On October 18, 2021, EPA issued its “PFAS Strategic Roadmap: EPA’s Commitments to Action 2021-2024.” This roadmap sets out EPA’s action plan for minimizing the release of PFAS into the environment. On September 6, 2022, EPA proposed to designate Perfluorooctanoic Acid (PFOA) and Perfluorooctanesulfonic Acid (PFOS), two PFAS compounds, as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Recently, EPA announced it was pushing back its target for this hazardous substance designation to February 2024. This designation could result in sellers being strictly liable for costs associated with onsite and offsite contamination from PFAS, regardless of whether the risk of contamination is known at the time of purchase. But doing so could raise major concerns for the real estate market, which, until recently, had turned a blind eye to PFAS related issues.
Before entering a business transaction involving real estate with potential environmental concerns related to PFAS, parties should consider the following to protect their interests.
Do Your Due Diligence
Environmental due diligence is crucial to the real estate acquisition process, particularly when purchasing an industrial or former industrial property, due to the need to understand the property’s environmental conditions and risks. Before listing for sale commercial real estate, a seller may want to conduct their own pre-marketing due diligence to evaluate its value and to consider either resolving or mitigating a prospective buyer’s potential concerns. Similarly, a prospective buyer should perform due diligence before closing on real estate to protect itself from liability to the extent possible and to obtain leverage regarding price and risk allocation.
Until the end of 2021, the ASTM Standard Practice for Environmental Site Assessments (the most accepted standard for environmental due diligence) didn’t really address PFAS. Even then, the concept of an evaluation of “substances not defined as hazardous substances” was only included as an issue outside the scope of a typical Phase I Environmental Site Assessment – effectively something optional that the purchaser/user of a Phase I ESA would have to ask to include specifically.
With these two PFAS compounds likely to be designated as hazardous substances under CERCLA, it is important to include PFAS as part of any due diligence in transactions where potential environmental liabilities are a concern.
If the Phase I ESA uncovers evidence of potential contamination (a “Recognized Environmental Concern”), then a Phase II ESA could be conducted. A Phase II assessment is typically a subsurface investigation of soil and groundwater for contaminants designed to confirm the existence and extent of the contamination. Now, with a Phase I ESA looking for potential PFAS issues, the Phase II should be designed to hopefully confirm the existence and extent of PFAS contamination as well.
Liability Protection in an Age of PFAS – What is Due Care?
If your due diligence finds PFAS, does that kill the deal? Not necessarily, but it may complicate matters. Michigan, Ohio, and some other states have programs that allow a purchaser of contaminated property to escape liability for the contamination of the property. In 2002, Congress added to CERCLA a bona fide purchaser defense, which allows a buyer to escape cleanup liability for contamination in or on property purchased. What each of those laws and programs provides is that the new owner takes some sort of due care regarding the contamination. These actions typically include:
- No disposal of hazardous substances at the property after acquisition;
- Do not exacerbate the existing contamination;
- Take steps to stop continuing releases and prevent future releases;
- Prevent or limit human, environmental, or natural resource exposure to earlier released hazardous substance releases;
- Comply with land use restrictions and do not impede the effectiveness or integrity of institutional controls;
- Provide cooperation, assistance, and access to persons authorized to conduct response actions or natural resources restoration;
- Comply with information requests and administrative subpoenas; and
- Provide legally required notices.
These programs vary state by state; therefore, one should be careful. But, oftentimes, if there is little chance of exacerbation or human exposure, the remaining due care tasks may be relatively minimal. For PFAS, at the moment, the primary pathway of concern is drinking water. So, if the property does not use well water and the buyer’s plan does not involve major underground work, due care may be a matter of maintaining and documenting the status quo.
Structuring Your Contract
Given that it is highly likely that EPA will designate the two PFAS compounds (and later likely more) as CERCLA hazardous substances, real estate sellers and buyers could be subject to liability. It is very possible that EPA may add new cleanup sites to the National Priority List, existing sites may see new obligations imposed for PFAS issues, and sites that were previously remediated and closed relating to other contamination may be re-opened to consider PFAS-related issues.
As sellers and buyers work to identify potential environmental liabilities in their real estate deals, both parties will need to consider the potential presence of PFAS compounds and associated risks. Buyers and sellers should address risk allocation for such PFAS liabilities in their purchase and sale agreements. While environmental liabilities are typically already addressed in such agreements, PFAS and the pending CERCLA designation (and likely future designations of other members of the PFAS family) add a new wrinkle. Parties to a deal may want to include language covering both current regulations of potential environmental contaminants, but also future federal or state regulations of potential environmental contaminants and, of course, identifying PFAS by name as a covered contaminant – regardless of their regulated status.
Environmental indemnities and insurance are worth considering, but given the nature of PFAS compounds, the still-evolving clean-up standards, and the lack of any scaled cost-effective method for addressing them, the availability, value, and cost of indemnities or insurance may render them less than ideal methods of protection.
As to past deals, we certainly foresee more litigation over narrow indemnity language limiting the seller’s responsibility to environmental liabilities existing at the time of sale if and when the agencies come knocking at one’s door.
Where there is a potential that PFAS is present, buyers and sellers will need to expand their environmental assessment work to understand how this new liability may impact them, evaluate what risk allocations they should consider, and consider the type of post-acquisition due care their ownership will require. The presence of PFAS is not a deal-breaker, but it very much may complicate matters.
If you have any questions regarding the PFAS impact on real estate transactions, please reach out to a member of Taft’s Environmental group.