Recent statutory changes to federal environmental law and expected
regulatory revisions may increase the burden on purchasers of real estate
seeking to avoid liability for past contamination of the property being
acquired.
This story begins on December 11, 1980, when President Carter
signed into law the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. § 9601, et seq., commonly known as "CERCLA" or
"Superfund." Section 107 of CERCLA makes the current owner or operator of a
property, among others, liable for the release or threatened release of
hazardous substances from the property, even if they had nothing to do with the
actual contamination of the site.
In 1986, Congress partially offset the
harshness of this liability scheme by adding an "innocent purchaser defense": a
purchaser who, at the time acquiring the property, did not know and had no
reason to know that the property was contaminated is not a "responsible party."
Superfund Amendments and Reauthorization Act of 1986, P.L. 99-499, § 101(f). To
establish that it had "no reason to know" of the contamination, the purchaser
must conduct "all appropriate inquiry into the previous ownership and uses of
the property, consistent with good commercial and customary practice" Id.
Congress did not elaborate on what it meant by "all appropriate inquiry,"
although it instructed courts to take into account any specialized knowledge or
experience on the part of the purchaser, the relationship of the purchase price
to the value of the property if uncontaminated, commonly known or reasonably
ascertainable information about the property, the obviousness of the presence or
likely presence of contamination at the property, and the ability to detect such
contamination by appropriate inspection. Id.
Court decisions have not
precisely determined the degree of pre-purchase investigation that will be
adequate to meet the "all appropriate inquiry" standard. Compare U.S. v.
Pacific Hide & Fur Depot, Inc., 716 F. Supp. 1341, 1348-49 (D. Idaho
1989)(no inquiry constitutes all appropriate inquiry under circumstances of the
case), and Foster v. U.S., 922 F. Supp. 642, 654-55 (D. DC 1996)(given
the commercial/industrial setting of the site, the relative ease with which
contamination at the site could have been discovered, the collective real estate
experience of purchasers, and the disparity between the purchase price and the
appraised value, it was incumbent on purchasers to investigate; failure to
conduct any environmental inspection not "all appropriate inquiry"); and
American National Bank and Trust Company of Chicago v. Harcros Chemicals,
Inc., 1997 WL 281295, at *14 (ND Ill. 1997)(reliance on one letter, without
conducting further investigation, does not constitute "all appropriate
inquiry").
In 1997, ASTM (formerly the American Society for Testing and
Materials) issued Standard E 1527-97 Standard Practice for Environmental Site
Assessments: Phase I Environmental Site Assessment Process. Its stated purpose
was to define good commercial practice for conducting an environmental site
assessment of a parcel of commercial real estate to permit the user to qualify
for the "innocent landowner defense." E 1527-97, par. 1.1 (Standard E 1527 has
since been updated and expanded; the current standard is E 1527-00).
Congress recently attempted to provide additional definition to the all
appropriate inquiry standard in the Small Business Liability Relief and
Brownfields Revitalization Act, P.L. 107-118(the "Act"), signed by President
Bush on January 11. Section 223 of the Act substitutes a new subparagraph
101(35)(B) in CERCLA, which states that, to establish that a landowner had no
reason to know that the property was contaminated, the owner must have, on or
before the date that the owner acquired the facility, carried out "all
appropriate inquiries, ... into the previous ownership and uses of the facility
in accordance with generally accepted good commercial and customary standards
and practices." Act, § 223(2). Congress directed the Administrator of the
Environmental Protection Agency ("EPA") to establish standards and practices for
the purpose of satisfying the "all appropriate inquiry" requirement. Id. The
regulations establishing these standards and practices were to be adopted no
later than two years after the date of enactment of the Act.
Congress
imposed interim standards. For properties purchased prior to May 31, 1997,
courts need consider only four criteria in determining whether the purchaser
satisfied the all appropriate inquiry requirement (the four criteria in the
original CERCLA statute noted above). For properties purchased between May 31,
1997, and the date EPA issues its regulations defining "all appropriate
inquiry," compliance with ASTM Standard E 1527 satisfies the "all appropriate
inquiry" requirement.
To develop a standard for "all appropriate
inquiry," EPA established a panel, which issued its Negotiated Rulemaking
Committee (draft) Final Consensus Document (the "Consensus Document") on
December 5, 2003. Although explicit that it is not a proposed or final rule, the
draft can give some insight into the rules that are expected to be issued by the
EPA in 2004.
