BAR BULLETIN FOCUS
June 15, 2004
INVESTIGATING A PROPERTY'S
~The Emerging "All Appropriate Inquiry" Standard~
By Pamela D. Marks
More than 20 years ago, environmental law
began to have an increasing impact on many real estate transactions.
Federal superfund law, the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), designated property owners as
among those liable for cleaning up releases of hazardous substances. Now,
when our clients buy or sell a parcel of property a key consideration is
potential liability for past environmental contamination. The
Environmental Protection Agency (EPA) is in the process of trying to
clarify the due diligence that will be expected of purchasers of property.
The rule currently under development is called the “All Appropriate
Inquiry” standard and is likely to impact a wide variety of clients and
CERCLA was not intended to chill the re-use
of industrial properties. However, clean-up costs for contaminated sites
escalated. The perceived risk of CERCLA liability discouraged developers
as well as companies seeking to re-locate, from purchasing property with
an industrial history. Lenders became skittish as costs of cleanup could
easily exceed the value of the property. As a result, many historically
contaminated properties – dubbed “brownfields” – were either kept off of
the market or languished on the market. This encouraged sprawl, helping
the new development and jobs to migrate to suburban or rural “greenfields.”
Policy makers began to conclude that CERCLA, a law designed to protect
public health and the environment, was encouraging the decay of urban
To encourage re-development of Brownfields,
the Federal and various state governments have put together packages of
incentives. These packages include attempts to improve the liability
protections for “innocent landowners” who purchase property without
knowledge of contamination and did not cause or exacerbate contamination.
Purchasers are not entitled to the innocent landowner liability defense if
they make no effort to discover a property’s condition. To the contrary,
current law imposes an obligation on the purchaser to make “all
appropriate inquiry” with respect to the history and environmental
condition of land prior to the purchase. In 2002, the Small Business
Liability Relief and Brownfields Revitalization Act (“Brownfields Act”)
added provisions intended to clarify when and how a purchaser of property
would be entitled to this important defense to liability under CERCLA.
EPA was required to promulgate a standard
for “all appropriate inquiry” by January 11, 2004; however, the rule
remains under development. EPA has developed a draft rule through a
negotiated rulemaking process that it completed in November, 2003.
Reportedly, EPA is poised to send the draft rule to the White House Office
of Management & Budget, which has 90 days to review the rule. Soon after,
a public comment period can be expected.
The new “all appropriate inquiry” standard
is likely to define due diligence for buyers of commercial and industrial
property and their lenders. A new standard would likely fill perceived
gaps in the present practices (currently an ASTM [American Society of
Testing Materials] Phase I standard). The draft standard requires an
inquiry by an “environmental professional,” and defines who is qualified
to perform these inquiries. The draft also defines the components of the
inquiry, such as who must be interviewed and which government records
should be researched. The investigations encompass traditional CERCLA
“hazardous substances” but also include other contaminants, pollutants and
By having a discernable standard for making
“all appropriate inquiry,” purchasers should be better equipped to
evaluate the ascertainable risks associated with the property and make
informed decisions with respect to purchase and redevelopment. Current
owners that are evaluating whether they should sell their property also
may benefit from increased certainty by conducting the same investigation
that a potential purchaser would conduct. Sellers are wise to know the
condition of property at the time of sale to avoid becoming liable for any
contamination that may occur in the future on that property. Thus, a
standard for a thorough investigation can benefit buyers and sellers.
Purchasers should expect consistency
between Maryland and Federal law with respect to the new standard.
Maryland superfund law incorporates the Federal “all appropriate inquiry”
standard. In Maryland, innocent landowners can enhance their liability
protection by proceeding through the State’s Voluntary Cleanup Program (VCP).
Still, the purchase of potentially contaminated property is not risk-free.
Any owner, even an innocent purchaser under Maryland’s VCP, could become
liable for “imminent and substantial endangerments to the public health or
the environment” that are subsequently discovered at the property. Even
so, a reliable environmental investigation and ascertainable standards
remove much of the guesswork.
For many urban properties, the stigma of
past industry and the perception of contamination have been overblown.
Some properties perceived as financially risky have proven to require
little or no environmental remediation. For these properties, the
investigation itself may become the primary extra expense associated with
the purchase. Nevertheless, purchasers should consider when to use the
correct and most current standards to assess their property purchases
because some properties do carry enormous potential environmental
liability. Clients who follow the correct standards will be better
prepared in the future to prove that they made “all appropriate inquiry”
before finalizing their purchase.
Pamela D. Marks practices law in the Baltimore office of Beveridge &
Diamond, P.C., and concentrates on environmental law and litigation.