No one wants to buy into a Superfund site. However, when buying or investing in property you can never be absolutely certain of what's in the ground. So how do you protect yourself? What does it take to meet a due diligence requirement? When have you done enough? It just got clearer.
The Environmental Protection Agency (EPA) recently published a final rule establishing an “all appropriate inquiry” (AAI) standard. The rule addresses minimum due diligence for so-called innocent or contiguous landowners as well as bona fide prospective purchasers seeking liability protection from the reach of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA, commonly known as Superfund). The AAI Rule will take effect on November 1, 2006, but can be utilized now!
On January 11, 2002, President Bush signed into law the Small Business Amendments Liability Relief and Brownfields Revitalization Act. The act provided for protections from liability under CERCLA for purchasers of properties ultimately found to be contaminated by hazardous substances. Hazardous substances are expressly defined under CERCLA and generally include a broad range of things, but do not include standard petroleum products. To qualify for the act’s protections, prospective purchasers must take reasonably diligent steps, including undertaking all appropriate inquiry to determine whether property may be contaminated.
Environmental professionals hired to undertake all appropriate environmental inquiries must now conduct interviews with a wider range of individuals than they would have had to under the prior American Society of Testing and Materials (ASTM) “Phase 1” guidelines. They must also undertake a more thorough visual inspection of properties adjoining the subject property, review a broader array of governmental records and expressly acknowledge areas of uncertainty that may have an effect on their conclusions.
Investigation and Assessment of Potential Environmental Liability
The whole idea of AAIs is for a prospective purchaser to investigate potential environmental contamination and assess and minimize future potential liability. Under the prior ASTM Phase I standard, identification of “recognized environmental conditions” (RECs) was required: “the presence or likely presence of any hazardous substances … on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances … into structures on the property or into the ground, ground water, or surface water of the property.” An REC would not include an insignificant or de minimis condition.
The new AAI rule replaces the REC concept with the “identification of conditions indicative of releases and threatened releases of hazardous substances on, at, in, or to the subject property.” The AAI rule, however, also includes a de minimis exception where hazardous substance concentrations “generally would not pose a threat to human health or the environment.”
Conducting an Environmental Inquiry
The new AAI rule requires that the environmental professional’s inquiry be conducted “within one year prior to the date of acquisition of the subject property.” The environmental professional must prepare a written report documenting the results of the environmental inquiry which must include:
- Interviews with past and present site owners, operators and/or occupants;
- A review of historical sources of information;
- A review of federal, state, tribal, and local government records;
- Visual inspections;
- Consideration of commonly known or reasonably ascertainable information within the local community about the subject property; and
- Consideration of how obvious the presence or likely presence of contamination is or may be.
If the property has multiple occupants, the environmental professional must interview the major occupants, as well as all occupants likely to use, store, treat, handle, or dispose of hazardous substances, or who have likely done so in the past. To the extent necessary to identify conditions indicative of “releases or threatened releases” of hazardous substances, the environmental professional must also interview one or more of the following persons: 1) current and past facility managers with relevant knowledge of uses and physical characteristics of the property; 2) past owners, operators or occupants of the subject property; or 3) employees of current and past occupants of the subject property.
In seeking to define what is meant by the term “environmental professional,” EPA ultimately adopted a range of acceptable qualifications, including various combinations of licensure, experience and education. The environmental professional’s written report must include a statement certifying that the author meets this definition. However, the environmental inquiry need only be conducted “under the supervision or responsible charge of, an environmental professional.”
The prospective purchaser, however, cannot simply turn everything over to a designated environmental professional. He or she must search or cause a search to be conducted of environmental cleanup liens against the subject property. The prospective purchaser also is obligated to give consideration to specialized knowledge of the subject property, the surrounding area, any other relevant experience, the relationship of the purchase price of the subject property to its value if it were not contaminated and commonly known or reasonably ascertainable information within the local community.
Meeting the requirements of EPA’s new AAI rule simply makes sense whether or not contamination is thought to exist and likely will become increasingly common as a standardized real estate valuation and assessment tool.
Prospective purchasers should also be aware that conducting AAI is only the first step in obtaining liability protection under CERCLA, a point that EPA made consistently throughout the promulgation process and in the preamble to the AAI rule. The act also imposes subsequent obligations, including: 1) complying with land use restrictions and ensuring the continuing effectiveness and integrity of institutional controls; 2) taking “reasonable steps” to prevent future potential releases of hazardous substances; and 3) complying with any CERCLA authorized government requests or demands and providing legally required notices (such as notifications of releases of hazardous substances).
The new AAI standards go further than the prior ASTM guidelines and have the advantage of being final EPA rules promulgated pursuant to federal law. Properly undertaking all appropriate inquiry should go a long way toward alleviating the uncertainty associated with property contamination and potential Superfund liability. Real estate professionals of all stripes would be well-advised to become more familiar with this important new development — no pun intended.