Maryland Bar Bulletin
Publications : Bar Bulletin : June 2006

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Raising the Bar on Environmental Due Diligence

~Get ready for changes in "all appropriate inquiry"~

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:

  1. 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."
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.

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Publications : Bar Bulletin: June 2006

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