Change Is In the Air – EPA’s Final All Appropriate Inquiries Rule
Change is in the air with regard to the way in which prospective purchasers, lenders and others will conduct environmental due diligence in the future. These changes stem from Congress’ enactment of the Small Business Liability Relief and Brownfields Revitalization Act, 115 Stat. 2356 (the Brownfields Amendments of 2002 or Amendments). As part of these Amendments, Congress required the Environmental Protection Agency (EPA) to develop standards for parties to conduct “all appropriate inquiries” prior to taking title to real property in order to determine if there are “conditions indicative of releases or threatened releases of hazardous substances” or petroleum products on the property. EPA convened a negotiated rulemaking committee (reg-neg committee) in 2003 to develop the proposed rule. The proposed AAI rule was published in August of 2004 (69 Fed. Reg. 52,542) (August 26, 2004), and the final AAI rule was published on November 1, 2005. See Standards and Practices for All Appropriate Inquiries (70 Fed. Reg. 66,070) (November 1, 2005) (to be codified at 40 C.F.R. pt. 312).
The final rule will make substantial changes in the way that Phase I environmental site assessments (ESAs) are conducted. The final rule puts new burdens on the “user” – typically, a prospective purchaser, seller, or lender – as well as more stringent requirements on the environmental professional (EP) who conducts the investigation. The final rule will affect most directly prospective purchasers of commercial real estate who seek to claim an exemption from liability for pre-existing contamination.
The Brownfields Amendments of 2002 added or clarified three potential defenses to liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund). EPA has described these three potential defenses as the Landowner Liability Protections (LLPs). Because of these 2002 changes to the Superfund law, a Phase I ESA report should state that the report is being prepared so that the user may qualify for one or more of the LLPs. Any report that states that it is being prepared solely to satisfy the “innocent landowner defense” does not provide the user with the full protections against CERCLA liability intended by the Brownfields Amendments of 2002.
The three potential defenses to CERCLA liability are the following:
1) The Bona Fide Prospective Purchaser (BFPP) defense creates a potential defense to CERCLA liability for a prospective purchaser who purchases contaminated property with prior knowledge of the contamination, provided, inter alia, that (i) the purchaser conducted “all appropriate inquiries” prior to taking title, (ii) the contamination occurred prior to the purchaser’s acquisition of the property, and (iii) the purchaser takes “reasonable steps” and exercises “appropriate care” post-closing to prevent continuing releases and future releases. This defense is the one most likely to apply in most contaminated property transactions.
2) The Contiguous Property Owner (CPO) defense, which creates a potential defense to CERCLA liability for a prospective purchaser of property if the purchaser did not know or have reason to know about the contamination at the time of purchase, provided, inter alia, that (i) the purchaser conducted “all appropriate inquiries” prior to taking title, (ii) the contamination was the result of the migration of hazardous substances from an adjacent property, and (iii) the purchaser takes “reasonable steps” and exercises “appropriate care” post-closing to prevent continuing and future releases.
3) The Innocent Landowner Defense (ILD), which creates a potential defense to CERCLA liability if the prospective purchaser did not know or have reason to know about contamination on the property at the time of the purchase, provided, inter alia, that (i) the purchaser conducted “all appropriate inquiries” prior to taking title, (ii) that no contractual relationship exists between the party that caused the contamination and the purchaser, and (iii) the purchaser exercised “due care” with respect to the hazardous substances and took precautions against foreseeable acts or omissions of third parties.
The threshold step for qualifying for any of these defenses is that the user must have conducted “‘all appropriate inquiries … into the previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards and practices” regarding environmental due diligence for a site. CERCLA §9601(35)(A)(i). Additional obligations apply post-closing (such as taking “reasonable steps” and exercising “appropriate care” to prevent continuing releases, preserving the integrity of institutional and engineering controls, and complying with legally required release reporting obligations) in order to retain eligibility for these defenses. The final AAI rule does not provide details about how to comply with these continuing obligations, other than to remind the user that complying with AAI is only the first step in qualifying for any of the three LLPs offered by the Brownfields Amendments of 2002.
The final rule will become effective on November 1, 2006. Until that time, the interim standard is the ASTM standard: Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process E 1527-97, E 1527-00, or E 1527-05. The recently released E 1527-05 Standard is intended to be generally consistent with the final AAI rule.
The final AAI rule relaxes the requirements of the proposed rule in four key areas:
1) EPA has relaxed the requirements regarding who will qualify as an EP. Under the final rule, any person with 10 or more years of full-time relevant experience in conducting environmental site assessments and related activities may qualify as an EP, even if he or she does not have a college degree.
2) The final rule does not require the user to share certain information (the additional inquiries) with the EP, including any specialized knowledge that the user may have about the property, any information about reductions in the purchase price that may be attributable to contamination on the property, or information about institutional controls on the property. Under the proposed rule, “all appropriate inquiries” would not have been deemed to be complete if the User had failed to share this type of information with the EP.
