by Karen Bjorkman
Effective November 1, 2006, the United States Environmental Control Agency ("EPA") instituted new environmental due diligence rules and guidelines applicable to all commercial real estate transactions. The new rules establish the "All Appropriate Inquiry" standard for landowners and lenders looking for a safe harbor defense under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA").
The goal of a pre-purchase environmental assessment (a "Phase I") is, and continues to be, avoidance of unwelcome surprises in what appears, pre-purchase, to be a clean site. The fundamental rule that we've all lived by in the past remains: CERCLA imposes liability on past and present owners and operators of real property for environmental contamination found on their property, regardless of fault or negligence. This general rule is subject to statutory exclusions, including defenses for bona fide prospective purchasers, innocent landowners, and contiguous property owners. In addition, however, the new rules require that, among other things, prospective property owners and operators must conduct all appropriate inquiry before acquiring the property (or placing the mortgage), in order to qualify for certain defenses which may be available under CERCLA.
What does “All Appropriate Inquiry” mean? Initially, it means that a Phase I report is essentially mandatory to benefit from certain CERCLA defenses. In addition, the Phase I report must be conducted or supervised by an "environmental professional," as defined by the new EPA standards.
Under the EPA's revised rules, the inquiry level required to create the new Phase I reports is more stringent. Phase I reports are now required to include: (i) interviews with owners, operators and occupants of the property (past and present), (ii) review of historical sources of information, dating back to the initial development of the property, (iii) searches for recorded environmental cleanup liens, (iv) reviews of federal, state, tribal and local governmental records, (v) visual inspections of the subject and adjacent real estate, (vi) known or reasonably ascertainable information about the real estate, (vii) whether the purchase price for the real estate reasonably reflects the fair market value of the property (without any existing contamination), (viii) the degree of obviousness as to the likely (or unlikely) presence of any environmental contamination, and (ix) the appropriate method of investigation to discover the same. Finally, it imposes a flexible standard on the availability of a safe harbor depending on the specialized knowledge or experience of the party seeking the protection. The scope of Phase I reports is also required to meet the broader requirements of the new ASTM standard E1527-05, which now includes assessment for petroleum products (previously excluded from the scope of CERCLA's definition of hazardous substances). As a result of these new requirements, the cost of a Phase I report will certainly increase.
While the EPA's new rules don't impose any new governmental reporting or disclosure requirements, the imposition of the new “environmental professional” definition means that the consultants who prepare Phase I reports must meet certain requirements which document the consultant's qualifications, their opinion as to whether the inquiry has identified conditions indicative of releases or hazardous substances on the real estate and an identification of any “data gaps” in the information developed as part of the inquiry which may have affected the conclusion. This will likely impose more checking and double-checking on the environmental consultant doing the research, thereby increasing the time needed to get a complete and accurate report.
Compliance with the new All Appropriate Inquiry standard is a critical and necessary step to enable prospective purchasers and operators to qualify for certain CERCLA defenses and will invariably produce better information about the environmental condition of real property which is the subject of a prospective transaction. It should also be noted that the popular “Reliance Letters” often used and relied upon in order to “reuse” an existing environmental report may no longer be independently sufficient. Existing reports will need to be updated to comply with the new standards. It's important that all purchasers, operators and lenders consider these new requirements and work with counsel and their environmental consultants to ensure that their pre-acquisition due diligence satisfies the new EPA rules.
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