By Lucy B. Jenkins, Jones Waldo
Environmental Law Update 2005-1
November 2005
On November 1, 2005, EPA issued its final rule to establish standards for conducting all appropriate inquiry ("AAI") into the environmental condition of a property in order to qualify for landowner liability protections under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). 70 Federal Register 66070. http://www.epa.gov/swerosps/bf//_final_rule.pdf This rule is effective on November 1, 2006 and applies to all commercial and industrial property transactions where the prospective purchaser is interested in protection from potential cleanup liability under CERCLA.
BACKGROUND
CERCLA provides liability protection for landowners who qualify as innocent landowners, bona fide prospective purchasers ("BFPP") and contiguous property owners. A showing of "all appropriate inquiry" into the environmental condition of the property, prior to purchase, is a prerequisite to establishing these landowner liability protections. The current industry standard for conducting all appropriate inquiry is the American Society for Testing and Materials ("ASTM") Standard E1527-05 entitled Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process ("ASTM Phase I Standard"). Since the passage of CERCLA in 1980, it has become common practice to obtain a Phase I Environmental Site Assessment ("Phase I ESA") conducted in accordance with the ASTM Phase I Standard, prior to a commercial transaction.
When Congress amended CERCLA in 2002 to add the BFPP and contiguous property owner liability protections, Congress directed EPA to promulgate regulations to address the standards and practices necessary to meet the all appropriate inquiry requirement and included a list of criteria that EPA must include in the regulation. EPA issued its proposed AAI rule on August 26, 2004. The final rule is very similar to the proposed rule.
HIGHLIGHTS OF THE FINAL RULE
• ASTM Phase I Standard. In the proposed rule, EPA considered adopting the then current ASTM Phase I Standard (the 2000 version), but determined that it did not meet the statutory criteria. Since publication of the proposed rule, ASTM has updated the 2000 version to address EPA’s concerns and has published the current 2005 version of the ASTM Phase I Standard. In the final rule, EPA determines that the 2005 ASTM Phase I Standard is consistent with the statutory and final rule criteria for all appropriate inquiry. Persons conducting all appropriate inquiry may use the procedure included in the 2005 ASTM Phase I Standard to comply EPA’s final rule. The 2005 ASTM Phase I Standard is more detailed than EPA’s final rule and will likely be the standard that most Environmental Professionals will use to conduct all appropriate inquiry.
• Environmental Professional. The final rule requires an Environmental Professional to manage or oversee the all appropriate inquiry and defines Environmental Professional as an individual who meets certain minimum education, licensing and experience qualifications. Based on public comments, EPA determines that individuals with ten years of full-time relevant experience qualify as an Environmental Professional. The Environmental Professional is required to issue a written report that includes: a statement of opinion as to whether the inquiry has identified conditions indicative of releases or threatened releases of hazardous substances; an identification of data gaps and comments regarding the significance of such data gaps on the Environmental Professional's ability to provide the above statement of opinion; a declaration that the Environmental Professional meets the regulatory definition; and a declaration that the all appropriate inquiry has been conducted in conformance with the AAI regulation.
• Visual Inspections. A visual inspection of the property by the Environmental Professional is required, unless the prospective purchaser makes good faith efforts to gain access but is refused access. If access is refused, the prospective purchaser is required to use aerial photography or to inspect from the nearest accessible vantage point. If a visual inspection of the property cannot be conducted prior to the purchase, EPA recommends that the Environmental Professional conduct an on-site visual inspection following the purchase. The visual inspection is required to be conducted by the Environmental Professional, because the Environmental Professional is best qualified to identify environmental conditions.
• Prospective Purchaser Responsibilities. The prospective purchaser is required to conduct the following inquiries:
1. Search for environmental cleanup liens;
2. Consider specialized knowledge or experience of the prospective purchaser;
3. Consider the relationship of the purchase price to the fair market value of the subject property, if the property was not contaminated; and
4. Determine commonly known or reasonably ascertainable information about the property.
The prospective purchaser may arrange to have the Environmental Professional conduct inquiry numbers 1 and 4 above. The prospective purchaser should document the results of these inquiries.