The environmental assessment requirements described in the
Consensus Document differ in several significant ways from the requirements of
ASTM E 1527. Under the Consensus Document, "all appropriate inquiry" as required
by CERCLA must include an "inquiry" by an "environmental professional." Such
inquiry must include interviewing the current owner and occupant of the subject
property. Consensus Document, § 312.23. If the property has multiple occupants,
the environmental professional shall interview major occupants, as well as
occupants likely to use, store, treat, handle or dispose of hazardous
substances, or those who have likely done so in the past. Id. The inquiry by the
environmental professional also should include "to the extent necessary to
achieve the objectives and performance factors" contained in the Consensus
Document, interviews with current and past facility managers, past owners and
occupants, or employees of current and past occupants.
ASTM Standard E
1527, on the other hand, requires that the current owner be asked to identify a
"key site manager;" once that person is identified, the person conducting the
site visit is required to make at least one reasonable attempt to arrange an
appointment with the key site manager. If unsuccessful, the environmental
professional must ask whether a key site manager or other person with good
knowledge of the uses and physical characteristics of the property is available.
Put simply, the Consensus Document requires an interview with the owner
of the property, ASTM E 1527 does not. In the case of properties owned by
corporations or other institutional owners, the Consensus Document is unclear
who the human being is who must be interviewed in order to qualify for the
innocent purchaser defense.
The Consensus Document also requires that
historical documents and records must be reviewed, including aerial photographs,
fire insurance maps, building department records, chain of title documents, and
land use records. Consensus Document, § 312.24. They must go back as far as the
time when the subject property first contained structures or was first used for
residential, agricultural, commercial, industrial, or government purposes. Id.
For the Chicago area, for example, a review of historical records might have to
go back to the early- to mid-19th Century, about a century earlier than current
environmental assessments typically reach. In contrast, the ASTM standard
requires that historical use information be reviewed from the present to the
property's obvious first developed use or 1940, whichever is earlier. The
standard notes that reviewing records predating 1900 would be necessary only if
the data is reasonably attainable and likely to be useful. ASTM Standard E 1527,
§ 7.3.
The Consensus Document also requires a visual, on-site inspection
of the subject property. Where an on-site inspection cannot be performed because
of physical limitations, remote or inaccessible location, or other inability to
obtain access, an on-site inspection is not required, provided that a good faith
effort to obtain access has been made; the Consensus Document states explicitly
that the "mere refusal" of a voluntary seller to provide access does not
constitute an excuse waiving the on-site inspection requirement. The Consensus
Document also requires that adjoining properties be inspected from the subject
property line, public rights of way, or other vantage points. Consensus
Document, § 312.27.
The ASTM standard requires that the environmental
professional shall visually and physically observe the property and all
structures on the property. ASTM Standard E 1527, § 8. The periphery of the
property shall be observed, as well as the periphery of all structures on the
property, and the property should be reviewed from all adjacent public
thoroughfares. The standard also states that accessible common areas of the
interior of structures on the property should be visually or physically
observed. The environmental professional must also document any limitations on
his or her ability to physically inspect the property. The environmental
professional must note current or past uses of adjoining property, to the extent
that they are observed during the site visit or identified during the records
review, but the environmental professional is not affirmatively obligated to
gather such information under the ASTM standard.
The Consensus Document
requires that the purchaser and the environmental professional take into account
"commonly known or reasonably ascertainable information within the local
community" about the subject property. Consensus Document, § 312.30. Sources of
such commonly known or reasonably ascertainable information include current
owners and occupants of the property, local and state government officials,
"others with knowledge of the subject property," and "other sources of
information (e.g., newspapers, websites, community organizations, local
libraries and historical societies)." Id.
The requirements of the ASTM
standard in this regard are much more limited. The environmental professional is
required to contact local government officials, in person or by telephone, and
ask questions to identify recognized environmental conditions on the subject
property. ASTM Standard E 1527, § 10.
In sum, purchasers of property who
are currently following ASTM Standard E 1527 meet the "all appropriate inquiry"
standard under CERCLA. Regulations defining all appropriate inquiry for purposes
of qualifying for CERCLA's innocent purchaser defense will, if they follow the
recommendations in the Consensus Document, require a more extensive
investigation into past uses of real property than is the current practice under
the ASTM Standard.
Published April 1, 2004.