3) The final rule relaxes the radius search requirement for institutional controls (ICs), so that the EP need only search the subject property for evidence of ICs (rather than all properties within one-half mile of the subject property).
4) The final rule clarifies that a user may rely on information contained in prior environmental reports, so long as “all appropriate inquiries” were conducted within one year of the date of taking title, and so long as certain activities within the report (regulatory database review, interviews, site visit, user’s knowledge, etc.) were updated six months prior to closing.
The final AAI rule imposes a number of obligations on the user that either do not exist or are not rigorously enforced under the interim standard, ASTM E 1527. Under the final rule, the user will have an obligation to identify institutional controls (ICs) and engineering controls (ECs) that have been placed on the property. This information is often contained in the land records, and increasingly in state government databases or registries.
Qualifications of the Environmental Professional
One of the most controversial provisions in the proposed AAI rule was the definition of “environmental professional.” The reg-neg committee tried to balance competing interests: requiring the EP to have specific minimum technical qualifications and several years of relevant experience, versus allowing current professionals who have been conducting ESAs for many years to be included within the definition of an EP. The definition in the final rule tries to strike a balance by creating a sliding scale, so that those with strong technical qualifications do not need to have been practicing in the field for as long, whereas those who have a less technical background may nevertheless qualify if they have been performing ESAs for a number of years. For instance, an individual who has 10 or more years of full-time relevant experience in conducting environmental site assessments may qualify as an EP, even without a college degree. An individual who has a P.E. or P.G. license or registration need only have three years of full-time relevant experience.
The final AAI rule imposes two declaration requirements on the EP: that he or she meets the definition of an EP, and that he or she has conducted the environmental site assessment in accordance with the rule. Users should carefully amend their scopes of work and inspect all Phase I ESAs conducted in accordance with the final AAI rule to be sure that they contain these EP declarations.
Institutional and Engineering Controls
In order to retain the liability protections offered by the LLPs, the property owner must be able to show that it did not do anything to interfere with the integrity or effectiveness of institutional or engineering controls placed on the property. For this reason, the final rule increases the emphasis upon both the user and the EP to make more highly concerted efforts to identify these types of controls on the property.
The EP must identify any data gaps in his or her assessment and evaluate whether that data gap has affected his or her ability to provide an opinion regarding whether there are any conditions indicative of releases or threatened releases on the property. A data gap is the inability to gather a certain type of information because of a physical barrier (e.g., snow, locked door), lack of time (e.g., regulatory agency will not respond to a FOIA request in less than 45 days), or other consideration (e.g., could not find any aerial photographs for a given 15-year time interval, even though photographs exist prior to and after that time). A data failure, on the other hand, is the absence of a specific type of information (e.g., no aerial photographs or city directories exist for the property prior to 1960).
Shelf Life of the Phase I ESA
The final AAI rule clarifies that a user may use information in “older” Phase I ESAs as part of AAI but may not rely exclusively on a Phase I ESA that is more than 12 months old to satisfy the “all appropriate inquiries” standard. In addition, while a user may reference older reports, certain aspects of those reports must be updated within a six-month window prior to closing, namely, the site visit, the regulatory agency records review, interviews and specialized knowledge of the user. The date of these activities, not the date of the report, is key; the activities themselves must have taken place six months or less before closing. As a practical matter, any Phase I ESA that is more than six months old is not likely to satisfy the “all appropriate inquiries” threshold.
Objectives and Performance Factors
One of the goals of the reg-neg committee was to change the “checklist” mentality toward environmental due diligence. The way in which they tried to do this was to create clear objectives and performance factors for the environmental due diligence process. Together, both the user and the EP are supposed to identify all of the following:
• current and past property uses and occupancies
• current and past uses of hazardous substances
• waste management and disposal activities that could have caused releases
• current and past corrective action activities undertaken to address past and ongoing releases
• engineering and institutional controls
• properties adjoining the subject property that could have environmental conditions that may have caused a release on the subject property
All AAI activities should be conducted with these objectives in mind.
The performance factors in the AAI rule provide that the EP (or the user) must:
• gather information that is publicly available, obtainable within a reasonable time and cost, and practicably reviewable
• review the thoroughness and reliability of the information gathered, taken into consideration all other information gathered during the inquiry
• identify and comment on the significance of any material “data gaps” that may affect the EP’s ability to draw a conclusion as to whether there are conditions indicative of releases or threatened releases on the property
• identify any conditions indicative of releases or threatened releases in the report
The chart below (divided into two links) compares some of the key differences between the final AAI rule and the ASTM E 1527-00 Standard. The chart does not address all of the issues that may affect the environmental due diligence process.
To view page one of the chart, please click the following link: Page 1
To view page two of the chart, please click the following link: Page 2
Change is in the air -– change that is likely to significantly affect the way in which Phase I ESAs are conducted. It behooves every user and EP to become familiar with the changes wrought by the final AAI rule. A user’s ability to qualify for a defense to CERCLA liability is the ultimate stake under these new rules.