HOW THE FINAL RULE DIFFERS FROM THE INTERIM STANDARD
The final rule is very similar to the interim standard (the 2000 ASTM Phase I Standard), but does expand the scope of some of the all appropriate inquiries and requires additional documentation of the inquiries as follows:
• Interviews. Interviewing the current owner or occupant of the property is mandatory. Interviewing past owners and occupants of the property is required if necessary to determine the potential for contamination of the property. If the property is abandoned, an interview of an owner of a neighboring property is required.
• Records Review. The final rule requires the examination of tribal (if applicable) and local government records (in addition to state and federal government records).
• Documentation. The final rule requires more extensive documentation of data gaps, opinions of the Environmental Professional, and inquiries of the prospective purchaser.
FREQUENTLY ASKED QUESTIONS
1. What standard should prospective purchasers use to satisfy the AAI requirement until the final rule is effective on November 1, 2006? Until November 1, 2006, prospective purchasers can use either EPA’s interim standard (the 2000 ASTM Phase I Standard) or EPA’s final rule (or the 2005 ASTM Phase I Standard).
2. Is sampling required as part of the AAI? Sampling is not required, but sampling may be valuable in determining the possible presence and extent of potential contamination at a property or to explain data gaps. EPA notes that a court may determine that a prospective purchaser should have conducted sampling to satisfy one of the statutory criteria, "the degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect the contamination by appropriate investigation." In addition, sampling may be necessary either pre- or post-acquisition, to fully understand the conditions at the property and to fully comply with post-acquisition statutory requirements necessary to maintain the BFPP landowner liability protection.
3. To whom does the AAI rule apply? The final rule applies to any person who seeks the landowner liability protections of CERCLA as an innocent landowner, BFPP or contiguous property owner. The final rule also applies to persons receiving Federal brownfields grant monies to conduct site characterization and assessment.
4. When should the AAI be conducted in relation to the purchase? What is the shelf life of the Phase I ESA? The AAI must be conducted within one year prior to the transfer of title. However, certain information (interviews, searches for environmental cleanup liens, reviews of government records, visual inspection of the property and adjoining properties and Environmental Professional's declaration) must be updated if collected more than 180 days prior to the purchase date and certain information (relationship of purchase price to property value, specialized knowledge of the purchaser and Environmental Professional ) must be collected specifically for the current transaction.
5. Can the AAI be conducted by one party, such as the seller, and transferred to a prospective purchaser? Yes, provided the report satisfies the AAI rule; the prospective purchaser reviews all information collected and updates the report as necessary to accurately reflect current conditions at the property; and the prospective purchaser updates the report to include any relevant specialized knowledge of the prospective purchaser and the Environmental Professional.
6. Does the proposed AAI rule apply to residential property? The final rule does not apply to property purchased by an individual for residential or other similar uses where a facility inspection and title search reveal no basis for further investigation. However, the final rule applies to commercial or governmental entities purchasing residential properties, such as an apartment building.
CONCLUSION
Prospective purchasers who are interested in qualifying for the CERCLA defenses to landowner liability must comply with EPA’s new rule, but should be aware that conducting AAI is just a threshold criteria and that there may be ongoing, post-acquisition criteria, such as complying with any land use restrictions. The new rule is a performance based standard, with requirements that the prospective purchaser must comply – requiring coordination with the Environmental Professional and documentation of all inquiries, not just following a Phase I checklist. Prospective purchasers should separately evaluate defenses to cleanup liability under state law. Prospective purchasers should also evaluate whether their environmental diligence should evaluate risks outside of the scope of the AAI rule.
Lucy Jenkins is an attorney with Jones Waldo and represents national retail chains, real estate developers, lending institutions and governmental entities in connection with transactions involving environmentally impaired property. This update is a periodic publication of Jones Waldo and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult with a qualified attorney concerning the particular circumstances and any specific legal questions you may have. |
