Forthcoming EPA Due Diligence Rule To Provide Key To Liability Defense

Friday, April 1, 2005 - 01:00

For many years the standard for environmental due diligence has been that established by the American Society for Testing and Materials ("ASTM"). The ASTM standard was established with no direct government involvement and no government commentary on the subject. The ASTM standard was developed to assist purchasers of property to qualify for the "innocent landowner" defense to Superfund liability. Purchasers of property and environmental consultants have grown comfortable with the ASTM standard. Currently lenders almost universally require that an environmental site assessment (commonly called a "Phase I") meeting the ASTM standard be performed prior to extending financing for property acquisition. This standard will soon be replaced with a standard established by EPA, which lenders almost certainly will require in the same manner as they required use of the ASTM standard in the past and purchasers will need to follow in order to be able to assert the defense to liability now available at federal law. Compliance with the ASTM standard will no longer be sufficient.

The Federal Brownfields Amendments of 2002 attempted to facilitate Brownfields development in several ways, including by deferring to state programs with respect to enforcement, expanding grants programs and establishing new defenses to Superfund liability for bona fide purchasers and contiguous property owners. To qualify for these new defenses the Amendments require that a purchaser conduct "all appropriate inquiry" with respect to environmental conditions on the property prior to acquisition and that the inquiry comply with a standard to be promulgated by EPA. The bona fide purchaser defense is notable because it significantly expands liability protection as compared to the prior "innocent purchaser" defense to cover contamination discovered during the "all appropriate inquiry." As a result, qualifying purchasers of property will have a defense even with respect to conditions they discover during due diligence. However, following acquisition, to maintain the defense the landowner must: (1) provide all required notices, (2) take reasonable steps to prevent continuing releases, (3) fully cooperate with investigatory and cleanup efforts, and (4) comply with any institutional controls. Thus, it is possible for a purchaser to have a defense at the time of acquisition and lose it thereafter.

EPA proposed a standard for all appropriate inquiry on August 26, 2004 (the "Proposal"), 29 Fed. Reg. 52542. The new standard proposed by EPA was prepared by a committee of stakeholders representing a broad spectrum of interests (the "Committee") through a process referred to as negotiated rulemaking. Subsequently, it has been subject to pubic comment. Given the breadth of interests involved in the Proposal's preparation and the lack of significant opposition, it is likely that the rule adopted by EPA will be very close to the Proposal. Therefore, we recommend that entities that acquire property and lend on new acquisitions, particularly those who prepare or require large volumes of Phase I assessments, become familiar with EPA's proposal so that they can commence using the new standard and taking advantage of the new bona fide purchaser defense as soon as it is adopted.

In general, the Proposal is a helpful commentary on how environmental due diligence should be conducted. The basic concepts underlying the new EPA standard are the same as current practice and large portions of the requirements are virtually identical to the ASTM standard. Several aspects of the standard are different, however, sometimes in subtle ways. Others are addressed in more detail or received different emphasis. These aspects of the Proposal warrant close attention. The following is a summary of these requirements. The aspects of due diligence not mentioned below are addressed by the Proposal in a manner consistent with current practice.

1. Environmental Professional

The current ASTM standard only includes a general requirement that the professional performing the assessment have the training and experience necessary to do so. The Committee concluded that it needed to establish minimum qualifications for such professionals. The Committee decided on a sliding scale of requirements for full-time relevant experience running from three years for professional engineers and geologists to five years for those with a Bachelor's Degree in a relevant discipline, to ten years for those with any Bachelor's Degree in any field. The Committee decided not to recognize the many certification programs maintained by independent professional organizations. Individuals not meeting these qualifications may participate in the preparation of the report, provided they are supervised by the professional. The professional would be required to sign the report and render an opinion that the he or she meets the definition of environmental professional and that the assessment was prepared in accordance with the all appropriate inquiry standard. Prescribed language for these opinions is included in the Proposal.

2. Timing of the Inquiry

The Proposal would establish a requirement that the inquiry be performed generally no more than one year prior to acquisition of the property. With respect to certain aspects of the inquiry, such as knowledge of the purchaser and relationship of price to condition of the property, which are discussed below, information must be current at the time of acquisition. Certain other information, including interviews, lien searches, review of government records and visual inspection, must be updated if it is more than six months old. Prior studies, including those performed for the seller, can be relied upon by the professional, provided they satisfy these requirements. In contrast, the ASTM standard merely provides that assessments no more than 180 days old are presumed to be valid.

