Bar Bulletin

June, 2004

 BAR BULLETIN FOCUS
 June 15, 2004

Environmental Law  

INVESTIGATING A PROPERTY'S INDUSTRIAL PAST
~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 property transactions.

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 centers.

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 petroleum products.

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.

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