On January 11, 2002, President Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act ("Brownfields Amendments"), Pub. L. No. 107–118, 115 Stat. 2356, which included a number of provisions providing CERCLA liability protections for certain landowners. Congress provided CERCLA liability protection for bona fide prospective purchasers to encourage the purchase and reuse of contaminated properties.¹ New CERCLA § 107(r) provides that bona fide prospective purchasers are not liable as owner/operators for CERCLA response costs. CERCLA § 107(r)(1). However, the property they acquire may be subject to a "windfall lien" when a response action by the United States increases the fair market value of the property. CERCLA § 107(r)(2)-(4). How the U. S. Environmental Protection Agency (EPA or Agency) would use its CERCLA § 107(r) windfall lien enforcement authority has been one of the more frequently asked questions about the new Brownfields Amendments landowner liability protections.

State and local governments are often integrally involved in contaminated property transactions, often at the forefront with respect to issues in this area, so EPA’s policies on the windfall lien provision could have important implications for state and local governments. On July 16, 2003, EPA answered some of the questions surrounding the implementation of CERCLA § 107(r) when it jointly issued, with the U.S. Department of Justice (DOJ), a guidance document entitled "Interim Enforcement Discretion Policy Concerning ‘Windfall Liens’ Under Section 107(r) of CERCLA," Memorandum from Susan E. Bromm, Director, U.S. EPA, Office of Site Remediation Enforcement, and Bruce S. Gelber, Chief, Environmental Enforcement Section, U.S. DOJ, July 16, 2003. This article outlines several of the important elements of the guidance.

The guidance is an expression of how EPA will generally exercise its enforcement discretion in implementing the windfall lien and does three main things. First, it explains EPA’s general approach to when it will, and will not, perfect a windfall lien at a site. Second, it describes the agency’s general approach to settling windfall liens. Third, the guidance identifies mechanisms and provides model documents for addressing certain parties’ windfall lien concerns on a site-specific basis. See id. at 1. Included with the guidance is a model windfall lien resolution agreement and a sample comfort/status letter. The guidance with its attachments is available at www.epa.gov/compliance/resources/policies/cleanup/superfund/ interim-windfall-lien.pdf.

Issued as an interim policy, EPA and DOJ have invited comments on the policy and are open to revisions or amendments if the experience gained implementing the policy indicates changes are appropriate. Id.

As a threshold matter, EPA notes that at most brownfields sites there is no windfall lien. The windfall lien only arises where the United States incurs response costs. Because the United States incurs response costs at only a very small percentage of the hundreds of thousands of brownfields properties across the nation, the vast majority of such properties will not be affected by the windfall lien provision. Id. at 2–3.

The policy specifically identifies three factors that may influence EPA’s decision-making regarding perfection of a windfall lien:

• Substantial unrecovered response costs that the agency is unlikely to recover from liable parties;

• Likelihood that a bona fide prospective purchaser will reap a significant windfall as a result of EPA’s site cleanup actions; and

• Transaction(s) structured so as to circumvent potential CERCLA liability.

Id. at 3–4. EPA notes that these are not the only factors for consideration, other factors may well be relevant on a site-specific basis, but highlighted these for consideration in assessing whether perfecting a lien would be appropriate. Id. at 4.

The agency will also consider perfecting a windfall lien at a property where all of the increase in fair market value occurs before acquisition by a bona fide prospective purchaser, but there are substantial unreimbursed response costs, no viable liable parties from whom to recover such costs, a significant increase in the property’s fair market value, and EPA’s response action occurs during ownership by a person exempt from CERCLA liability. Id. Because EPA’s cleanup could result in a windfall at taxpayer expense for the CERCLA-exempt party while EPA has substantial unreimbursed response costs, EPA may consider placing a windfall lien on the property. Id. Whether EPA would do so depends on the site-specific circumstances and the equities of a particular situation. Id. Possibly placing a lien on the property in this situation is an exception to EPA’s general approach of not perfecting a windfall lien when the increase in fair market value occurs before acquisition by a bona fide prospective purchaser. Id.

For those instances when EPA might perfect a windfall lien, the agency developed and attached a "Model Agreement for Release and Waiver of Lien, CERCLA § 107(r)." This document is designed to ease the process for resolution of windfall liens. Id. at 14.

