New Phase I Environmental Standards to be Promulgated by EPA BY DANIEL E. JOHNSON AND JOSEPH L. KESLING

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ALL APPROPRIATE INQUIRY:

The driving force behind due diligence has historically been theComprehensive Environmental Response, Compensation andLiability Act/Superfund Amendments and Reauthorization Act(CERCLA/SARA). Enacted in 1986, CERCLA serves as anaddendum to the original Superfund law of 1980. To date,CERCLA, or “Superfund,” has achieved the following: 1)established prohibitions and requirements concerning closedand abandoned hazardous waste sites; 2) provided for joint,s t r i c t , and retroactive liability of persons responsible forr e l e a s e s of hazardous waste at these sites; and 3) established a trust fund to provide for cleanup when noresponsible party could be identified.

Superfund has always had an “out” by allowing the assertion ofthe “innocent landowner defense” to liability, requiring that “allappropriate inquiry into the previous ownership and uses of theproperty be consistent with good commercial or customarypractice.”

Until recently, the criteria to qualify as an innocent landowner wereuncertain. Fortunately, recent amendments to Superfund clarify whatconstitutes “all appropriate inquiry.” The Small Business LiabilityRelief and Brownfields Revitalization Act became effective in 2002. TheAmendments embrace the American Society for Testing andMaterials (ASTM) Standard Practice for Environmental SiteAssessment (E1527-97). The Act require the EnvironmentalProtection Agency (EPA) to adopt regulations within two years thatestablish standard for “appropriate inquiry.”

Other liability clarifications, such as for “contiguous propertyowners” and “bona fide purchasers,” also are included in the Act,although their practical effects may be limited. Interestingly, theAct specifically provides for the purchase of a contaminatedproperty, while limiting liability if certain conditions are met.

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n accordance with the 2002 Small BusinessLiability Relief and Revitalization Act, theEPA is finalizing draft regulations coveringdue diligence standards for “all

appropriate inquiry” (AAI) – the process by whicha property’s potential to be contaminated isinvestigated.

The EPA is slated to propose a draft AAI rule in latesummer 2004, followed by a 60-day publiccomment period. After any necessary changes aremade, the final regulations likely will bepromulgated in early 2005.

Meanwhile, members of the environmentalconsultant community, particularly phase Iprofessionals, are following the development ofthe proposed AAI rule with great anticipation.The draft rule replaces the current reference inthe Act to the ASTM E 1527-00 siteassessment standard, giving it the potential toaffect every real estate transaction in theUnited States once the final rule ispromulgated. It therefore has been critical forthose involved with due diligence forcommercial real estate to stay apprised of any

developments that will likely impact asignificant number of commercial real estatetransactions.

The new regulations clearly outline the stepsproperty owners must take to be able to assert adefense to CERCLA liability. While this defense isnothing new (it first appeared on the scene in 1986 in amendments to Superfund), thepromulgation of detailed regulations regardingAAI is.

The operable assumption in the marketplace formany years has been that the ASTM guidance setsthe standard for AAI and is consistent with goodcommercial practices, as required by the 1986Superfund amendments.

The Act, in attempt to facilitate brownfieldsredevelopment, not only amended theinnocent landowner defense, but also addedtwo new landowner liability defenses for the first time:

1) Bona fide prospective purchaser: createsprotection for a property owner whoknowingly purchases contaminated property,provided that the contamination occurredprior to purchase; and

2) Contiguous property owner: creates adefense for an owner of property whencontamination is caused by a nearby property,provided the owner did not know of it at thetime of purchase.

Congress expressly required 10 criteria beaddressed by the regulations as outlined onpage 21.

While the Act is clearly intended to facilitatebrownfields redevelopment and to offerliability relief to those attempting to developcontaminated property, the AAI regulations areintended to cover all types of commercial

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IALL APPROPRIATE INQUIRYCRITERIA

The Act establishes a number of conditions that parties must meet in order to qualify for any of the above CERCLAliability defenses. The criteria to be addressed by the final “all appropriate inquiry” standard are as follows:

1. Interviews with the past and present owners, operators and tenants of the facility to gather information regarding the potential for contamination of the facility.

2. Review of historical sources, such as the chain of title documents, aerial photographs, building department records, and land use records to determine previous uses and occupancies of the real property since the property was first developed.

3. Searches for recorded environmental cleanup liens against the facility that are filed under federal, state or local law.

4. Review of federal, state and local governmental records, waste disposal records, and hazardous waste handling,generation, treatment, disposal and spill records, concerning contamination at or near the facility.

