While sophisticated transaction parties have been aware for some time of the need to evaluate potential liabilities associated with PFAS compounds, EPA’s proposal to designate PFOS and PFOA as hazardous substances under CERCLA will heighten that focus and likely change the dynamic between sellers and buyers where potential or actual PFAS liabilities exist.

Potential exposure to PFAS liabilities will become a heightened diligence item and any potential or known liability is likely to impact transaction terms. Sellers of any property or business that has potential PFAS contamination are likely to be well served by completing a Phase I Environmental Site (and otherwise assessing potential PFAS liabilities) before commencing a sales process. To the extent potential liabilities are identified, a seller and its counsel can then determine whether to put forth a constructive solution and proceed with the sales process (recognizing this will be a point of negotiation with any buyer) or complete further testing and potentially remediation before doing so (delaying the sales process, but potentially resolving what could otherwise become a contentious issue, or even a “deal killer” before going to the market). Absent proactive handling of this exposure point, a sophisticated buyer will likely require completion of a Phase 1 and not proceed with consummation of a transaction without completion of extensive diligence on the point, and likely will require a clean Phase 1. Non-recourse transactions which utilize representations and warranties insurance will be impacted, as well, because claims for losses arising out of exposure to (or the existence of) PFAS substances are standard exclusions to any representations and warranties policy (and known liabilities of any kind are excluded). We think that designation of PFOS and PFOA as hazardous substances under CERCLA will increase the likelihood of special indemnities where there are potential or actual PFAS liabilities. Transaction parties that find themselves in such a situation will need to consult with qualified legal and technical counsel to navigate the issue and potential avenues to resolution.

Sellers must be cautious about scope of diligence. Designation of PFOS and PFOA as CERCLA hazardous substances will bring these substances within the scope of “recognized environmental conditions” (RECs) for Phase 1 Environmental Site Assessments, and identification of any such REC (or identification of actual or potential PFAS contamination through other means) is likely to result in a need to conduct invasive sampling and testing (e.g., a Phase II Environmental Site Assessment). However, if a seller agrees to conduct or allows a prospective buyer to conduct a Phase II ESA to further assess identified potential PFAS contamination, the seller (as the party responsible for the property or operations in questions) is responsible for the result of such assessments, which may include notifications to governmental authorities and potential agency action and remediation. Sellers and buyers will both need to carefully consider how the result of the assessment will impact a seller’s indemnification obligations and a buyer’s obligation to close. Further, as discussed below, a seller may remain exposed to contributory cleanup costs beyond its indemnification obligations even if the transaction closes.

Sellers may be faced with extra- and post-contractual liabilities. It is common practice for buyers and sellers to agree to disclaimers of extra-contractual representations, limit recourse to an express indemnity, and further limit that indemnity through survival periods and monetary caps. In the case of a non-recourse transaction with representations and warranties insurance, such limitations are typically even more protective of the seller, providing only that the seller’s representations do not survive the closing (except in the case of fraud) and that the buyer shall have no recourse to the seller for breach of the seller’s representations (except in the case of fraud). Sophisticated sellers may also seek to obtain a broad release from the buyer as to any and all claims, losses, damages, etc. arising out of or relating to the property or business the buyer is acquiring, except as expressly provided for (and limited to) the indemnity in the purchase agreement. However, CERCLA allows parties conducting cleanup activities to seek contribution from former owners of properties or operations with PFAS impacts. A CERCLA claim for contribution is not premised on a contractual breach and is instead a statutorily mandated cost-sharing regime. As such, disclaimers of extra-contractual representations and attempts to limit a seller’s post-closing liability will not be an effective defense to a CERCLA claim for contribution. We think it is likely that a broad release coupled with an appropriate indemnity (depending on how broadly it is structured and its exact language), would operate to waive a buyer’s claim even under CERCLA for post-closing contribution by a seller for cleanup costs and provide the seller with a defense in any action brought by agencies or other PRPs under CERCLA.

Sellers of real property will be directly impacted. Sellers of real property will need to closely examine the definitions of terms such as “environmental laws”, “hazardous materials” and “hazardous substances” in agreements to determine whether or not CERCLA and PFOS and/or PFOA are implicated. Additionally, a seller may seek to carve out PFOS and PFOA from the representations and warranties made by the seller regarding environmental conditions, or avoid making any representations related to environmental conditions, since it is likely that PFOS and/or PFOA are present at some level in many properties and a seller may not be able to make a blanket representation that it has no knowledge of hazardous materials on the property²

40 CFR Part 302, [EPA-HQ-OLEM-2019-0341; FRL-7204-02-OLEM] at 36 “a significant body of scientific evidence shows that PFOA and PFOS are persistent and mobile in the environment”

“PFOA and PFOS are common contaminants in the environment because of their release into the environment since the 1940s and their resistance to degradation”

“In addition to being found in groundwater, surface water, soil, sediment, and air, they have been found in wild and domestic animals such as fish, shellfish, alligators, deer and avian eggs; and in humans”

. In the cases where sellers do not provide adequate representations and warranties regarding the environmental condition of a property, a buyer will need to rely on its own environmental diligence, similar to the manner in which parties rely on title searches and/or title insurance. Sellers must also be aware of statutory requirements that are triggered by PFAS and PFOA being designated as hazardous substances under CERCLA, for example:

• The sale of all federally owned property must comply with CERCLA requirements related to PFOS and/or PFOA. When federal agencies sell or transfer real property, a notice of the presence of hazardous substances is required in certain circumstances under Section 120(h) of CERCLA. Furthermore, in certain circumstances, Section 120(h) of CERCLA requires federal agencies to provide a covenant warranting that “all remedial action necessary to protect human health and the environment with respect to any [hazardous substances] remaining on the property has been taken before the date of such transfer, and any additional remedial action found to be necessary after the date of such transfer shall be conducted by the United States.”
• State property transfer laws and regulations, such as:
  1. Connecticut’s Property Transfer Program.
  2. Michigan’s Baseline Environmental Assessment Program.
  3. New Jersey’s Industrial Site Recovery Act (New Jersey has already included PFOS and PFOA prior to their designation as hazardous substances under CERCLA).

A seller should consult with qualified counsel familiar with the local jurisdiction to determine the specific requirements applicable to its property transfer.