NOTE: The following article is from the collection of articles in our Automobile Dealership Buy/Sell Newsletters. The newsletter deals with the complex area of buying and selling automobile dealerships. Some of the material may not be up to date because of changes in the law from the date shown at the end of the article. This article is not to be taken as legal, accounting, tax, or other advice. You should consult your own professionals for such advice and for any updating of the information provided.
A dealer has sold his dealership business to a new operator. The selling dealer has retained ownership of the dealership real estate and leased it to the buying dealer on a long term lease which does not define their respective rights and duties in the event of a release of hazardous materials on the dealership property. (This is not necessarily unusual. Many long-term leases, still in effect, were drafted before hazardous waste indemnities became standard.) Thereafter, it comes to the attention of the seller that a significant release of hazardous materials has occurred on the dealership property. Absent lease provisions spelling out the relative rights and duties of the owner and the tenant as to the hazardous materials release, are the parties left to litigate this problem if they cannot cooperatively work it out? California’s new Environmental Responsibility Acceptance Act may provide the owner and the tenant with an alternative to litigating the dispute.
The Environmental Responsibility Acceptance Act is embodied in California Civil Code Sections 850 through 855, and is due to take effect on July 1, 1998. Among other things, the Act would require the owner of real property, who becomes aware of a hazardous materials release on the property which exceeds a specified threshold, to take reasonable steps to identify the potentially responsible party and to notify the responsible party and the government agency having jurisdiction over the property. Conversely, if it is the responsible party who first discovers the hazardous materials release, then he must notify the owner in writing of the release. In either event, the responsible party would then face a choice of giving the owner a “negative” response (an indication that he will take no remedial action) or a “commitment statement” containing his commitment to remediate the hazardous materials release in accordance with any governmental cleanup order.
This article represents a general outline of the basic provisions of this new law.
II. Awareness of Hazardous Materials Release
The notification requirements are set in motion when either the owner or the tenant acquires “actual awareness” of a release of hazardous materials exceeding what the Act terms the “notification threshold.” Actual awareness means actual knowledge by the owner or tenant or by their employees or representatives. The “notification threshold” means a release of such a magnitude that it is the subject of a response action ordered by a government agency or it is impeding the ability of the owner to sell or lease the property or of a tenant to otherwise use the site. If the release of a hazardous material exceeds the notification threshold defined in the Act, then the notification requirements must be followed.
III. Notification Requirements
If it is the owner who first acquires actual awareness of the hazardous materials release, the owner must first take all reasonable steps to identify the “responsible party.” The owner must then send the responsible party a “Notice of Potential Liability.” The Notice of Potential Liability must state that a release exceeding that notification threshold has occurred on the property and that the owner believes the tenant is the responsible party with respect to the release. In addition, a copy of the notice must be sent to the government agency having jurisdiction over the site. If it is the responsible party who first acquires actual awareness of the release of hazardous materials, then he must send the owner a written “Release Report,” notifying the owner that a release of hazardous materials has occurred.
Once notification has been given by the party having actual awareness of the release, the next step in the process is triggered: the responsible party’s decision to issue a “negative response” or a “commitment statement.”
IV. Negative Response vs. Commitment Statement
The responsible party now has 120 days in which to issue either a “negative response” or a “commitment statement.”
(a) Negative Response. A negative response means a written response by the responsible party that he will not undertake any investigation or remedial action as to the release of hazardous materials. A negative response is also deemed to occur if no response is given.
(b) Commitment Statement. Alternatively, the responsible party can issue a Commitment Statement, which in essence constitutes the responsible party’s written agreement to remediate the hazardous materials release by undertaking any investigation and remediation required by the government agency having jurisdiction over the property. The Commitment Statement becomes a binding agreement if accepted in writing by the owner within 45 days (see below).
The issuance of the Commitment Statement leads to the next step in the statutory process: rejection of the Commitment Statement by the owner resulting in a mediation process, or acceptance of the Commitment Statement resulting ultimately in the cleanup of the release.
V. Owner’s Rejection or Acceptance of Commitment Statement
(a) Rejection and Mediation. A rejection of the Commitment Statement triggers the mandatory mediation process. The Act states that the mediation process shall be supervised by a neutral third party mutually agreed upon by the owner and the responsible party. The mediation process lasts for a period of 90 days after the rejection of the Commitment Statement, unless extended further by agreement of the parties. The fees and costs of the mediator are to be borne equally by the parties.
During the mediation process, the parties are to attempt to reach a settlement allocating their respective rights and duties as to the hazardous materials release and any cleanup necessitated thereby. Any agreement reached will govern the subsequent course of the cleanup. If the settlement is not reached within the 90 days, the mediator must declare the mediation process unsuccessful and terminate the process. The parties are then free to litigate or otherwise resolve the matter.
(b) Acceptance of Commitment Statement. In lieu of rejecting the Commitment Statement and initiating mediation, the owner can accept the Commitment Statement by executing it within 45 days. Upon timely execution of the Commitment Statement by the owner, the Commitment Statement takes effect, with the following results:
• The Commitment Statement constitutes a binding agreement that the responsible party will undertake all investigation and remediation action required by the government agency having oversight.
• All lawsuits by the owner against the responsible party (except those for personal injury or wrongful death pertaining to the hazardous materials release) shall be stayed for a period of not more than two years provided the cleanup is proceeding to the satisfaction of the oversight agency.
• If the responsible party defaults in his performance of the remediation under the Commitment Statement, the owner can bring a lawsuit for damages for breach of the Commitment Statement.
VI. Apparent “Gaps” in the Act
A close review of the Act reveals what appear to be several “gaps” in the statutory scheme. These include the following:
• Neither the owner nor the responsible party are subject to any fines, penalties or damages if they fail or refuse to give a Notice of Responsibility or a Release Report.
• The Act says nothing about what happens if the responsible party gives a negative response.
• The Act is silent as to what will ensue if the parties cannot mutually agree upon a mediator.
• Although mediation appears to be a necessary pre-condition to bringing a lawsuit, the Act somewhat confusingly permits either party to terminate mediation at any time without penalty.
Although the ostensible purpose of the Act is to provide owners of property and responsible parties with an alternative to litigating hazardous waste disputes, the “gaps” listed above would seem to frustrate that purpose. Moreover, since the Act has not yet gone into effect, there are no reported court decisions as to its effectiveness or application in any particular setting. It therefore remains to be seen whether the Act will achieve its desired results.
Perhaps the most telling feature of the Act is the provision that states the Act will be subject to and superseded by a private contract between the parties. In any transaction concerning real property, whether a sale or a lease, it isalwaysbest for the parties involved to agree in writing beforehand as to their respective rights and duties regarding a hazardous materials release, rather than leaving those rights and duties for determination under an uncertain and untested law.
This article was written in 1998.