Bush signed the Small Business Liability Relief and Brownfields Revitalization Act (the "Act") into law. The Act amends the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") by purporting to provide CERCLA liability protection for prospective purchasers of brownfields, contiguous property owners, innocent landowners, and small business owners. While the Act is aimed at encouraging the cleanup and redevelopment of an estimated 500,000 to 1,000,000 brownfields across the United States in an attempt to minimize urban sprawl, the Act is of virtually no use to private purchasers of industrial properties due to: (i) the limited number of industrial sites that qualify as "brownfields" under the Act; (ii) the Act’s requirement that a prospective purchaser believe, after "all appropriate inquiry," that the property is contamination-free; and (iii) the fact that the Act’s protections are applicable only if specified cleanup requirements are met.

The Act turns on its head what brownfields redevelopment was commonly believed to encompass by narrowly redefining what qualifies as a brownfield. Moreover, the Act puts federal and many state laws at odds with the basic premise behind urban revitalization. North Carolina’s Brownfields Property Reuse Act of 1997, for example, provides protection for either a seller or buyer who did not cause or contribute to the contamination at the property if that individual agrees to remediate the property for the proposed reuse. Under the Act, however, a prospective purchaser who wishes to limit his liability for environmental contamination under CERCLA must not have been aware, after all appropriate inquiry, of any contamination at the property.

Although the dichotomy that the Act creates may do nothing more than affect how the cleanup of a particular brownfield is financed, it almost certainly ensures that most such cleanups will continue to be financed through privately funded initiatives between willing buyers and sellers. Even though the Act increases funding for state and local programs that assess and clean up brownfields, it precludes private purchasers from receiving the benefits of such programs as those eligible to receive the funding under the Act are limited to: (a) a general purpose unit of local government; (b) a land clearance authority or other quasi-governmental entity that operates under the supervision and control of local government; (c) a government entity created by a state legislature; (d) a state-sanctioned redevelopment agency; (e) a state; or (f) an Indian tribe. Even for these eligible entities, the Act caps the amount of federal funds available to a single brownfields site at $200,000 per year and the amount of funds available to a single eligible entity at $1,000,000 per year.

Prior to the enactment of the Act, most inactive historical industrial sites in urban environments were generally called "brownfields." The Act, however, severely narrows the meaning of the term "brownfield" by exempting a variety of sites from the scope of its definition. While the Act generally defines a "brownfield" as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant," it specifically excludes many sites and facilities from this definition. The excluded sites and facilities include those: (i) listed on the National Priorities List ("NPL"); (ii) undergoing a removal action; (iii) that are subject to a unilateral administrative order, court order, administrative order, or consent order/decree; (iv) that have received a permit under the Clean Water Act, the Safe Drinking Water Act, the Solid Waste Disposal Act, or the Toxic Substances Control Act; (v) that are undergoing corrective action or subject to closure under RCRA; and (vi) where PCBs have been released.

Because many industrial facilities that are being bought and/or sold through private transactions have received permits under one or more of the listed federal statutes or are otherwise excluded from the Act’s definition of a "brownfield," the protections offered by the Act will rarely apply in complex commercial transactions. In 2001, for example, it was estimated that 75 of the 159 facilities on the NPL were contaminated with PCBs. These facilities are not atypical of the types of facilities that are privately for sale at reduced costs. The exclusion of so many types of properties belies the Act’s purported intent of brownfields revitalization by constraining real estate developers and companies committed to urban renewal. Even for those industrial sites that do meet the definition of a brownfield, the implausibility of the appropriate inquiry requirement or the improvidence of agreeing to cleanup without liability protection limits the Act's usefulness.

In addition to providing liability protection for a limited number of prospective purchasers of "brownfields," the Act generally amends CERCLA's "innocent landowner defense." To insulate himself against liability for environmental contamination under CERCLA, a prospective purchaser of commercial property must establish that he had no reason to know of contamination at the property. Under the Act, the prospective purchaser must show that he carried out "all appropriate inquiries" into the previous ownership and uses of the subject facility in accordance with generally accepted good commercial and customary standards. Moreover, the Act directs EPA to promulgate regulations that set forth minimum, specified "standards and practices" for purposes of satisfying the "all appropriate inquiry" criterion by January of this year.

