P R O B A T E   &   P R O P E R T Y
March/April 2004
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Environmental Law Update

Environmental Law Update Editor: Rafe Petersen, Holland & Knight LLP, 2099 Pennsylvania Ave., N.W., Suite 100, Washington, DC 20006-6801, rafe.petersen@hklaw.com.

Environmental Law Update provides information on developments in environmental law as it applies to property, probate, and trust matters. The editors of Probate & Property welcome information and suggestions from readers.

EPA to Clarify Environmental Due Diligence Level Required to Reduce the Likelihood of Superfund Liability

As most sophisticated real estate professionals know, environmental due diligence is an important aspect of any real estate transaction. The reasons for this are relatively straightforward. First, the presence of contamination can lead to significant costs, delays, or at times even render a project infeasible. In addition, state and federal environmental laws are very harsh in how they allocate liability, basically holding anyone in the chain of title responsible for the presence of contamination. Consequently, obtaining a Phase I Environmental Site Assessment or some other sort of professional analysis of the environmental condition of a property is an essential component to any deal—whether it be a lease of a shopping center or the purchase of a family home.

That being said, the question often arises as to “how much due diligence is enough.” This can be key to establishing one of three potential defenses to liability (referred to as the “landowner liability protections” or “LLPs”) under Superfund (more formally known as the Comprehensive Environmental Response, Compensation and Liability Act or “CERCLA”). To date, the level of due diligence sufficient to meet the innocent landowner defense has never been clearly articulated by the U.S. Environmental Protection Agency (EPA). Instead, the question has often been answered in the courts. That is about to change, however, because the EPA is in the process of promulgating a rule that will provide a federal standard that, if met, will secure that defense for prospective purchasers. Under the rule, if such a purchaser undertakes “all appropriate inquiry” into prior ownership and use of a property at the time of acquisition, then the purchaser will not be held liable under CERCLA for undiscovered contamination when cleaned up at a later date.

Perhaps the most important impact of this new rule is on the ASTM standards. For years, the ASTM standards (the Transaction Screen and the Phase I and II Site Assessments) have been the “gold standard” for environmental due diligence—having been embraced by the real estate and lending communities and generally having been held a sufficient level of due diligence by the courts. But that appears likely to change a bit, with the “all appropriate inquiry” standard imposing different, and at times more onerous, requirements than under the ASTM standards.

The Brownfields Amendments

On January 11, 2002, President Bush signed into law H.R. 2869, the Small Business Liability Relief and Brownfields Revitalization Act (the “Brownfields Amendments”). As discussed in prior articles, under the Brownfields Amendments, bona fide prospective purchasers are exempt from Superfund liability even if they have knowledge of the existence of contamination at a site if they made “all appropriate inquiry” into the prior uses of the property in accordance with “good commercial and customary standards and practices.” The Brownfields Amendments required EPA to develop regulations to establish standards and practices for conducting “all appropriate inquiry” by January 2004. Until that time, the Brownfields Amendments designate the American Society for Testing and Materials (ASTM) Standard Practice for Environmental Site Assessment: Phase I Environmental Site Assessment Process, ASTM E 1527 (the “Phase I Standard”), as the interim standard.

The Consensus Rule

EPA decided to develop the new standards via a “negotiated rulemaking” process (“reg-neg”). As such, EPA relied on various stakeholders (25 organizations and associations) to thrash out the details of a proposed rule. In December 2003, the reg-neg committee made available the Consensus Rule (available on EPA’s web site at www.epa.gov/brownfields/regneg.htm) that was the result of several months of work. EPA will use this document as the foundation for formal public notice and comment. Although the Consensus Rule must still go out for public comment, EPA has stated that it expects there to be a need for few substantive changes to a proposed rule developed under the reg-neg process before the publication of a final regulation. Hence, the Consensus Rule gives a good idea of where EPA is ultimately headed.

