Look Before You Leap - New Hurdles For Brownfields Re-Development

Saturday, April 1, 2006 - 01:00

Introduction

Recent developments in environmental law are having a significant impact on real estate transactions involving contaminated and/or potentially contaminated properties. Since the late 1990's, policymakers have been pushing for new development projects at "brownfields" sites instead of developing the remaining "greenfields" and open space. New federal legislation was passed to provide incentives for brownfields re-development to limit and contain sprawl and provide for liability protections to developers and purchasers.

As a result of this policy initiative and federal legislation, EPA was tasked with drafting a new due diligence standard that developers must meet to gain federal liability protection when purchasing contaminated sites. While the intent of federal legislation was to make brownfields more attractive, EPA's new due diligence standard will result in increased costs and lead times associated with pre-purchase environmental due diligence. To complicate matters further, EPA has issued a new policy initiative that may increase environmental risks and future costs at certain brownfields sites for property owners post-purchase. Moreover, recent court decisions have not helped matters for brownfields, making voluntary cleanups less attractive and recovery of cleanup costs more uncertain.

This article provides a brief overview of certain issues that may significantly impact the manner and means by which transacting parties approach pre- and post- purchase due diligence and conduct in order to assess and manage environmental risk in brownfields re-development.

The All Appropriate Inquiry Rule - Raising The Bar on Due Diligence

In 2001, the Brownfields Revitalization and Environmental Restoration Act (the "Brownfields Act"), amended the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and mandated that EPA promulgate new federal due diligence standards for real estate transactions. On November 1, 2005, EPA published its final rule setting forth federal standards for conducting "all appropriate inquiries" ("AAI" or the "Rule") prior to the purchase of property.1 The AAI Rule establishes the level of inquiry necessary for a purchaser to qualify for a defense to potential CERCLA liability for environmental cleanup. The Rule is much anticipated, as it replaces and updates the Phase I Environmental Site Assessment process that industry has been using for years in property transactions.

The final AAI Rule becomes effective November 1, 2006 and will replace the former pre-acquisition due diligence standards under ASTM E1527-00 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process. Until then, the interim standard for properties purchased after May 31, 1997 remains ASTM E1527-00. After November 1, 2006, parties must comply with the final AAI Rule2 in order to be eligible for one of the three CERCLA liability defenses: innocent landowner; contiguous property owner; and bona fide prospective purchaser ("BFPP").3

The AAI Rule sets forth additional actions, responsibilities, and qualifications on those performing due diligence beyond the prior ASTM standard for Phase I Studies. The following list describes several critical new AAI requirements:4

1. The Rule requires that Environmental Professionals ("EPs") who conduct and/or have primary responsibility for the investigation have specific levels of education, licensing and/or experience.

2. The Rule requires mandatory interviews with current owners and occupants of the subject property. The Rule also requires interviews with prior owners/ occupants or neighboring property owners in certain instances.

3. The Rule requires a more detailed review of site historical records, including "commonly known or reasonably ascertainable information" and tribal and local government records in addition to federal and state records, as well as searches for recorded environmental cleanup liens.

4. The Rule requires a visual inspection of the subject property and adjoining properties. There is a limited exemption if the subject property cannot be visually inspected.

5. The Rule requires that the EP address all data gaps.

6. The Rule requires consideration of the relationship between the purchase price and the fair market value of the property if the property were not contaminated.

The requirement that the EP identify and opine on the significance of data gaps could have a profound impact on the cost and timing of real estate transactions. Under AAI, EPs may be more cautious when assessing the environmental condition of properties than under the prior ASTM standard for a Phase I Study. The enhanced requirements in the Rule will likely lead to more costly and time consuming Phase I studies and more frequent EP recommendations for Phase II site assessments. Although the Rule does not technically require a Phase II site assessment to meet AAI, prospective purchasers interested in obtaining CERCLA liability protection may have no choice but to conduct a Phase II site assessment on a property if the EP identifies data gaps that preclude him/her from confirming the absence of a release or threatened release of a hazardous substance.

