Commercial tenants should be wary of their potential liability for contamination as an “owner” or “operator” under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”). Prevailing case
law states that a tenant may be responsible for contamination which preceded its tenancy in essentially two ways: (1) by controlling the property to such an extent that it is deemed the “de facto owner” of the property by the courts; or (2) by exercising a level of control over the “hazardous substances at issue” on the property so as to be deemed an “operator” for CERCLA purposes.
I. Liability of a Tenant as an “Owner”
It is well established that CERCLA imposes liability on an “owner or operator” of a contaminated site. 42
USC §9601. Although it may seem contrary to common sense, the Second Circuit has stated that a tenant which is
not the record owner can actually be considered an “owner” under CERCLA under certain circumstances.
Commander Oil Corp. v. Barlo Equip. Corp., 215 F.3d 321, 329 (2nd Cir. 2000) (“[w]hile the typical lessee should not
be held liable as an owner, there may be circumstances when owner liability for a lessee would be appropriate”). In
Commander Oil, the owner of the property (plaintiff) sued its tenant and the tenant’s subtenant for indemnification
and contribution after the EPA cleaned up contamination caused by the subtenant. Plaintiff could not hold the
tenant liable as an “operator” because the subtenant (and not the tenant) was the “operator.” Therefore, plaintiff
sued the tenant under the theory that the tenant was an “owner” under CERCLA. The district court granted
summary judgment to the plaintiff on the question of liability as an “owner” against the tenant under CERCLA by
virtue of the tenant’s “authority and control” over the parcel operated by the subtenant. The district court ruled
that although the subtenant was responsible for all response costs, the court allocated these costs between the
actual owner and the tenant because the subtenant was “financially irresponsible.”
On appeal, the Second Circuit explicitly recognized that a tenant could be held liable as an “owner.” However, it did
not impose liability on the tenant, based on the facts of the case. The Second Circuit decided that, in order to
determine who is and who is not an "owner," a court should look to the indicia of legal ownership, rather than
evidence of site “control.” On the facts of the case, the Second Circuit found that the tenant did not possess
sufficient indicia of ownership to be liable as an “owner.” The facts of this case involved numerous restrictions on
the tenant’s rights, combined with reservation of certain rights by the actual owner of fee title.
Recently, the District Court for the District of Connecticut denied a motion to dismiss filed by a defendant alleging
that it did not qualify as a de facto “owner” by virtue of the indicia of ownership incidental to its tenant status.
Pateley Associates I, LLC v. Pitney Bowes, Inc., 2010 WL 1332172 (March 31, 2010). This case involved a saleleaseback
arrangement between the buyer-lessor Pateley and the seller-lessee Pitney Bowes. The district court
held that the indicia of ownership were much stronger than in Commander Oil. The facts of Pateley involved a
long-term lease with a limitation on the owner’s right to terminate, combined with other rights and responsibilities
running to the tenant’s benefit.
In light of these cases, a commercial tenant should take care to structure its lease so that it does not assume
sufficient indicia of ownership and inadvertently become a de facto “owner” for purposes of CERCLA. Generally
speaking, the more authority and control that is retained by the owner with respect to the real property, the less
likely the tenant will be characterized as a de facto owner under CERCLA.
II. Liability of a Tenant as an “Operator”
CERCLA has also been interpreted to hold an “innocent” tenant liable as a current “operator,” on at least one
occasion. See Clear Lake Properties v. Rockwell International Corporation, 959 F.Supp. 763 (S.D.Tex., 1997). In that
case, the district court granted summary judgment to the defendant Rockwell on its third-party claim against Pace
Analytical Services, Inc. (“PASI”) as a current operator. PASI was a tenant of the property where it operated a
laboratory. The Court rejected PASI’s argument that it could not be the “operator” of the site because it only
operated a laboratory there. The Court also rejected PASI’s argument that, in order to be held liable, an “operator”
must have had the ability to control the release of hazardous substances at the time the release occurred. The
implication of Clear Lake Properties is that, under CERCLA, a tenant which leases property that was already
contaminated before the commencement of its lease may be liable for the cleanup, even if it did not cause the
contamination.
Thereafter, in 1998, there was a significant change in law with regard to “operator” liability, in favor of commercial
tenants. The Supreme Court refined the test for operator liability by requiring that “an operator must manage,
direct, or conduct operations specifically related to pollution ….” U.S. v. Bestfoods, 524 U.S. 51, 66-67 (1998).
Although that decision dealt with potential CERCLA liability of past owners and operators, the “operator” test set
forth in Bestfoods may also be applied to current operators. The test set forth in Bestfoods involved an
interpretation of the general definition of “operator.”
Because Bestfoods limits the potential liability of an operator, there is an apparent conflict between that decision
and the statutory scheme of joint and several liability traditionally associated with CERCLA. Although CERCLA has
traditionally been interpreted broadly to impose liability without regard to fault, Bestfoods tends to narrow the
scope of liability. Perhaps surprisingly, there has been very little explicit discussion in post-Bestfoods case law about
a tenant’s exposure to liability for contamination caused pre-lease. However, the Second Circuit has recently
interpreted the Bestfoods test to implicitly require “a level of control over the hazardous substances at issue” in
order to impose liability under CERCLA (emphasis added). AMW Materials Testing v. Town of Babylon, 584 F.3d
436, 444 (2nd Cir., 2009). In AMW Testing, the Second Circuit refused to hold a town and a fire company liable for
releases of hazardous materials during their response to a fire, where the hazardous materials at issue were stored in
a burning building into which the firefighters could not gain safe entry. Consequently, in a dispute over liability for
contaminated soils or groundwater, a tenant would presumably be held liable as an “operator” only if it had control
over that contamination.
Although the test for holding a tenant liable as an “operator” (based on management of activities causing
contamination) is different from the test for holding it liable as an “owner” under CERCLA (based on indicia of ownership), the two tests may overlap to the extent they both encompass control over environmental matters.
Generally speaking, to avoid liability as an “owner,” a tenant should act like a tenant, and not like an owner. To avoid
liability as an “operator,” a tenant should avoid becoming involved in the management of hazardous substances,
especially soils and groundwater contaminated prior to the lease.
Conclusions
The leading case law in the Second Circuit suggests that a tenant can be liable under CERCLA as a “de
facto owner” or as an “operator.” A current tenant may be able to avoid “de facto owner” liability by not acquiring
sufficient indicia of ownership, based on a careful review of the factors which courts have considered germane. A
current tenant may be able to avoid “operator” liability by avoiding involvement with “operations specifically related
to pollution,” and more specifically, control “over the hazardous substances at issue.”
The Authors
John T. Kolaga is Special Counsel and Chair of the firm’s Environmental Practice Group. He has
practiced environmental law and environmental-related
litigation in state and federal courts for
more than twenty years.
(716) 858-3760
jkolaga@damonmorey.com
Christopher D. Ahlers is an Environmental Associate
with extensive experience with federal and state
environmental laws and regulations, in the course of
environmental auditing, due diligence investigations,
remediation, and environmental litigation.
(716) 858-3729
cahlers@damonmorey.com
© 2010 Damon Morey LLP, John T. Kolaga, Esq. and Christopher D. Ahlers, Esq. This document is intended as an informational resource for our clients, the media, and the public in general. This publication’s content should not be construed
as legal advice. No legal action should be taken without first consulting professional counsel.
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