Although EPA has not yet published an "all appropriate inquiry" rule, an EPA-established advisory committee adopted a recommended standard in November 2003. To meet the "all appropriate inquiry" test, the recommended standard establishes minimal qualifications for environmental professionals and requires that they conduct investigations aimed at identifying "conditions indicative of releases or threatened releases." In addition, the proposed standard: (i) requires that the parties seek to identify, through specified practices, both current and past property uses, occupancies and activities, engineering and institutional controls, and nearby property conditions; (ii) obligates the prospective purchaser to share information about environmental cleanup liens, his or her specialized knowledge or experience, and the relationship of the purchase price of the property to the fair market value; (iii) requires that the parties gather publicly available information and review the thoroughness and reliability of the information gathered; (iv) compels the environmental professional to prepare a written report that, inter alia, identifies and comments on the significance of any data gaps; and (iv) mandates that the parties consider the "degree of obviousness of the presence of releases." A report is valid under the proposed standard only if all of the information in the report is collected within one year of closing and if certain specified activities have been undertaken or updated within 180 days of closing.

As of February 1, 2004, the proposed standard was undergoing EPA review and had not yet been published as a proposed rule. Until EPA publishes a final rule, the performance of Phase I ESAs in accordance with ASTM procedures (either Standard E1527-97 or E1527-2000) satisfies the Act’s "standards and practices" requirements with respect to property purchased after May 31, 1997. See EPA, Clarification to Interim Standards and Practices for All Appropriate Inquiry Under CERCLA and Notice of Future Rulemaking Action, 68 Fed. Reg. 3430 (Jan. 24, 2003). While the proposed "all appropriate inquiry" rule states that the environmental professional should provide "an opinion regarding additional appropriate investigation," both the Act and the proposed rule fail to mention what should be done if additional investigation is warranted. Based on the Act’s current language, it appears that its protections would not be afforded if a Phase II ESA were necessary because in such a circumstance, a prospective purchaser would be on notice that there is likely contamination at the property.

In the context of brownfield revitalization, the Act’s due diligence requirement undermines the whole premise of brownfield redevelopment even for those properties that qualify for the Act’s protections. The purpose of brownfields redevelopment has been the cleanup of blighted areas. In this country, blighted areas are typically those that were once economically viable industrial areas. Urban renewal of these areas can only take place if one is aware of the contamination or potential contamination at a particular site. The Act, as it currently reads, fails to take this logic into account but nevertheless purports to encourage the cleanup of close to one million brownfields.

In addition to altering the "innocent purchaser defense," the Act generally amends CERCLA by providing that a prospective purchaser does not qualify for the Act's protection until he has cleaned up the site to a specified standard. Specifically, the Act provides that a "bona fide prospective purchaser" of a brownfield site whose only liability is based on his status as the current owner or operator of the site will not be liable under CERCLA provided that the purchaser cooperates with the site’s cleanup. Not only must the purchaser cooperate with the site’s cleanup, but he should be aware that the Act creates a lien against the property and in favor of the EPA for sites where the agency has incurred unrecovered cleanup costs that have increased the value of the property. In addition to cooperating in the site’s cleanup, a "bona fide prospective purchaser" must not have any contractual, corporate, or financial relationship with any potentially liable party (other than those relationships involving transfer of title in the property); take reasonable steps to stop releases, prevent future releases and limit human and natural resource exposure to any previously released hazardous substance; and conduct the required level of due diligence of the site.

In the brownfield context, the remediation requirement itself further constrains the usefulness of the Act to commercial transactions. Even in the rare circumstance where a prospective purchaser finds uncontaminated property that is not specifically excluded from the Act’s definition of a brownfield, he must be willing to clean up the site before he can avail himself of the Act’s protection. In the traditional brownfields context, absent gross negligence, a person could choose to clean up a brownfield to a particular standard and not be liable for any harm to human health and the environment caused by the property’s contamination. Once the brownfield has been cleaned up, the owner would then be free to do with it whatever he chooses — even sell it at a profit. The Act, however, effaces this practice by not offering its protections to one who agrees to undertake the cleanup of a brownfield until its specified cleanup requirements are met. Even then, if it is sold at a profit, the EPA may be able to lay claim to some or all of the proceeds.

Moreover, the Act provides that the owner of the property can have no reason to know of the contamination and therefore assumes that the owner will rely upon the government to clean up the property. As discussed earlier, this premise is contrary to the prevailing practice in brownfields redevelopment. In addition, it puts an unnecessary onus on the government given that buyers and sellers have been, and will continue to be, willing to divide cleanup responsibilities amongst themselves.

The Act does very little to encourage the cleanup of brownfields on a large scale. It is unlikely that the Act will foster an escalation in brownfields revitalization due to the definition of a brownfield, the stringent due diligence requirement, and the limits of the Act’s protection. It is unfortunate that what many thought would be a tool to propel brownfields redevelopment is nothing more than an impediment.