How Appropriate Is Your Due Diligence?

New Environmental Due Diligence Standards Apply to Properties Acquired After November 1, 2006

Any person acquiring an interest in real property on or after November 1, 2006, who seeks to escape potential liability for pre-existing contamination will need to be sure that it conducts its environmental due diligence in accordance with the Environmental Protection Agency’s (EPA’s) final All Appropriate Inquiries Rule (AAI Rule). See Standards and Practices for All Appropriate Inquiries (70 Fed. Reg. 66,070, November 1, 2005). The AAI Rule provides prospective purchasers and others who acquire an interest in commercial real estate a potential defense to Superfund liability. These defenses, known as the Landowner Liability Protections (LLPs), were contained in the Brownfields Amendments of 2002.

Prospective purchasers and others who seek to qualify for one of the LLPs should request a Phase I Environmental Site Assessment (ESA) that is conducted in accordance with the ASTM Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, E 1527-05, rather than the previous ASTM Standard (E 1527-00). EPA recognizes the ASTM E 1527-05 Standard (but not the E 1527-00 Standard) as being compliant with the final AAI Rule.

Objectives and Performance Factors

Both the updated ASTM Standard and the final AAI Rule require that environmental due diligence follow certain objectives and performance factors. The goal is to identify conditions indicative of releases and threatened releases. All steps in the environmental due diligence process should be conducted with these objectives and performance factors in mind. To that end, the environmental due diligence process now includes certain tasks that were not required before, including without limitation the following: the inquiry must be conducted by an Environmental Professional (EP) (as defined in the final AAI Rule); the Phase I ESA must contain certain declarations from the consultant that he or she qualifies as an EP and conducted the assessment in accordance with the final AAI Rule; the EP must explain any “data gaps” that may affect his or her ability to draw conclusions about releases or threatened releases; and the EP must interview prior owners and occupants who may have knowledge of conditions indicative of releases or threatened releases on the property. Certain tasks must be accomplished within the six month period prior to closing, or they must be updated if the prospective purchaser seeks to qualify for one of the LLPs. In particular, the site inspection, interviews, regulatory records review, search for environmental liens and EP declarations must have occurred (or have been updated) within the six month window prior to closing.

The requirement to conduct All Appropriate Inquiries is only a threshold step to qualifying for one of the LLPs under the federal Superfund statute. Equally important are the “continuing obligations” that apply post-closing, including without limitation the need to comply with land use restrictions, preserve the integrity and effectiveness of institutional controls, provide legally required notices about contamination to regulators, and take reasonable steps to stop any continuing or threatened releases of hazardous substances.

For further information about the changes brought by the final AAI Rule, please see, “Change Is In the Air – EPA’s Final All Appropriate Inquiries Rule,” Holland & Knight Environment Newsletter, Fourth Quarter 2005.