3. Objective of the Inquiry; Conditions vs. Releases

The Proposal would establish what are referred to as "performance factors" for all appropriate inquiry. The basic performance factor is that the inquiry gather the information that is required for each standard practice that is publicly available, obtainable from its source within reasonable time and cost constraints, and which can practicably be reviewed. The following are the types of information that the Proposal would require be gathered about the subject property as part of all appropriate inquiry: (1) current and past property uses; (2) current and past use of hazardous substances; (3) waste management practices that could have caused releases; (4) current and past corrective actions; (5) engineering and institutional controls; and (6) nearby properties that have conditions indicative of releases. To the extent these objectives cannot be satisfied despite good faith efforts (referred to in the Proposal as "data gaps") the report must comment on significance of their absence. The scope of information required to be assessed pursuant to the Proposal is somewhat broader than that required by the current ASTM standard. The Proposal would require that the report determine the presence of releases and threatened releases, while the ASTM standard requires that "recognized environmental conditions" be identified, which are defined by ASTM by reference to a cleanup obligation.

4. Interviews

The Proposal would place an increased emphasis on interviews of persons knowledgeable regarding the environmental condition of the property. As with the ASTM standard, an interview of the current owner and occupant would be required by the Proposal. In addition, the Proposal would require that interviews of others with relevant knowledge, such as current and past facility managers and past occupants, be conducted as necessary to meet the objectives of the inquiry. For abandoned properties, the Proposal would require that at least one neighbor should be interviewed. In the case of properties having more than one owner or occupant, the major occupants using hazardous substances should be interviewed. The Proposal does not suggest a set of questions; rather, the questions required to be asked would depend on site-specific conditions and the extent of the professional's prior knowledge.

5. Record Searches

The ASTM standard requires identification of historic uses back to 1940 or the property's first obvious use, whichever is earlier. By contrast, the Proposal makes no reference to obvious use. The Proposal would require inquiry relying on title documents, and use records, aerial photos, fire insurance maps and historical practices as far back as the property is known to have contained structures or to have been first used. As a result, particularly for properties with long histories, it may be necessary for the professional to invest more time identifying the earliest structure or first use. With respect to nearby properties, unlike the ASTM standard, the Proposal would allow minimum search distances to be adjusted at the discretion of the environmental professional to account for physical conditions and land use.

6. Title Searches

Title searches are identified by the ASTM standard as one possible source of information regarding historical uses, but it is left to the user of the assessment to conduct the title search and provide it to the environmental professional, which under current practice often is not done. The Proposal would specifically require that a search for recorded environmental liens be conducted and provided to the environmental professional. Moreover, the professional would not be able to render the required opinion without the title search. Accordingly, once the standard is formally adopted, it will be important that the party requesting an assessment order a title search early in the process and make it available to the environmental professional to use as part of the investigation of historic uses.

7. Visual Inspection

The Proposal identifies the visual inspection of the property as the most important aspect of all appropriate inquiry. For that reason, the Proposal requires that the visual inspection be performed personally by the environmental professional signing the report, rather than merely under the professional's supervision. Since visual inspections currently are often performed by persons not qualified as professionals under the Proposal, this change is likely to increase the cost of assessments. An inspection is not required in the rare circumstance in which access to the property is denied despite good faith efforts to obtain access. In that instance, an inspection must be conducted from the perimeter of the property. In contrast to current practice, which requires only that obvious conditions on adjoining properties be inspected, the Proposal also specifically requires that all adjoining properties be visually inspected from the subject property's boundary.

8. Relationship of Price to Value if not Contaminated

The ASTM standard requires that price be addressed only where it is known to be less than that of comparable properties. The Proposal, however, would require a determination of whether the price reflects market value. An appraisal is not required, and the objective of this determination is not to ascertain the exact value of the property. Like the title search, this aspect of all appropriate inquiry may be performed by the purchaser and provided to the environmental professional.

9. User Obligations

The Proposal would specifically require that the party relying on the assessment satisfy certain obligations. These obligations include conducting a title search, and identifying any specialized knowledge regarding the property, commonly known information and the relationship of price to value. Currently many assessments are prepared without the benefit of this information. In view of the opinion they must render, environmental professionals are likely to specifically request this information in writing from the user.

10. Degree of Obviousness of Contamination

While the Proposal does not address the circumstances in which sampling would be appropriate, it implies strongly that if contamination is obvious, sampling should be conducted as the next reasonable step and that failure to do so would jeopardize the defenses that may otherwise be available.

Conclusion

In anticipation of EPA's adoption of the all appropriate inquiry standard, purchasers of property, lenders and environmental consultants should become familiar with the Proposal so that they will be in a position to comply with it as soon as it is finalized. Purchasers should take steps to ensure that the consultants they use are familiar with the new standard and that all environmental assessments conducted following its adoption in fact comply and, just as importantly, say they comply with the new standard so that they can avail themselves of the bona fide purchaser defense. Purchasers should expect that the new standard will result in a modest increase in the cost of assessment. Lastly, purchasers should be prepared to satisfy their increased obligations under the new standard with respect to title searches, price and specialized knowledge.

Kermit Rader is a Partner in the Environmental & Land Use Practice Group at WolfBlock. His practice focuses on the environmental aspects of real estate and corporate transactions, regulatory compliance counseling and remediation issues

Please email the author at krader@wolfblock.com with questions about this article.