Expanded Site Assessments Required Under EPA's Proposed "All Appropriate Inquiry" Due Diligence Standard - Part II

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":

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• An OPINION as to whether the inquiries conducted identified conditions indicative of releases or threatened releases;⁶

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• An OPINION as to whether there were any data gaps and an assessment of the significance of any data gaps on the ability of the environmental professional to render the first opinion;

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• A DECLARATION as to whether the inquiries were conducted in conformance with the standards and practices set forth in the rule; and

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• A DECLARATION that the individual signing the report meets the definition of "Environmental Professional" as defined in the rule.⁷

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• No Guarantee of Results: No one should rely on a Phase I Report as a guarantee that property is uncontaminated. There is no "certification" required from the Environmental Professional as to the accuracy of the results of the report. A Phase I site assessment is an indicator of whether there have been releases at the site using "reasonably ascertainable" information. It does not mandate testing, nor does it thoroughly investigate the potential for non-compliance with applicable regulatory requirements that could expose a buyer who continues such operations to penalties.

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• What Are the Qualifications of an Environmental Professional: A controversial issue has been defining the mix of professional degrees, experience and other qualifications needed to perform pre-acquisition due diligence.⁸ No professional or trade association certifications are recognized in the draft as sufficient, alone, to qualify. The rule only requires that the Environmental Professionals self-declare that their qualifications meet the criteria.⁹

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• Landowner or Purchaser May Perform Some Activities: There are several responsibilities that are not typically within the purview of an Environmental Professional that may require that the user supply certain information or employ other experts, such as:

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• Information showing the relationship between the purchase price to the fair market value of the subject property if the property were not contaminated;

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• An assessment of commonly known or reasonably ascertainable information about the property;

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• Information about whether the purchaser/landowner has specialized knowledge or experience; and

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• Documentation showing the existence of any liens filed against the property.¹⁰

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.

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• Reliance on Prior Reports: Information from prior site investigations must be updated if it was collected more than 180 days prior to the date a purchaser acquires title to the property. However, certain information from prior reports cannot be transferred to the new buyer, and any new conditions or events must be considered.¹¹

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• What Are the New Substantive Elements: Under the proposed rule, a wider range of individuals and sources of information concerning the target property - and properties contiguous to it - must be consulted. Those performing all appropriate inquiries must identify institutional controls (non-engineered controls such as deed restrictions) that help prevent exposure to site conditions by restricting certain activities, and interviews with past as well as current facility managers with relevant knowledge of the property as far back as possible concerning chemical handling, storage, treatment and disposal. Uses of contiguous properties must also be visually assessed (from the property line or other off-site vantage points if direct access is not feasible) and a broader array of governmental records must be evaluated both as to the subject property and adjoining properties.¹²

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• New Requirement to Identify Data Gaps: If data gaps of significance are determined to exist during the due diligence process, and they cannot be resolved by additional Phase I tasks, they must be identified in the report, and will likely lead to more Phase II's.¹³

IV. What Are Some Key Differences From ASTM Phase I

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• The ASTM Phase I enumerates specific state and federal electronic databases to be reviewed in the government document portion of the assessment, whereas the proposed rule identifies broad categories of documents to be reviewed with no limitation (other than geographic distance from the site) as to time frame.

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• Under the ASTM standard Recognized Environmental Conditions, which included conditions that potentially gave rise to an enforcement action or cleanup obligation if it were brought to the attention of a regulatory agency, had to be identified. The AAI rule focuses instead on releases or threatened releases of hazardous substances or petroleum, only if such releases would pose a threat to human health or the environment. This broadens the analysis an Environmental Professional must perform.

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• The new rule lists engineering and institutional controls that must be assessed, which were not previously included in the ASTM standard.

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• The ASTM Phase I standard differs from the proposed rule as to the visual inspection required for surrounding parcels. The ASTM standard views adjoining parcels from the target parcel, while the AAI rule requires other vantage points in addition to the target parcel which may require negotiation of site access agreements.

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• The content of the written report is much broader, in that the ASTM Phase I standard only requires an opinion as to whether a "Recognized Environmental Condition" is potentially present and its potential impact on the property. The rule requires the report to identify data gaps and their significance, the qualifications of the professional, information regarding the purchase price of the property relative to its uncontaminated value, and the relative sophistication of the buyer.V. Analysis Of Controversial Issues And Comments

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).
³Id. 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
⁶Extremely 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.
⁷Id. at 52551; proposed rule § 312.21(c).
⁸Id. at 52552; proposed rule §312.10(b).
⁹The 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).
¹²Id. at 52556; proposed rule § 312.20 through 312.27 generally.
¹³Id. 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.