Raising the Bar on Environmental Due Diligence
~Get ready for changes in "all appropriate inquiry"~
By Gina Zawitoski and Paul D. Ackerman
The innocent purchaser, bona fide prospective purchaser and contiguous property
owner defenses to federal Superfund liability for owners of contaminated property
require purchasers to conduct all appropriate inquiry (AAI) into the previous
ownership and uses of the property in an effort to identify existing contamination.
For many years, Phase I Environmental Site Assessments (Phase I ESA) have been
routinely performed to meet this requirement and to identify environmental
risks, but whether a particular Phase I ESA was enough to establish AAI has
been uncertain. In its final AAI rule (70 Fed. Reg. 66070), the U.S. Environmental
Protection Agency (EPA) has clarified that AAI requires a greater level of
assessment than traditionally performed.
The AAI rule establishes new environmental due diligence standards and practices
that must be followed in order to qualify for the referenced landowner liability
protections. The rule becomes effective on November 1, 2006, and is estimated
to affect more than 250,000 commercial real estate transactions nationwide
annually. The EPA also announced that the 2005 update of ASTM E1527 Standard
Practice for Phase I ESA may be used in lieu of the AAI rule to meet the federal
due diligence requirements. Until November 1, AAI may be met by using the new
AAI rule or ASTM E1527-05, ASTM E1527-00, ASTM E1527-97. After November 1,
only the new AAI rule and ASTM E1527-05 will constitute compliance with AAI.
Compliance with the new requirements will be critical to limiting the liability
of clients engaged in real property transactions. The AAI rule also establishes
important new standards for environmental consultants. This article briefly
summarizes the background of the AAI rule and provides an overview of the new
due diligence standards and practices that will take effect in November.
Background of the AAI Rule
Under the federal Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA, or Superfund), owners and operators of contaminated
property may be held strictly liable for, among other things, the cost of cleaning
up contamination regardless of fault or negligence. An unintended consequence
of this liability scheme is to deter potential purchasers from investing in
the acquisition and redevelopment of historically contaminated properties (sometimes
called
"brownfields sites") because only innocent purchasers (whose due diligence
failed to find contamination) could defend against liability.
In 2002, Congress amended CERCLA to lower the barriers to brownfields redevelopment
by, among other things, extending defenses to people who purchase property
with knowledge of contamination ("bona fide prospective purchasers") and to
owners of property contaminated by off-site sources ("contiguous property owners").
It also directed the EPA to issue a regulation setting forth the standards
and practices for carrying out AAI. After negotiating with more than 25 organizations
representing the real estate and lending service industries, environmental
consultants and professionals, state and federal regulators, and public interest
groups for over three years, the EPA finalized the AAI rule on November 1,
2005.
The Who, What and When of AAI
Under the rule, AAI must be conducted by an environmental professional
(EP) whose qualifications are spelled out in the rule. Specifically, the inquiry
must include and the EP must take into account all of the following:
- Interviews with past and present owners, operators and occupants;
- Reviews of historical sources, such as chain of title documents, aerial
photographs, building department records and land-use records;
- Searches for recorded environmental cleanup liens;
- Reviews of Federal, State, local and tribal government records, including
waste-disposal records, underground storage tank records, hazardous waste
management records and spill records;
- Visual inspections of the facility and of adjoining properties;
- Evaluating the purchaser's specialized knowledge or experience;
- Assessing the relationship of the purchase price to the value of the property,
if the property was not contaminated; and
- Commonly-known or reasonably ascertainable information about the property.
A written report must be prepared that includes, among other things, the
EP's opinion about whether conditions indicative of a hazardous substance release
have been identified, an evaluation of data gaps, and documentation of the
EP's qualifications, including a prescribed declaration by the environmental
professional. While not mandatory, the EPA recommends that the EP provide an
opinion about additional appropriate site investigation, if any.
The assessment must be completed within one year prior to the date of acquisition,
with updates required for some information collected more than six months before
closing.
What's Changed?
The most prevalent industry standard for conducting Phase I ESAs is ASTM
E1527-00 (which replaced E1527-97 in 2000). The major differences between E1527-00
(the "old standard") and the new AAI due diligence standard (the "new standard")
include:
- Qualifications for Environmental Professionals are prescribed. Unlike
the old standard, the new standard contains certification, licensing, education
or experience requirements for individuals who are supervising "all appropriate
inquiries."
- Interviews with the current owner and occupants of the subject property
are now mandatory. Under the old standard, a reasonable attempt
to interview a key site manager and a reasonable number of occupants
was sufficient.
- Interviews with past owners and occupants may be required in some
circumstances. The old standard required interviews to inquire
about past uses, but did not require the EPs to find and interview past
owners and occupants.
- Interviews of neighboring property owners or occupants are mandatory
if the subject property is abandoned. Under the old standard,
such interviews were discretionary and rarely done.
- Responsibility for identifying use limitations and environmental
liens may fall to either the EP or the client. Under the old
standard, the user of the Phase I ESA (not the consultant) was responsible
for ascertaining whether use limitations (e.g., institutional
controls) or environmental liens were present. Under the new standard,
if the user does the search and does not report the results, the EP must
identify a data gap in the report.
- Federal, state, tribal and local records must be reviewed. Under
the old standard, local and tribal records were reviewed at the discretion
of the EP.
- Inspections of adjoining properties from the property line, public
rights-of-way or other locations are required. The old standard
required only that the EP report relevant information about the adjoining
property that was actually observed.
- Data gaps require more extensive documentation. The new
standard requires the EP to identify data gaps, identify the sources consulted
to address data gaps, and comment on the how the data gaps affect the EP's
ability to identify conditions indicative of hazardous substance releases
and threatened releases.
- The Phase I ESA Report has a limited shelf-life. A Phase
I ESA must be completed within one year before closing. If the Phase I investigation
occurred more than 180 days before closing, interviews, inspections, historical
records review and the environmental lien search must be updated. Information
from older reports can be used, but all of the information must be reviewed
and updated in order to complete all appropriate inquiry.
Other Requirements
To be eligible for CERCLA landowner liability protection, a purchaser must
do more than conduct AAI. Eligibility also requires compliance with certain "continuing
obligations"
spelled out in the 2002 amendments to CERCLA, including:
- Compliance with land-use restrictions;
- Not impeding the effectiveness or integrity of institutional controls;
- Taking
"reasonable steps" to prevent releases of hazardous substances affecting
the property;
- Cooperating and assisting Federal or state regulatory officials or other
persons conducting response actions or natural resource restoration at the
property;
- Complying with CERCLA information requests and administrative subpoenas;
and
- Providing legally-required notices.
Standards for satisfying these "continuing obligations" are not defined in
the statute or in EPA regulations, though the EPA has published interim guidance
to provide some assistance to the regulated community. This guidance and other
resources on AAI and related brownfields liability issues can be found on the
EPA's website at http://www.epa.gov/brownfields/liab.htm#liabiss.
Gina Zawitoski is a partner and Paul D. Ackerman
a senior associate with the Baltimore Office of DLA Piper Rudnick Gray Cary
US LLP. Both concentrate their practices in the area of environmental law.
