Fourth Quarter 2004

EPA Seeks Public Comment on Proposed Rule Governing Environmental Due Diligence Standards

Holland & Knight Newsletter
Amy L. Edwards

After more than nine months of internal review, the Environmental Protection Agency (EPA) has finally published its proposed rule governing environmental due diligence. See 69 Fed. Reg. 52542 (August 26, 2004). The proposed rule will make substantial changes in the way that Phase I environmental site assessments (ESAs) are conducted in the future. The proposed rule puts new burdens on the “user” – the person commissioning the report and recipients of brownfields grants – as well as more stringent requirements on the environmental consultant who conducts the investigation. These changes are likely to increase the cost of a typical Phase I ESA. Anyone who routinely commissions or reviews Phase I ESAs should be following this rulemaking closely.

Compliance with the proposed all appropriate inquiries (AAI) rule will be the first step toward qualifying for one of the potential defenses to Superfund liability established under the Small Business Liability Relief and Brownfields Revitalization Act of 2002 (the Brownfields Amendments). These potential defenses – innocent landowner, contiguous landowner, or bona fide prospective purchaser – are also known as the Landowner Liability Protections (LLPs).

EPA hosted its first public hearing on the proposed rule at its recent Brownfields 2004 conference in St. Louis (see related story), and will be hosting additional public hearings on October 20 from 1 to 3 p.m. in Room 1153 of the EPA East Building, 1201 Constitution Avenue, N.W., in Washington, D.C., and on November 18 in San Francisco.

The proposed rule was the product of an intensive negotiation over much of last year by a Negotiated Rulemaking Committee established pursuant to the Federal Advisory Committee Act (FACA). The rule that resulted was a series of compromises made by a wide array of stakeholders, ranging from representatives of banking associations; environmental professionals; federal, state and local agencies; home builders; public interest groups; and environmental organizations.

This article summarizes the primary changes that are likely to occur under the proposed rule.

User obligations – The proposed rule puts heightened obligations on the person commissioning the report if he seeks to qualify for one of the LLPs. Specifically, the user must share with the environmental professional the following types of information: (1) information about environmental cleanup liens that have been filed or recorded, (2) any specialized knowledge or experience, (3) the relationship of the purchase price to the fair market value of the property, if the property were not contaminated, and (4) commonly known or reasonably ascertainable information about the Property. The EP is then required to consider the significance of this information in his report. All appropriate inquiry will not be deemed complete if the user has not provided this information.

Objectives – The proposed rule states that “all appropriate inquiry” is intended to search for conditions “indicative of releases or threatened releases” of hazardous substances. The proposed rule does not use the ASTM terminology, Recognized Environmental Conditions, or RECs, which may be a different standard than “releases or threatened releases.” The term REC has been used to mean a condition that, if brought to the attention of a regulatory agency, would likely give rise to an enforcement action or a cleanup obligation.

Both the environmental professional and the user have various obligations to achieve this new objective. Together, they must try to identify (1) current and past property uses and occupancies, (2) current and past uses of hazardous substances, (3) waste management and disposal activities that could have caused releases, (4) current and past corrective action activities undertaken to address past and ongoing releases, (5) engineering controls, (6) institutional controls, and (7) properties adjoining the property that have environmental conditions that could result in conditions indicative of a release on the property.

Performance criteria – The FACA Committee wanted to change the “checklist” mentality that governs some Phase I ESAs. For this reason, the Committee added a performance factor section to the proposed rule. Either the environmental professional or the person seeking to qualify for an LLP must (1) gather information that is publicly available, obtainable within a reasonable time and cost, and practicably reviewable, (2) review the thoroughness and reliability of the information gathered, taking into consideration the information gathered in complying with other portions of the “all appropriate inquiries” rule, (3) identify any data gaps, and comment upon the significance of those gaps, and (4) identify in the report any releases or threatened releases (except for those releases that would not pose a threat to human health or the environment). For the user, it will no longer be acceptable to play “ostrich” and ignore significant data gaps or clearly erroneous information in a Phase I report.