Post-Purchase Obligations - "It's Not Over 'Til It's Over"

Pre-purchase AAI may assist a purchaser in securing federal liability protection, but it does not guarantee that once the purchaser becomes the property owner it will retain liability protection under CERCLA. Rather, a brownfields purchaser must maintain its protected BFPP status by meeting certain conditions with respect to post-purchase behavior. In order to maintain the CERCLA liability defense as a BFPP, a property owner must satisfy "reasonable steps" to stop any continuing release, prevent threatened future releases, and prevent or limit exposure to any previously released hazardous substance. While the scope and requirements for fulfilling the "reasonable steps" requirement vary from site to site and are generally undefined, parties seeking BFPP status usually inherit long term maintenance and monitoring obligations that continue for as long as they own the property. The "operation and maintenance" phase of a cleanup may pose future risk and uncertainty for brownfields sites under EPA's new strategy for post-construction cleanup sites.

EPA's Final National Strategy To Manage Post Construction Completion

On October 12, 2005, EPA issued its Post Construction Completion ("PCC") Strategy, which focuses on the effectiveness of remedial measures to protect human health and the environment at Superfund sites.5 The PCC Strategy sets forth five (5) broad goals:

(1) Ensure that remedies remain protective and cost effective.

(2) Ensure that institutional controls required as part of the remedy are effectively implemented (e.g. deed notice or other site controls).

(3) Assure adequate financing and capability to conduct post construction completion activities.

(4) Support appropriate reuse of sites while assuring remedy reliability.

(5) Improve site records management to better ensure remedy reliability.

Within the next five years, EPA plans to evaluate all Superfund construction complete sites in accordance with these goals. To the extent EPA determines that a site remedy is inadequate, EPA may re-open Records of Decisions ("ROD") on cleanups and impose further removal or remedial measures. Thus, the PCC Strategy poses a number of concerns for responsible parties and developers. First and foremost is the potential for EPA to re-open remedies to ensure that cleanups remain protective. Whether the PCC Strategy leads to re-opening cleanups may be influenced by new technologies and cleanup standards that arise after remedial construction has been completed. This policy may expose responsible parties and property owners at brownfields sites to additional environmental and financial risk in the future, years after the cleanup is complete.

In addition, the PCC Strategy requires financial assurance to guarantee the long-term maintenance and monitoring at sites to ensure the cleanup is effective and remains protective of human health and the environment. Overall, the PCC Strategy increases future costs and uncertainty for developers at brownfields properties and property owners because of the risk that EPA could re-open past cleanup decisions.

Developing Without A Net? - Voluntary Cleanups Post- Aviall

In 2005, the United States Supreme Court reversed 25 years of Superfund law regarding contribution for private party cleanups in Cooper Industries Inc. v. Aviall Services Inc.6 As a result of Aviall, a potentially responsible party ("PRP") who undertakes a voluntary cleanup of a property is no longer entitled to bring a contribution action against other PRPs under Section 113 of CERCLA, unless they were sued under Section 106 or 107 of CERCLA or enter into an administrative settlement or judicial order. This decision may leave some parties unable to recover response costs from other PRPs under the federal Superfund law. Although it may still be possible for a party to recover cleanup costs by pursuing a section 107(a) CERCLA cost recovery claim and/or under state law, Aviall has had a chilling effect on voluntary cleanups.

Given the additional requirements for pre-purchase due diligence, uncertain post-purchase obligations and the threat of re-opening cleanups, and the potential unavailability of contribution claims, it is critical that developers and prospective purchasers identify, evaluate, manage and allocate environmental liabilities and future financial risk as early as possible in a brownfields transaction.

Conclusion

As a result of EPA's new AAI Rule, the PCC Strategy, and the Aviall decision, the cost of doing business both prior to and post purchase of contaminated or potentially contaminated properties will undoubtedly increase. A proactive approach is recommended to identify any environmental issues early in the process in order to adequately manage risk, allocate liability for cleanup, and reduce uncertainties concerning future remedial obligations. In sum, those involved in brownfields transactions must undertake more time-consuming, complex, and costly investigations to gather sufficient information to fully evaluate and address environmental issues for re-development to successfully occur.

William S. Hatfield and Camille V. Otero practice in the Environmental department at Pitney Hardin LLP, where Mr. Hatfield is a Partner and Ms. Otero is an Associate. This article represents only the authors' opinions and does not necessarily reflect the views of Pitney Hardin or any of its clients.

Please email the authors at whatfield@daypitney.com or cotero@daypitney.com with questions about this article.