Before the 2010s, many real estate deals closed without the mere mention of per- and polyfluoroalkyl substances (PFAS) as part of negotiations or in diligence. Leap forward a decade to 2022 and diligence questions relating to the presence of PFAS on real estate are essentially market, especially for industrial and some commercial properties. The paradigm shift cannot be attributed solely to one force; instead, a culmination of regulatory, statutory, judicial, and transactional considerations have elevated PFAS to an issue that could seriously impede or even kill a deal.
Whether involved as a seller, buyer, lender, or another interested party concerned about the liabilities, there are several key considerations, among others, that parties to real estate transactions should be aware of in 2022.
PFAS Risks as ESG Issues
As the growing trend to analyze Environmental, Social, and Governance (ESG) issues both internally as a company and from a market perspective to understand competitors’ moves, evaluating PFAS use at a subject property and the potential for PFAS contamination are focal points in the current ESG discussion. Depending on the deal structure, closing a real estate transaction could mean a buyer is the new owner of the land, including any contamination issues, as well as the physical assets of any improvements, including chemical storage, raw materials, and products at various stages in a production process, which could contain PFAS. PFAS products and contamination onsite affect several areas of ESG-related topics, including water/soil contamination, community involvement, and product safety.
Investors, alongside regulators discussed below, are keenly watching PFAS-related risks. Such risks can be included in ESG scores for companies. Not only are analysts viewing PFAS as a remediation and litigation risk, but analysts are also focused on reputational risks associated with PFAS contamination issues. Additionally, given the largely unregulated nature of PFAS, the unknown regulatory landscape regarding these emerging contaminants is a risk on its own. An opportunity for improvement noted by some analysts includes boosting responsiveness over remediation of a contaminated site and establishing a dialogue and collaboration with the affected communities. Further, while analysts predict increased litigation and regulatory risks, pressure on companies to enhance transparency related to PFAS issues and transition away from products that cause these issues is likely.
Developing and Variable Regulatory Landscapes
Regulatory scrutiny of PFAS in products, drinking water, and the environment is growing at both the federal and state level. How regulators address PFAS contamination is often a key point of analysis in a real estate transaction.
In October 2021, the U.S. Environmental Protection Agency (EPA) released an agency-wide strategic roadmap to ramp up regulation of PFAS through 2024. Critically, the U.S. EPA intends to designate Perfluorooctanoic acid (PFOA) and Perfluorooctanesulfonic acid (PFOS) as Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) hazardous substances.
This designation would have two immediate impacts: (i) owners of property would become strictly liable for the presence of these substances on their property, regardless of if they caused the contamination (subject to CERCLA’s defenses); and (ii) Phase I environmental site assessments performed as part of diligence in a real estate transaction would be required to include findings on these substances under either ASTM 1527-13 or 1527-21.
At the state level, several states have enacted currently enforceable regulatory cleanup levels for some PFAS substances in soil, groundwater, and surface water. Thus, landowners in certain states could be held responsible for remediating their property to applicable cleanup levels, which generally vary depending on the type of property use (e.g., residential, commercial, or industrial). Several other states have released guidance relating to how state agencies will address PFAS in site remediation, and others are in the process of promulgating regulations to establish PFAS cleanup levels. At the federal level, the U.S. EPA is moving forward with enforceable drinking water standards, among other regulations, and added several PFAS substances to the Regional Screening Levels tables, which are not cleanup standards but screening levels used to determine if response activities are needed under CERCLA.
In addition to currently applicable state regulatory levels, the U.S. EPA and many states are currently investigating sources of PFAS contamination and studying the presence of PFAS in drinking water and the environment. Thus, while a Phase I may identify no PFAS issues at the subject property or in the immediate area (and they likely will not until PFOA and PFOS are designated CERCLA hazardous substances), it likely will not address more discrete regulatory issues, for example data indicating PFAS in a water supply near the subject property uncovered by a state study on PFAS contamination and not formal enforcement. Depending on the regulatory atmosphere in the state and on U.S. EPA’s treatment of PFAS as a CERCLA hazardous substance, this fact pattern could present a significant regulatory issue looming for a potential buyer.
Parties must also be cognizant of state laws triggered by selling certain real estate that mandate environmental investigation and remediation as part of the sale. As PFAS become increasingly regulated and part of state cleanup programs, addressing PFAS contamination as part of a real estate transaction could become an increasing concern in certain states with environmental investigation triggers based on a transaction.