5. Visual inspection of the facility and adjoining properties.

6. Specialized knowledge of experience on the part of the individual seeking to assert the defense.

7. The relationship of purchase price to the value of the property, if the property was not contaminated.

8. Commonly known or reasonably ascertainable information about the property.

9. Results of an inquiry reported by an environmental professional.

10. The degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect contamination by appropriate investigation.

10 Criteria for Conducting All Appropriate Inquiry

APPLICABILITY: ALLCOMMERCIAL PROPERTY &SOME RESIDENTIAL TOO!

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properties, not just brownfields. It shouldalso be noted that AAI includes residentialproperties under certain circumstances. Forexample, residential properties used forcommercial purposes, as well as residentialproperties under government ownership, are included.

Under ASTM, the objective of AAI was to identify“recognized environmental conditions,” whichgenerally means the presence or likely presence ofhazardous substances or petroleum that isindicative of a release. Under AAI, petroleum isgenerally excluded from the objective, and theobjectiveis subtlydifferent: “to identify conditionsindicative of releases or threaten releases ofhazardous standards …”

It is worth noting that significant releases (andliability) can be attributed to petroleum spills orleaks (i.e., leaking underground storage tanks ,MTBE), and AAI should be augmented to coverthese risks.

While the negotiated role-making committeeanticipated a shift away from prescriptive or a“checklist” mentality for AAI, they did build insafeguards to confirm that appropriateprofessional judgment is being exercised.Performance criteria were built into AAI asguideposts, and it appears that it was theCommittee’s intent to force the marketplace torespond to significant data gaps, data failureor false or misleading information.

To satisfy AAI, either the environmentalprofessional or the prospective “innocent”landowner must do the following:

• Gather information that is publiclyavailable, obtainable within a reasonable timeand cost, and that can be reviewed practicably

• Review the thoroughness and reliability ofthe information gathered, taking intoconsideration any data gathered in complyingwith other portions of the AAI rule

• Identify any data gaps and comment uponthe significance of those gaps

• Identify any releases or threatened releases(except for those releases that would not posea threat to human health or the environment)Other significant changes associated with thenew AAI regulations include the following:

1. Environmental Professionals: Must nowmeet specific education, exper ience andcertification requirements under the AAI rule,and certify that these provisions have beenmet in the report.

2. Record Review: The standard review offederal and state government records underASTM E 1527-00 is expanded under AAI toencompass records from local governmentagencies, as well as records maintained byIndian tribes.

3. Institution Control: Searches forengineering and institutional controls withinone-half mile of the subject property must beconducted by environmental professionals

PROFESSIONAL JUDGMENT &PERFORMANCE CRITERIA

CONTAMINANTS COVERED BYAAI: CHANGES FROM ASTM

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under the draft AAI rule and are reflective of anincrease in brownfield sites.

4. Historical Research: The draft AAI rule’sprovisions for historical research are verygeneral, leaving decisions about the researchtime frame, data sources and search intervalsup to the environmental professional’sjudgment. This may be detrimental to reportquality, with little guidance from the regulationson the appropriate levels of inquiry.

5. Interviews: Interviews with owners oroccupants of neighboring properties will bemandatory for ESAs at brownfield sites. Inaddition, past owners or operators of a subjectproperty must be interviewed.

6. Shelf Life: Environmental inquiries under theAAI rule are good for one year. Phase I ESAs olderThe one year will need to be redone.

7. User Obligations: Under the proposed rule,it would appear that a key element of AAI is a fulldisclosure of information. In particular, the usermust share the following pieces of information withthe environmental professional: 1) details aboutenvironmental cleanup liens that have beenrecorded; 2) any specialized knowledge orexperience; 3) the relationship of the purchase priceto the fair market value of the property, if theproperty is not contaminated; and 4) commonlyknown or reasonably ascertainable informationabout the property. If this information is availableand not provided, some commentators havesuggested AAI will not be validated and complete.

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While Congress had in mind the promulgation of regulations thatwill expand liability defenses previously available, the expansion willlikely result in more exhaustive and expensive Phase I assessmentsand changing due diligence standards (whether CERCLA-driven ornot, the new regulation clearly will impact customary practices).In addition, it seems clear that in order to be able to assert theinnocent property owner or contiguous property owner defenses,the bar will be raised for level of quality, and documentation (e.g.,file review) will be necessary.

Of course, ultimately the marketplace will determine what impactsthese new, more complex and intensive regulatory-drivenrequirements will have, but until the final regulations are approvedlater this year, we can only anticipate that the cost of due diligencewill be on the rise.❖

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