Buyers, Sellers and Lenders Beware: Standards for Environmental Due Diligence Are Changing

Thanks to the Brownfields Amendments of 2001, P.L. 107-118, the standards for conducting environmental due diligence are changing.  These changes will affect anyone who commissions or relies upon Phase I Environmental Site Assessments.         

The Brownfields Amendments directed the Environmental Protection Agency (EPA) to promulgate regulations regarding what constitutes “all appropriate inquiry” under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) no later than January 11, 2004. The Brownfields Amendments state that the EPA must consider the following criteria in developing its regulations:

• use of an environmental professional
• interviews with past and present owners, operators and occupants
• review of historical sources of information
• searches for recorded liens
• review of federal, state and local records regarding waste disposal practices, spills, underground storage tanks, and the like
• visual inspections of the facility and adjoining properties
• utilization of any specialized knowledge
• evaluation of the relationship between the purchase price and the value of the property
• utilization of commonly known or reasonably ascertainable information about the property
• consideration of the degree of obviousness of the contamination

Until the new regulations are issued, Congress specified in the amendments that parties may use the Standard Practice on Environmental Sites Assessments:  Phase I Environmental Site Assessment Process (ASTM Standard Practice E 1527-97) as the basis for determining what constitutes “all appropriate inquiry.”

Because the ASTM Standard Practice changed in 2000, EPA recently clarified in a direct final rule that parties conducting “all appropriate inquiry” may rely upon either the 1997 or the 2000 version of the ASTM Standard (68 Fed. Reg. 3430-3435).  In addition, EPA has recently announced that it is establishing a Negotiated Rulemaking Committee, or “reg neg,” to develop standards and practices for conducting “all appropriate inquiry.” ( 68 Fed. Reg. 10675-10680). Among the issues to be resolved by the Committee are the following:

• ways to minimize disruption to the real estate market
• shelf life of an assessment
• balancing the need for a high level of certainty without imposing time consuming and expensive regulatory requirements
• defining the extent to which sampling may be required

At the same time, ASTM has convened a task group to work on changes to the existing standard to clarify that anyone conducting “all appropriate inquiry” in accordance with the standard should qualify as having conducted “all appropriate inquiry” for purposes of all three defenses to CERCLA liability recognized in the Amendments.  These defenses are the “innocent landowner,” “prospective purchaser” and the “contiguous landowner” defenses.

The EPA is also planning to issue within the next few weeks its “common elements” guidance on the steps that are required to qualify for the three defenses to CERCLA liability under the amendments.  These steps include, among other things, conducting “all appropriate inquiry”; preserving the integrity and effectiveness of institutional controls; taking reasonable steps to prevent releases; and complying with all legally required release reporting requirements.

Finally, substantial progress is being made by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in drafting a model uniform environmental covenant act.  Such an act is needed to enhance all parties’ ability to implement and enforce institutional controls at contaminated sites.

The Brownfields Amendments require states to maintain a database of brownfields sites that rely on institutional controls, and  also require parties who wish to qualify for one of the three defenses to CERCLA liability to establish that they “preserved the integrity and effectiveness of institutional controls.” 

In the absence of a uniform model law, this may be extremely difficult to do, given the current state of legal authority in many jurisdictions to implement, track and enforce institutional controls.  The NCCUSL drafting committee recently concluded its winter 2003 drafting session, and hopes to have a final version of the model law ready for presentation to the full conference for final approval at its next meeting this summer.

Amy Edwards is a member of the ASTM Task Group that is working on the revisions to the ASTM Phase I ESA Standard (E 1527) and an advisor to the NCCUSL committee that is drafting the Uniform Environmental Covenant Act.  She also is the editor/author of a book entitled Institutional Controls:  Their Implementation and Enforcement at Brownfields Sites, that will be published this spring by the American Bar Association.