Innocent Landowner Status as a Defense to Liability

Put most simply, the innocent landowner defense allows owners of contaminated property toescape CERCLA liability if the contamination was placed on the property before acquisition, andthe landowner did not know, or have reason to know, at the time of acquisition of thecontamination's presence. It began with the original Superfund Act in 1980. One of the few defenses to this stringent liability scheme is the "third-party defense,"available when the defendant can show by a preponderance of the evidence that the release or threatof release was caused solely by "an act or omission of a third party other ... than one whose act oromission occurs in connection with a contractual relationship , existing directly or indirectly, withthe defendant ...." (6) The third-party defense requiresfurther that the defendant establish that (a)he/she exercised due care as to the hazardous substance concerned, and (b) took precautions againstforeseeable acts or omissions of the third party. These clarifying efforts culminated in 2002 in the SBA. (12)
Not all property owners will be subject to the new "all appropriate inquiry" regulations. The SBA adds further prerequisites for invoking the innocent-landowner defense, relating to the defendant's conduct after land purchase. Alandowner lacks a contractual relationship with predecessors in the chain of title if the disposalof the hazardous substances on the site preceded acquisition and at time of land acquisitionhe/she did not know and had "no reason to know" that the hazardous substance had beendisposed of there. "No reason to know," in turn, means that before the date of acquisition,he/she made "all appropriate inquiry" (as defined above). (15) A de minimis settlement enables aparty identified by EPA as potentially liable to settle early with EPA and thereby avoidprotracted, expensive negotiations with the agency and a myriad of other liable parties over theallocation of liability at the site. Note also the absence of "all appropriate inquiry"and certain other prerequisites for innocent-landowner status as a third-party defense. Notwithstanding, EPA guidance demands all appropriate inquiry for de minimis settlementeligibility as well. Second, since "had no reason to know" requires allappropriate inquiry, the lack-of-constructive-knowledge prerequisite for settlement must beread to do the same. Prospective Purchasers

The prospect of CERCLA liability has long been thought to chill investment in realproperty that is known or feared to be contaminated. So EPA in 1989 established a policy toward prospectivepurchasers of contaminated property, (23) offeringin "very limited circumstances" to enter intoa "prospective purchaser agreement" (PPA) -- effectively, a settlement with the would-bepurchaser by which EPA covenants not to sue based on existing contamination at the site. Prospective purchasers of contaminated property were slow to take advantage of the new PPA device. For a Congress seeking to encourage redevelopment of brownfields, thisnumber was too low. For this reason, these voices have urged that buyers of such landconsider making use of both a PPA and the new BFPP exemption.
The Superfund Act contains several mechanisms that eliminate or contain liability, or reduce liability-related transaction costs, normally incurred under the Act by persons that acquirecontaminated land. This report covers three of them. Two mechanisms use innocent landowner status -- "innocent" referring to a landowner's lack of actual or constructive knowledge on the dateof site acquisition as to the presence of hazardous contamination there. The third is based on the bona fide prospective purchaser concept, and is intended to encourage redevelopment of sites knownat the time of acquisition to be contaminated.
The first innocent landowner mechanism uses that status to invoke the Superfund Act's third-party defense to liability. One prerequisite is that the release of hazardous substances musthave been caused solely by a third party lacking a contractual relationship with the defendant. Alandowner is defined to lack a contractual relationship with predecessors in the chain of title if thedisposal of the hazardous substances on the site preceded acquisition by the owner and at the timeof acquisition he/she did not know and had "no reason to know" that the hazardous substance hadbeen disposed of there. "No reason to know," in turn, means that before the date of acquisition,he/she made "all appropriate inquiry" into conditions at the site and the history of site uses. In 2002,Congress enacted an important clarification of the meaning of "all appropriate inquiry." The otherprerequisite is that the landowner continued after acquisition to exercise due care, took precautionsagainst foreseeable acts of the third party, etc.
The second innocent landowner mechanism makes a current landowner identified by EPA as potentially liable eligible for a "de minimis settlement" with the agency. A de minimis settlementenables a landowner to settle early with EPA and thereby avoid protracted, expensive negotiationswith the agency and a myriad of other liable parties over the allocation of liability at the site. Eligibility requires, among other things, that all appropriate inquiry was done by the owner prior toacquisition. This mechanism has not been used often.
The third mechanism aims not to exempt a landowner from liability, but to limit that liability prior to purchase. Its origin lies in the belief that Superfund liability may chill investment in realproperty that is known or feared to be contaminated ("brownfields"). In 1989, EPA offered in "verylimited circumstances" to enter into "prospective purchaser agreements" -- negotiated settlementswith would-be purchasers of land by which EPA covenanted not to sue. Congressional desire fora less resource-intensive method of encouraging redevelopment of brownfields led to its creation in2002 of a new exemption from liability, for the "bona fide prospective purchaser." Eligibilityrequires that the person not impede the site cleanup, made all appropriate inquiry, etc. Some haveurged that buyers of contaminated land pursue both prospective purchaser agreements with EPA andbona fide prospective purchaser status, but EPA guidance states that the availability of the formeris limited now.