Importantly, the guidance identifies a number of situations in which, notwithstanding the incurrence of some response costs, the agency will exercise its enforcement discretion and generally not perfect a windfall lien on a property. Id. at 4. The specifically identified situations are:

• A bona fide prospective purchaser acquires at fair market value after cleanup is complete;

• Previous resolution of seller’s CERCLA liability included potential windfall from EPA’s response action at the site;

• EPA’s only expenditures at the site are brownfield monies;

• EPA’s only response costs at the site will be preliminary site investigation or site assessment costs;

• A purchase by a bona fide prospective purchaser for residential use in which both the buyer and seller are nongovernmental and noncommercial entities;

• An acquisition by a bona fide prospective purchaser for the creation or preservation of a public park or other similar public purpose;

• A substantial likelihood EPA will recover all of its cleanup costs from liable parties (e.g., EPA has settled with liable parties for full cost recovery and future work); and

• Another enforcement discretion policy applies indicating EPA would not pursue cost recovery (e.g., EPA’s "contaminated aquifers" policy).

Id. at 5–7. In each of these situations, EPA’s general approach will be to not perfect a windfall lien on the property. Id.

By identifying in the policy the agency’s approach in the above situations, EPA intends that parties conducting real estate transactions with properties in such situations will have their windfall lien concerns addressed and will not need EPA’s involvement in their real estate transaction. Id. at 12. Nonetheless, where one of the above described scenarios arises and site-specific circumstances make EPA involvement appropriate, EPA may provide a comfort/status letter explaining that the agency does not intend to perfect a windfall lien on the property.²

In situations in which EPA has or will file a windfall lien, in an exercise of its enforcement discretion, EPA will generally seek in settlement only the increase in fair market value, attributable to EPA’s cleanup action at the property, that occurs after acquisition by a bona fide prospective purchaser. Id. at 8. This enforcement discretion policy is designed to strike a balance between encouraging beneficial reuse of contaminated properties and not providing windfalls at taxpayer expense. Id. The guidance provides a number of examples that are useful in illustrating how EPA would apply this approach in different factual circumstances.

In determining the increase in fair market value attributable to an EPA response action, EPA will look to the difference between the fair market value of the property as if cleanup were complete versus the fair market value at the time of acquisition. Id. at 10. EPA urges bona fide prospective purchasers to obtain a reliable estimate assessing the value of the property as "if cleanup were complete." Id. Most often this should be based on a professional appraisal, although in some instances other mechanisms may suffice. Id. EPA also urges bona fide prospective purchasers, who have legitimate concerns regarding the potential for a significant windfall lien, to resolve the potential windfall lien "at or around" the acquisition of the property. Id. The model lien agreement is designed to resolve concerns over any existing or future windfall lien.

The guidance also discusses situations in which a bona fide prospective purchaser acquires a property that is encumbered with a CERCLA § 107(l) lien for all of EPA’s unrecovered response costs. EPA expects that in most instances the section 107(l) lien would be resolved when the bona fide prospective purchaser acquires the property. Id. at 11. Otherwise, EPA may subsequently pursue enforcement of the lien in an in rem action against the property. Id. at 12.

Although the guidance does not necessarily answer all of the questions surrounding EPA’s implementation of the windfall lien provision, it does address some of the more significant outstanding questions. Because EPA and DOJ are interested in receiving comments on the policy and its implementation, state and local entities with additional questions or concerns should avail themselves of this opportunity.

1. To qualify as a bona fide prospective purchaser, an entity must meet specified criteria provided for in CERCLA §§ 107(r) and 101(40)(A)-(H). If an entity does not satisfy these criteria it may be subject to full CERCLA liability. EPA issued guidance discussing the bona fide prospective purchaser criteria. See "Interim Guidance Regarding Criteria Landowners Must Meet in Order to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability ("Common Elements")," Memorandum from Susan E. Bromm, Director, Office of Site Remediation Enforcement, U.S. EPA, Mar. 6, 2003.

2. Id. at 12–14. Providing a comfort/status letter must be done consistent with EPA’s existing comfort/status letter policy. See "Policy on the Issuance of Comfort/Status Letters," Memorandum from Steven A. Herman, Assistant Administrator, Office of Enforcement and Compliance Assurance, Nov.8, 1996, reprinted in 62 Fed. Reg. 4,624 (Jan. 30, 1997) (hereinafter "Comfort/Status Letter policy"). Comfort/status letters are limited to situations in which the letter would facilitate cleanup and redevelopment of a brownfield, realistic probability of liability, "and no other mechanism available to adequately address the party’s concerns." Id.