Lions and Tigers and Bears, Oh My! Avoiding Joint and Strict Liability Under CERCLA for Commercial Landowners

Those beasts in the land of Oz struck fear into the heart of a little girl from Kansas. Far more fearsome to commercial landowners, however, is the potential for liability under CERCLA. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) was passed in 1980 to facilitate the cleanup of hazardous substances.

As a practical matter, when a commercial landowner is named in a CERCLA action, two viable defenses exist. The first defense is that the contamination was caused solely by the acts of an unrelated third party. The third-party defense includes a provision known as the "innocent landowner defense," an important provision for commercial landowners, as well as lenders and lessees. CERCLA excludes liability for persons who acquired contaminated property, did not know and had no reason to know that it was contaminated, and did not contribute to the contamination. The purchaser must, at the time of the acquisition, have undertaken "all appropriate inquiry" into previous ownership and uses of the property consistent with good commercial and customary practices in an effort to minimize liability. Prospective purchasers will frequently include a Phase I Environmental Assessment as part of its "all appropriate inquiry" effort.

The second defense is that the harm is divisible and the court should apportion damages, rather than impose joint and several liability. Although not a bar to liability, proving this second defense will frequently cause the commercial landowner's liability to be dramatically reduced. The burden is on the commercial landowner to show that the harm is divisible. The courts have made it clear that the harm will be found divisible and apportionment will apply only where the owner can produce detailed evidence allowing the court to make very specific findings as to the quantity and nature of the chemicals released from the owner's property. Commercial landowners with any concerns regarding chemical use on their properties would do well to take an active role in monitoring its tenants' activities. To satisfy the evidentiary standards for apportionment, a landowner would need to maintain copies of detailed operational records from its tenants in order to realize any liability limitations in a future CERCLA action.

In sum, prospective purchasers of property that has any history of the use or storage of hazardous substances should place environmental due diligence at the top of their list of priorities. If a prospective purchaser performs "all appropriate inquiry" into the property's environmental condition and satisfies certain other statutory requirements, it may qualify for CERCLA's innocent landowner defense. Close attention should also be given to the importance of negotiating indemnities, representations and warranties, and environmental insurance provisions that adequately insulate purchasers from CERCLA liability. After the completion of the purchase, commercial landowners should monitor their tenants' activities to gain some measure of knowledge regarding their operations and usage of chemicals.

If you have any questions regarding any real estate legal matter, in San Diego please contact Brian Frasch (litigation) at bfrasch@gordonrees.com or Eric Young (transactions) at eyoung@gordonrees.com or call us at (619) 696-6700. In San Francisco, please contact Phil Wang at pwang@gordonrees.com or call us at (415) 986-5900. This Real Estate Update was prepared by Brian Ledger of the firm's San Diego Office. He can be reached at bledger@gordonrees.com or (619) 230-7729.