Land Transactions Involving Contaminated Property: “As-Is” Provision Does Not Entitle a Seller to Immunity

California Environmental Lawyer Jay TufanoIn a cautionary tale underscoring the importance of due diligence prior to purchasing a property and clearly defining indemnity obligations in a purchase and sale agreement, the court in DP Etiwanda, LLC v. Simsmetal USA Corp., No. EDCV211238JGBSPX, 2022 WL 2101722 (C.D. Cal. Jan. 27, 2022) was called upon to determine whether an “As-Is” provision served as a de facto indemnity agreement and otherwise barred claims arising under federal and state Superfund statutes (i.e., CERCLA and the HSAA) and common law. The issues in the case serve as a reminder that failure to define liabilities and obligations prior to purchase can be a costly mistake (regardless of the outcome in court).

The seller and prior owners of the subject property in DP Etiwanda operated a metal recycling business on the property for several decades before selling it to the buyer. Soon after the buyer (the “plaintiff”) acquired the property and took possession, it encountered high concentrations of contaminants which led to millions of dollars in investigation and remediation costs.

When the plaintiff sued the seller and prior owners and operators to recover its response costs, the seller moved to dismiss the action claiming the purchase and sale agreement’s terms, which noted that the plaintiff bought the property “As-Is, Where Is, and With All Faults” (“As-Is Provision”), barred the plaintiff’s CERCLA and HSAA claims. The seller argued that the plaintiff’s assent to the As-Is Provision was tantamount to an agreement to indemnify the seller for the property’s environmental conditions. The court rejected this argument on two grounds.

First, as the court observed, an “as-is” provision is distinct from an agreement to indemnify. Such provisions put buyers on notice that the seller makes no representations or warranties about the property and thus, can serve as a defense against breach of warranty claims. As-is provisions, however, do not waive statutory claims against the seller. Second, the As-Is Provision in the purchase and sale agreement did not bar the plaintiff’s CERCLA (and HSAA) claims because, under CERCLA (and the HSAA), indemnity terms must clearly evince an intent to transfer liability from one party to another. The As-Is Provision in the agreement did not meet that standard.

In addition to statutory claims, the buyer also sued under nuisance, trespass, and negligence. The court granted the seller’s motion to dismiss on nuisance and trespass, holding that the environmental conditions giving rise to the plaintiff’s complaint existed at the time the plaintiff agreed to the As-Is Provision, thus making it irrelevant that the seller may have created the conditions. That is, the plaintiff agreed to the environmental conditions when it bought the property whether or not they were created by the seller.

As to the plaintiff’s negligence claim, the court denied the motion to dismiss. Rejecting the seller’s argument that the plaintiff contractually waived its right to enforce a duty by agreeing to the As-Is Provision, the court held that such provisions do not act as a general waiver of claims. To the contrary, the plaintiff adequately alleged several distinct duties thus allowing its claim to survive.

As a final thought, market conditions, business operations, personal and family issues, and a multitude of other factors can create urgency in consummating land transactions. In some cases, this is unavoidable. As the DP Etiwanda case illustrates, however, developing an understanding of environmental conditions prior to purchase is a must in each transaction.