Common Issues with Liability Defenses and PFAS
Given CERCLA’s potent strict liability scheme, prospective buyers usually perform a Phase I in order to satisfy not only their own diligence needs, but also U.S. EPA’s All Appropriate Inquiry (AAI) standard, a requisite to several CERCLA defenses for new owners. Prospective buyers should be aware that if PFOA and PFOS are designated CERCLA hazardous substances, the Phase Is performed are required to evaluate for issues related to those substances in order to comply with AAI and preserve the CERCLA defenses. Additionally, given U.S. EPA’s stated intent to evaluate the several other PFAS substances for eventual CERCLA hazardous substance designation, this issue would arise each for each PFAS substance so designated.
Another defense to liability exists in some states with laws that provide a mechanism for prospective purchasers or new owners to limit their liability with respect to pre-existing contamination. However, while these laws may seem like surefire protections to prospective purchasers, many of these programs include limitations where liability for PFAS could evade protections. Specifically, the liability protections under these programs are often tied to the contamination disclosed to the regulators. If a Phase I or Phase II submitted to the regulator as the basis for the application for the limitation of liability does not identify PFAS contamination onsite, then the limitation of liability is often constrained to the known or suspected contamination. A careful review of these laws are essential to estimate PFAS risks as a prospective buyer.
Relatedly, a seller may disclose during diligence that a property completed a voluntary remediation program offered by the state to the satisfaction of the regulator, resulting in the issuance of a “No Further Action” letter. These No Further Actions letters and related releases of liability and/or covenants not to sue by the regulators often address only the contamination remediated and contain explicit reopeners where a regulator could seek additional remediation. For example, a common reopener in these situations is where contamination is newly discovered or re-evaluated and determined to present a threat to human health. If PFAS were not remediated as part of a voluntary remediation and no risk assessment was ever conducted for PFAS, then a landowner could be at risk for additional remediation despite the property receiving a No Further Action letter.
Finally, where an insurance policy applies to a subject property, parties should be cognizant of the limits of the policy. PFAS are commonly excluded from coverage, especially in more recent policies, unless a premium is paid for a specific endorsement that adds PFAS to the policy’s coverage.
Certainly, the potential liability concerns related to PFAS warrant a close examination of other ways to protect a party’s interest when buying a selling real estate, including, for example, ensuring lease terms and asset purchase agreements contain the most favorable provisions for a party’s position in the transaction.
The Court’s Role in PFAS Liability
To no surprise, court decisions on PFAS-related issues are growing increasingly common as the law surrounding PFAS liability develops, and these cases are often cited when discussing PFAS ESG issues. Tort-related lawsuits over PFAS have focused heavily on liability for PFAS contamination in the environment, especially where public and private drinking water supplies are affected. Courts could increasingly act as a gap-filler party where a state is not currently regulating or bringing enforcement actions for PFAS in the environment. This could present a risk where a new landowner purchases a property contributing to PFAS contamination plume that migrates off-site. With no regulatory involvement, parties affected by the plume could turn to the courts.
By way of perhaps the most recent court-related update, the recent Supreme Court opinion in West Virginia v. EPA is causing a stir relating to the extent of U.S. EPA’s regulatory authority. In this case, the Court devised a new “major questions doctrine” test, which essentially reviews a regulatory action in the context of the agency’s statutory authority to determine if the regulation exceeds statutory authority by implementing “sweeping and consequential” regulations. The opinion casts doubt into U.S. EPA’s ability to promulgate sweeping regulations that affect regulated industries absent congressional authorization. Given U.S. EPA’s growing regulatory push to address PFAS, it is possible that the opinion could be cited in challenges to U.S. EPA’s authority to regulate these chemicals. For example, the U.S. EPA is currently tracking thousands of PFAS chemicals, but international definitions of PFAS chemicals are even more extensive than U.S. EPA’s list, while trade associations posit both lists are overly-broad. Given the general reasoning behind the West Virginia v. EPA case, a court could consider these issues best decided by Congress.
To conclude, parties to real estate transactions should be aware of the rapid development of PFAS regulation and liability in the United States to understand potential environmental risks at the property subject to the transaction. Absent a clear understanding of the current and/or future liability risks, parties could be left with significant liabilities and investments significantly affected by PFAS contamination.