Part I, which appeared in our April 2005 issue, focused on the innocent landowner defense which protects individuals who, despite conducting inquiries into the historical uses of a property, discover site contamination after acquiring the property. Part II describes EPA's proposed "all appropriate inquiry" standard and analyzes the cost and timing considerations that will affect real property transactions.
III. Key Features of EPA's Proposed Rule1
(a) What Is The Effective Date: The rule will apply to properties acquired after it is finalized, and will supersede all prior standards, including the ASTM Phase I standard. In the interim, buyers of properties acquired after May 31, 1997 and before the rule becomes final must use the ASTM Phase I standard. Properties acquired prior to May 1997 must follow the statutory requirements outlined in the CERCLA amendments.2 In all cases, the due diligence must be conducted at or before taking title to the property and within ONE YEAR prior to taking title to the property.3
(b) Are There Any New Reporting Obligations: The rule would not impose any new reporting or disclosure obligations; instead it identifies what must be investigated and included in the report in order to document that "all appropriate inquiry" has been performed in the context of private transactions in order to qualify for liability defenses. However, all existing federal, state and local release reporting requirements must be complied with in connection with any conditions found.4
(c) What Must Be In The Written Report: The rule requires a written report documenting the results of all appropriate inquiries and any conclusions regarding conditions indicative of releases or threatened releases at the property. The report must be signed by an "Environmental Professional" who must express specific opinions (see below).5 The "user" of the report (the buyer, seller, or lender) may then use the report to document the inquiries that it conducted and the findings for purposes of qualifying for any liability defense.
(f) What Opinions Are Required Of The Environmental Professional: The written report must include the following opinions or declarations of the "Environmental Professional":
Environmental Professionals will impose liability disclaimers or contractually place the duty on the user to supply information upon which the Environmental Professional may rely in forming opinions about these matters.
IV. What Are Some Key Differences From ASTM Phase I
Reaction to the proposed rule has been mixed. Lenders, consultants and prospective purchasers have lauded the greater clarity of how parties can qualify for the liability defense,14 and others support the integrity of having established criteria for environmental professionals.15 Also, having a regulatory definition of "all appropriate inquiry" instead of a standard practice adopted by a private standardization organization enhances the certainty that courts will follow it in resolving disputes. However, some are struggling with the added lead time and expense of meeting these expanded requirements, and the lack of compelling reason to overturn a process that has worked well to date.16 Government databases for some of the documentation required under the proposed new rule (such as for engineering and institutional controls) are still under development and "at least five years away."17
Further, the expected conservatism among lenders and purchasers in connection with anticipated data gaps is likely to result in more numerous Phase II's at additional expense. Typical turnaround times for conducting Phase II work, could range, at a minimum, from 30 to 60 days, and, depending on work scope, likely add thousands of dollars. The proposed rule still does not provide for assessment of potential risks posed by issues such as lead-based paint, wetlands or endangered species, urea formaldehyde foam insulation, or molds. Thus, while the proposed rule has much to recommend it, parties should expect delays, additional costs, and more potential unanswered questions.
1 The Federal Register Notice explaining the proposed rule contains over forty pages of fine print and it references other documents, such as the Report of the Negotiated Rulemaking Committee. Therefore the points summarized below hit the highlights but do not cover all of the details that may potentially affect property buyers.
2 Id. at 52545; 68 Fed. Reg. 24888 (May 9, 2003).
3 Id. at 52556; 42 U.S.C. §§ 9607(q)(1)(A)(viii) and 9601(35)(B); proposed rule § 312.20(b)(2) and (3).
4 Id. at 52551; proposed rule § 312.1(d).
5 Id. at 52551; proposed rule § 312.21
6 Extremely small quantities of contamination that do not pose a threat to human health or the environment need not be identified as a potential recognized environmental condition under either the ASTM Phase I standard or the proposed rule . Id. Also, § 3.3.31, ASTM E-1527-00.
7 Id. at 52551; proposed rule § 312.21(c).
8 Id. at 52552; proposed rule §312.10(b).
9 The standard recognizes that persons not meeting the qualification criteria for an Environmental Professional may "contribute" to the process under the supervision of someone who does qualify . Id. at 52552 to 52555.
10 Id. at 52556; proposed rule § 312.21(c).
11 Id. at 52556; proposed rule § 312.20(b)(2) and (3).
12 Id. at 52556; proposed rule § 312.20 through 312.27 generally.
13 Id. at 52556; proposed rule § 312.21(c)(2)
14 "EPA's Proposed 'All Appropriate Inquiry' Rule Will Change The Way Environmental Site Assessments Are Performed," D. Lourie, J. Johnston (citing the approval of the Association of Soil and Foundation Engineers [now "ASFE"], American Society of Civil Engineers and National Ground Water Association for the proposed rule); "AAI Needs More Clarification," B. Trilling, Esq., Brownfield News, Issue 1, Feb. 2005 (Letter to Editor) [inviting EPA to respond with clarity to issues raised on behalf of the National Association of Industrial and Office Properties and other participants in the stakeholder process.]
15 "All Appropriate Inquiry Will Bring Integrity," D. Lourie, P.E, Brownfield News, Issue 5, Dec. 2004, at p. 42.
16 "If It Ain't Broke, Why Are We Fixing It?" L. Hoffman, Brownfield News, Issue 5, Dec. 2004, at p. 41. Virtually no one believes EPA's estimated $40-$50 of increased expense. Most consultants will acknowledge that the additional tasks and evaluations will add several hundred dollars to the cost of preparing Phase I reports alone.
17 Id., citing Tad Minkler, of First Search Technology Corporation, a national environmental data provider. A September 2004 EPA guidance document ("Strategy to Ensure Institutional Control Implementation at Superfund Sites") [OSWER No. 9355.0-106] discusses EPA's intention to create an "Institutional Controls Tracking System" for certain sites to ensure long-term durability, reliability and effectiveness of such controls, and to ensure they are publicly available.
Jean H. McCreary is a Partner and Chair of the Energy & Environment Practice Group of Nixon Peabody LLP. She has been certified by the Board of Environmental Auditor Certifications as a Certified Professional Environmental Auditor and participated in the comment process for the AAI rulemaking on behalf of three professional associations representing auditor interests. She advises clients in real estate transactions and corporate mergers and acquisitions representing the buyer, seller, lender and occasionally consulting interests.