Definition of an environmental professional – As a result of a concern about the poor quality of certain Phase I ESAs being performed today, the FACA Committee established minimal criteria for anyone conducting “all appropriate inquiries.” The inquiry must be conducted by an environmental professional (EP), and the EP must possess “sufficient specific education, training, and experience necessary to exercise professional judgment to develop opinions and conclusions regarding the presence of a release or threatened release to the surface or subsurface of a property, sufficient to meet the objectives and performance factors.” The EP must hold certain degrees or be practicing within this field for a certain number of years. Specifically, an EP must (1) have a Professional Engineer’s (PE) or Professional Geologist’s (PG) license or registration plus three year’s of full time relevant experience, or (2) be licensed or certified to perform environmental inquiries plus have three years of full-time relevant experience, or (3) have a Baccalaureate or higher degree in engineering, environmental science or earth science, plus five years of full time relevant experience, or (4) have a Baccalaureate or higher degree plus 10 years of full time relevant experience. The EP must include in his report a statement that he meets this definition and that he has prepared the report in accordance with the standards and practices of the proposed rule. Deference is given throughout the proposed rule to the professional judgment of the EP. It will be important to verify the qualifications of the person who will be preparing the AAI report in advance.

Data gaps and sampling – The proposed rule defines a “data gap” as “a lack of or inability to obtain information required by the standards and practices ... despite good faith efforts by the environmental professional or [user] ... to gather such information ... . “ The EP is required to identify data gaps in his report and to provide comments upon the significance of that gap on his ability to provide an opinion regarding the likelihood of releases or threatened releases. Sampling is not required to fill such gaps, but the proposed rule acknowledges that it could be conducted for this purpose. While some on the FACA Committee felt strongly that sampling should be required as part of AAI, the Committee ultimately agreed that sampling was optional.

Institutional and engineering controls – The proposed rule acknowledges the importance of identifying institutional and engineering controls as part of “all appropriate inquiries” by (1) stating that the EP and the user must try to identify them as one of the objectives of the inquiry, (2) requiring the EP to search for institutional and engineering controls that exist on or within one-half mile of the property, and (3) requiring the user to share with the EP any specialized knowledge that he or she may have. Phase I ESAs have not traditionally looked for, or identified, institutional or engineering controls as part of routine environmental due diligence. This is an important change toward making “all appropriate inquiries” consistent with the objectives of the Brownfields Amendments.

Shelf life – A Phase I ESA is considered “valid” under the proposed rule if all of the information in the report has been collected within one year of closing, and if the following types of activities have been conducted or updated within one hundred eighty (180) days of closing: (1) interviews with past and present owners, operators and occupants of the Property, (2) searches for environmental cleanup liens, (3) review of government records, (4) visual inspection of the property and adjoining properties, (5) declaration by the environmental professional, and (6) noting of any relevant changes in the condition of the property and any specialized knowledge of the environmental professional or the user. As a practical matter, any Phase I ESA that is more than six months old will need to be updated under the new EPA rule.

Content – The proposed rule makes several significant changes in the content of the information that must be gathered as part of “all appropriate inquiries.” The EP must now interview past owners, operators and occupants of the property, not just the current owner, operator and occupant. If the property is considered to be “abandoned,” the EP must also interview one or more owners or occupants of neighboring or nearby properties. The EP must visually inspect adjoining properties from the property line, public right-of-way or similar vantage point, not just the subject property. The EP must identify data gaps and comment upon their significance and must declare that he qualifies as an EP and that he has conducted the inquiry in accordance with the standards and practices of the proposed rule. The proposed rule contains expanded search distances and obligations, including the requirement to look for registries or lists of institutional and engineering controls on or within one-half mile of the property. Only in extremely rare circumstances will a Phase I ESA be considered to constitute “all appropriate inquiries” where there has not been an on-site visual inspection, and the EP will need to fully document those circumstances and efforts made to obtain comparable information. The EP’s report must contain an opinion (not a recommendation) regarding any additional investigation that might be appropriate.


Until the new EPA rule is finalized, Phase I ESAs conducted pursuant to ASTM 1527-97 or 1527-00 will be deemed to satisfy “all appropriate inquiry.” ASTM is, at the same time, diligently working on modifications to E 1527-00 to make it consistent with EPA’s proposed rule. The EPA rule is not likely to be finalized for several months after the public comment period closes. In the meantime, you can expect that the cost of conducting environmental due diligence will increase to meet the parties’ heightened obligations under the proposed “all appropriate inquiries” rule.

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