The New Standard for “All Appropriate Inquiries”
On November 1, 2005, the United States Environmental Protection Agency (“EPA”) issued final standards for conducting “all appropriate inquiries” (“AAI”) for purposes of various defenses against liability under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). As of November 1, 2006, a prospective property purchaser must follow the federal standards – codified at 40 C.F.R. Part 312 – when conducting pre-acquisition due diligence. Adherence to these guidelines is necessary to qualify for landowner liability protections provided by CERCLA, including, among others, the “innocent landowner” and “contiguous landowner” defenses. The AAI standard also governs the site characterization and assessment activities of any party seeking a brownfields grant under CERCLA Section 104(k)(2)(B). Additionally, the conduct of AAI can allow identification of business risks arising under other environmental laws.
Background on CERCLA Liability
Since the late 1960s, all sizes and types of real estate projects have become increasingly subject to environmental regulation, and the development and redevelopment of property impacted by soil or groundwater contamination have been particular challenges. Undertaking thorough and effective environmental due diligence prior to the acquisition of real property is essential to avoid the potential for owner/operator liability under environmental schemes such as CERCLA and to identify business risks. CERCLA is especially notable among environmental laws because it imposes a standard of strict liability on property owners and operators for the cost of remediation of “hazardous substances,” regardless of whether the owner or operator actually caused the contamination. CERCLA defines “hazardous substance” broadly, but the statute excludes some pollutants, most notably petroleum.
CERCLA liability extends to all current owners and operators and to all parties who owned or operated the property at the time of disposal 1 . While well intended, this virtually unlimited imposition of liability for remediation costs imposed unacceptable risks to prospective purchasers and, in so doing, has tended to discourage property transfers and economic redevelopment.
Congress amended CERCLA to address the effects of strict liability in 1986. The Superfund Amendments and Reauthorization Act (“SARA”) created the “innocent landowner defense” to CERCLA liability. Specifically, new CERCLA section 101(35)(B) provided a defense from strict liability for persons who could demonstrate that “they did not know and had no reason to know” prior to purchasing the impacted property that any hazardous substance had been disposed of or had impacted the property. In order to qualify for this defense, property owners were required to demonstrate, among other things, that “all appropriate inquiry” into the previous ownership and uses of the property had been undertaken prior to acquisition.
Congress further amended CERCLA in 2002 to provide the “contiguous landowner” defense and to establish a “brownfields” program to encourage redevelopment of contaminated sites. The 2002 amendments also required EPA to establish the standards and practices which would constitute AAI for purposes of the innocent landowner, contiguous landowner, and participants in the brownfields program. EPA discharged that requirement by issuing the final AAI rule in 2005.
How to Maintain Eligibility for CERCLA Defenses
A. Requirements for All Appropriate Inquiries
To perform AAI essentially means to conduct a Phase I environmental site assessment (“ESA”). In fact, EPA has explicitly recognized compliance with ASTM Standard 1527-05 for Phase I ESAs as sufficient for purposes of AAI under CERCLA.
1. Documentation and Qualifications of the Environmental Professional
The final AAI rule requires a written report outlining the results of the investigation into the past uses and current condition of the property. This report must contain an opinion of an “environmental professional” as to whether the AAI identified any conditions suggesting the potential for a release or threatened release of hazardous substances that could impact the subject property. The environmental professional also must identify and comment on any data gaps that impact the ability to render such an opinion. The environmental professional must provide a declaration that he or she meets EPA’s definition of an “environmental professional,” has specific and relevant experience, and has performed all work consistent with the rule on all appropriate inquiries. EPA requires an environmental professional, or one under the professional’s direct supervision, to conduct many of the elements of AAI.
The primary objective of AAI is to identify information relating to current and past uses and conditions that could have led to the release of hazardous substances on the subject property. This information will be identified in the following ways:
Under the final rule, an environmental professional must interview current owners and occupants, current and past facility managers with relevant knowledge of the property, and neighboring owners or occupants if the property is abandoned.
An environmental professional must search historic sources, such as chain of title documents, aerial photos, and land use records, should be searched as far back in history as there is documentation that the property contained structures or was placed into use. If documentation cannot be traced back this far, it must be noted as a data gap to the inquiries.
The search for environmental cleanup liens can be the responsibility of the purchaser or the landowner, but must be provided to the environmental professional for inclusion in the report.
Review of Federal, State, and Local Records:
The environmental professional must search reasonably ascertainable government records and available lists for institutional and engineering controls at the subject property. The search must also take into account such records at other properties within specified distances from the subject property.
The environmental professional must inspect the property and adjoining properties visually.
Any specialized knowledge or experience on the part of the prospective purchaser and/or the environmental professional conducting the investigation must be considered in reaching the opinion and conclusions set forth in the report.
The final rule requires a consideration of the relationship of the purchase price to the fair market value of the property, if the property were not contaminated. The environmental professional need not conduct this element of AAI.
Commonly Known Information:
Commonly known and reasonably ascertainable information may be obtained from the owner or occupant of the property; members of the community, including neighboring property owners, government officials, or local media sources; local libraries; or historical societies.
Degree of Obviousness:
Persons conducting AAI must consider all of the information obtained during the investigation to determine whether an obvious conclusion can be drawn that there are conditions indicative of a release or threatened release of a hazardous substance.
All appropriate inquiries must be conducted within one year prior to the date on which a person or entity acquires a property. Prior investigations may be updated within one year of acquisition to satisfy the AAI standard. However, several components of the investigation must be updated within 180 days prior to the passage of title. These components include interviews with past and present owners, operators, and occupants; searches for recorded environmental cleanup liens; reviews of federal, tribal, state, and local government records; visual inspections of the facility and adjoining properties; and the declaration by the environmental professional.
B. Additional Requirements for Avoidance of Liability
Even after the conduct of AAI and the purchase of the property, a property owner must observe certain continuing obligations in order to qualify for the CERCLA liability defenses. Continuing obligations include complying with all land use restrictions and reporting obligations; not impeding any institutional controls implemented at the site; taking reasonable steps to prevent releases; cooperating with EPA, state, or other parties conducting response actions; complying with CERCLA information requests; and providing legally required notices.
The primary objective of the AAI standard is to identify any conditions indicating a release or threatened release of hazardous substances that might impact the subject property. Compliance with the AAI standard also enables the property owner to qualify for various CERCLA defenses and to avoid costly remediation obligations. The conduct of AAI may reveal other information not relevant under CERCLA but which nevertheless indicates other significant risks, such as petroleum contamination. It is critical to engage a qualified environmental professional to ensure that the full protections of these defenses are available.
Although lenders are protected from CERCLA’s liability provisions by the secured creditor exemption, they may still face significant losses when borrowers incur CERCLA liability. For instance, cleanup costs can exceed the entire property value, leading to loan default and leaving lenders with unmarketable property as a result of environmental impacts. In today’s real estate market, this risk of default is of particular concern to the banking community. It is also likely that rating agencies will modify their own guidelines to mandate compliance with the new AAI standard.