Under the Consensus Rule, an “appropriate inquiry” must be based on interviews with past and present owners, reviews of historical sources, reviews of government records, visual inspections, commonly known or reasonably attainable information, and information concerning the degree of obviousness of the presence, the ability to detect the contamination, and prior reports of other consultants (depending on age and other factors). The inquiry itself must address the following:

1. current and past property uses and occupancies;

2. current and past uses of hazardous substances;

3. waste management and disposal activities that could have caused releases or threatened releases of hazardous substances;

4. current and past corrective actions and response activities undertaken to address past and ongoing releases of hazardous substances;

5. engineering controls;

6. institutional controls; and

7. properties adjoining or located nearby the subject property that have environmental conditions that could have resulted in conditions indicative of releases or threatened releases of hazardous substances to the subjectproperty.

This is a wider array of potential issues than generally identified under the Phase I Standard, requiring professionals to search a large number of potential sources of information such as land records and agency databases. As such, it could lead to increased costs and take longer to complete.

Another change is that the level of inquiry is based on “performance standards.” The professional must gather all information that is required for each of the above factors, which is publicly available or obtainable from its source within reasonable time and cost constraints and which can be practicably reviewed, and must review and evaluate the thoroughness and reliability of the information gathered. If there are “data gaps,” the professional must identify the sources of information consulted to address such data gaps and comment upon the significance of such data gaps for the ability to identify conditions indicative of releases or threatened releases. On the whole, this appears to be a heightened standard of inquiry when compared to the Phase I Standard. For example, EPA does not focus on identification of “recognized environmental conditions” (RECs). RECs are the term of art used in Phase I to indicate that the property warrants further analysis. Rather than requiring the environmental professional to identify RECs, the “all appropriate inquiry” standard would require investigation of conditions indicative of “releases” or “threatened releases” of hazardous substances. This follows the language of CERCLA, which triggers liability on the basis of a “release” or “threat of release.” Interestingly, however, subsurface investigations (Phase II) are not a required step in the inquiry.

In turn, under the Consensus Rule, persons seeking to qualify for the defense (the prospective purchaser) must provide certain information to the professional. This includes information related to environmental cleanup liens; any specialized knowledge of the subject property; information concerning the area surrounding the subject property, the conditions of adjoining properties, and any other experience relevant to identifying conditions indicative of releases or threatened releases; the relationship of the purchase price to the fair market value of the subject property, if the property was not contaminated; and commonly known or reasonably ascertainable information about the subject property. Thus, it makes clear that a sophisticated purchaser may be held to a higher standard when attempting to demonstrate that it met the “all appropriate inquiry” standard.

The end result is a written report that identifies any releases or threats of releases, discusses data gaps, and presents the qualifications of the professional. The professional must make a declaration of its qualifications and that it followed all the standards under the rule.

Persons seeking to qualify for one of the liability defenses must ensure that the investigation is undertaken by “an environmental professional.” This is defined as “a person who possesses sufficient specific education, training, and experience necessary to exercise professional judgment to develop opinions and conclusions regarding the presence of releases or threatened releases . . . to the surface or subsurface of a property, sufficient to meet the objectives and performance factors” as set forth in the rule. Among other requirements, professionals must hold certain degrees or licenses, remain current in their field, and have the equivalent of three years of full-time relevant experience.

Conclusion

Although the clarification of what level of due diligence may be sufficient to reduce the likelihood of CERCLA liability is a welcome change, EPA appears ready to expand the scope of information that must be obtained to qualify for the LLPs. This may increase costs and delay due diligence. Although the contours of the final rule have yet to be formally promulgated (it may not be finalized until the end of 2004), and the new rule is not mandatory, the downside of undiscovered contamination may be enough to cause many to insist on the expanded level of analysis. Moreover, ASTM is in the process of making changes to its Phase I Standard and such changes will likely reflect the requirements set forth in whatever is in the EPA’s final rule. The bottom line is that it is apparent that real estate professionals will soon have to alter the manner in which they conduct environmental due diligence.

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