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Utah Protections From Cleanup Liability for Prospective Purchasers
Posted on Jan. 9, 2013

It has become the industry standard for prospective purchasers of commercial or industrial property to obtain a Phase I Environmental Site Assessment (Phase I Report) as part of their due diligence.  A Phase I Report may identify environmental conditions that are integral to negotiating the purchase.  A Phase I Report can also be used to qualify the purchaser for the federal cleanup defenses under CERCLA:

Bona Fide Prospective Purchaser (BFPP) Defense  

  • Obtain Phase I Report prior to purchase;
  • Acquire property with knowledge of contamination;
  • All contamination took place before the property purchase;
  • Purchaser takes reasonable steps.

Contiguous Property Owner (CPO) Defense  

  • Obtain Phase I Report prior to purchase;
  • No knowledge prior to purchase of contamination migrating from other property;
  • Owner has not caused or contributed to the release; and
  • Owner takes reasonable steps.

Innocent Purchaser Defense      

  • Obtain Phase I Report prior to purchase;
  • No knowledge prior to purchase of contamination;
  • Purchaser takes reasonable steps.

Third Party Defense        

  • Contamination caused solely by a third party;
  • No contractual relationship between the purchaser and the third party;
  • Purchaser exercises due care.

In addition to qualifying for the federal defenses, the prospective purchaser should also consider applying for Utah state defenses.  Utah has adopted the BFPP, CPO and innocent purchaser defenses and has additional protections.

Prospective Purchaser Should Assess Whether Federal and State Defenses are Beneficial.  In considering whether to qualify for federal and state defenses, the purchaser should analyze the potential for federal or state cleanup liability may apply.  Considerations include the following:

  • For properties with past or ongoing environmental cleanups, whether a federal or state agency was or is overseeing or paying for the cleanup.
  • The type of contamination and associated cleanup program.  For example, the federal defenses under CERCLA do not cover petroleum cleanups but the Utah state defenses do cover petroleum. 
  • For properties where the Phase I identifies no environmental conditions, the prospective purchaser likely will qualify for the Utah innocent landowner defense.
  • For properties with known or potential contamination requiring remediation, the purchaser should consider conducting a cleanup, or requiring the seller to conduct a cleanup, under the Utah Voluntary Cleanup Program.

Federal Defenses are Automatic, But a Purchaser is Required to Apply for Utah Defenses.  A Phase I Report automatically satisfies the threshold requirement for the federal defenses, meaning the prospective purchaser simply needs to obtain a Phase I Report and does not need to seek confirmation from EPA that it qualifies for the defense. The Utah state defenses are not automatic. The purchaser only qualifies for the state defenses if it submits an application and the Utah Department of Environmental Quality (“DEQ”) issues a letter, called an Enforceable Written Assurance (EWA) Letter, before the purchase closes. 

Utah Enforceable Written Assurance – BFPP, CPO and Innocent Landowner Defenses. DEQ will only issue an EWA letter if the prospective purchaser has obtained a Phase I Report and there is no unacceptable risk to human health or the environment.  If contamination exists, DERR may require one or more of the following:  cleanup, a risk assessment, long term groundwater monitoring, use restrictions, other institutional controls or a recorded environmental covenant. DEQ will not bring an enforcement action under the Hazardous Substances Mitigation Act against the holder of an EWA Letter, provided the holder continues to satisfy the ongoing obligations required under the EWA Letter.  If contamination exists, DEQ may issue an EWA Letter conditioned upon a cleanup under the Utah Voluntary Cleanup Program. An EWA is not transferable to a successor owner if the purchaser sells in the future, but the next prospective purchaser could likely obtain a second EWA Letter, based on the first EWA Letter.

Utah Certificate of Completion Under Voluntary Cleanup Program.  If a prospective purchaser enters into the Voluntary Cleanup Program prior to purchase and completes a cleanup to the satisfaction of DEQ, DEQ will issues a Certificate of Completion that gives the purchaser a release from liability under all of the state environmental programs for the benefit of the purchaser, lender and successor owners.

Utah Enforceable Written Assurance – Hazardous Waste Program.  DEQ is also authorized to issue an EWA Letter to a prospective purchaser of property that is subject to a permit for treatment, storage or disposal of hazardous waste and the prospective purchase is not a permittee. The EWA Letter states that the prospective purchaser will not be subject to enforcement action for existing contamination.  The EWA also protects the prospective purchaser from any cost recovery or contribution action under state law. 

Practical Considerations.  Even if the purchaser qualifies for applicable federal or state cleanup liability defenses, the purchaser should consider how any known or potential environmental conditions will be addressed and who will take responsibility, and also whether there are ongoing requirements to maintain the defenses.  The purchaser may be able to negotiate purchase terms where the seller retains responsibility for environmental conditions. 

  • For example, if a prospective purchaser qualifies for the BFPP defense, it can purchase property with known environmental conditions without assuming any cleanup liability.  But, if it encounters contamination during construction, construction can be delayed until the contamination is remediated.  The purchaser may have to front the cleanup costs to minimize the delay and may not have any recourse for reimbursement, unless it negotiates an indemnity from the seller.  
  • A less problematic example is a purchase of property with a completed cleanup that incorporates property use restrictions such as no residential use and no groundwater wells.  In order to maintain the BFPP defense, the purchaser is simply required to comply with these restrictions. 
  • One valuable aspect of the cleanup defenses may be protection from cleanup liability due to future state or federal reopeners of cleanup due to lower cleanup levels. 

It is important to design pre-purchase environmental diligence to minimize potential federal and state environmental liability by qualifying for and obtaining appropriate federal and state cleanup defenses.

 

*This post was written by Attorney Lucy B. Jenkins

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Department Chair

tomTom Berggren

Tom has an extensive finance and real estate practice representing a wide range of businesses and financial institutions. He specializes in real estate secured loans and often serves as local counsel in multi-state credits. He has the expertise to assist developers, lenders, nonprofits and governmental entities take advantage of New Markets, Historic and Investment tax credits as part of the project financing.

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