Changes to Phase 1 Environmental Site Assessment
Requirements Will Be Effective November 1, 2006
Since the enactment of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) in 1980, the commercial real estate industry has had to deal with the harsh reality that a current owner or operator of a contaminated property could be held responsible for cleanup of the contaminated property regardless of whether it had anything to do with causing the contamination. Congress enacted the Superfund and Reauthorization Act (SARA) amendments to CERCLA in 1986 to provide liability protection to innocent landowners who unwittingly purchased contaminated property. However, the innocent landowner defense proved to be of limited value due to the requirement that "all appropriate inquiry” prior to purchase did not reveal a reasonable basis for believing contamination existed at the property.
In 2002, Congress enacted the Brownfield Amendments to CERCLA which, among other things, clarified the innocent landowner defense and added two conditional defenses to CERCLA liability- the "bona fide prospective purchaser” and "contiguous property owner” defenses. The prospective purchaser defense was a major change in the liability scheme of CERCLA. For the first time since CERCLA’s enactment, one could purchase property known or suspected to be contaminated without incurring liability for cleanup, provided the purchaser meets certain conditions before and after purchase. The contiguous property owner defense applies to those who unwittingly purchase property that is contaminated by hazardous substances migrating from a contiguous property.
One of the threshold requirements for all three landowner defenses to CERCLA liability is that the purchaser perform all appropriate inquiry into the previous ownership and uses of a property before purchasing it to determine whether the property is, or potentially is, contaminated. The process for assessing properties for the presence or potential presence of contamination is often referred to as "environmental due diligence” or "environmental site assessment”. Over time, the commercial real estate industry had come to view ASTM E1527 for Phase I Environmental Site Assessments as the customary and appropriate standard for pre-purchase inquiry. However, rather than adopting the ASTM standard outright, the Amendments directed EPA to establish by regulation the appropriate standards and practices on how to conduct all appropriate inquiry.
The All Appropriate Inquiry Rule
EPA issued the standards and practices for conducting all appropriate inquiry (AAI) on November 1, 2005, and the rule will go into effect on November 1, 2006. The rule applies to any party claiming protection from liability as an innocent landowner, a contiguous property owner or a bona fide prospective purchaser. It also applies to site characterizations and assessments performed by parties who receive grants for such activities at brownfield properties under EPA’s Brownfield Grant Program.
In conjunction with the development of the rule, ASTM International updated the E1527 standard to ASTM E1527-05. EPA expressly acknowledges that the revised ASTM standard is consistent and compliant with the AAI rule. The rule and ASTM standard requirements are designed to identify hazardous substances at, on, in or to the property that would cause the incurrence of response costs for which the purchaser would be liable due to its ownership or operation of the property. The EPA rule and revised standard adopt a performance-based approach to performing AAI rather than a strict checklist approach. The rule is flexible in that it allows for discretion on the part of the environmental professional performing the Phase I assessment, but the level of inquiry selected will be subject to results-oriented scrutiny rather than comparison to a check-off list.
The EPA rule and ASTM E 1527-05 include the same categories of due diligence activities- site reconnaissance, records review, interviews and documentation of recognized environmental conditions. However, certain inquiry requirements have been enhanced to achieve the objectives and performance factors in the rule. Some of the more significant changes and additions from the previous ASTM standard are as follows:
Unlike the previous ASTM standard, the rule imposes specific educational, certification, licensing and relevant experience requirements for the person, called an "Environmental Professional or "EP, who performs or supervises the performance of the Phase I assessment.
The rule requires that the written Phase I report include two signed declarations by the EP; one that the EP meets the qualification requirements under the rule and the other that all appropriate inquiries were performed in accordance with the rule.
Generally, purchasers can rely on information in previous Phase Is conducted for the property. However, the rule requires that many of the components of the previous Phase I, including the site inspection, be updated within 180 days before the date of acquisition of the property. In addition, the rule requires that if information from a previous Phase I is used, the report must include a summary of any relevant changes to the conditions of the property since that time.
The rule places a greater emphasis on documenting the sources of information consulted by the EP and specifying any data gaps remaining after the inquiry is complete. The EP must also comment in the written report on the significance of the data gaps in his or her ability to form an opinion on conditions at the site. The rule contains enhanced requirements for review of historical records and interviews with neighbors and current as well as past owners, occupants, site managers or employees of the property.
The user or the consultant must search federal, state, tribal and local records for (1) institutional or engineering controls at the property or any property within a ½ mile; and (2) cleanup liens filed or recorded against the property. The EP must, except only in exceptional cases, perform a visual onsite inspection of the property and any structures and improvements. Any failure to physically inspect the property will be subject to very close scrutiny should the need to establish AAI arise.
The rule places greater responsibility on the purchaser to provide information and evaluate facts of the commercial transaction at issue. In particular, the purchaser is required to provide the EP with information concerning any specialized knowledge it may have about the property and must, in all cases, compare the purchase price to the fair market value of the property if the property were not contaminated. If the proposed purchase price is less than the fair market value, then the purchaser must further consider whether the price reduction is due to the presence of hazardous substances.
Implications of the AAI Rule to Purchasers
Users of Phase I assessments should modify their standard Phase I Request for Proposal to require that the Phase I comply in all respects with the AAI rule and ASTM E1527-05. Standard language in consultant bids that the assessment will be performed in "substantial compliance” with the ASTM standard is no longer acceptable. The user must also be prepared, in all cases, to perform a "clean vs. dirty” value comparison, provide the consultant with relevant information it has concerning the property and ensure that a search of title and other records is performed for evidence of environmental liens, institutional controls or engineering controls to which the property is subject. Finally, users will need to be cognizant that because of the additional requirements imposed by the AAI rule, the cost of the Phase I report and the time needed to complete it will likely increase. The Phase I needs to be ordered soon enough to allow the consultant sufficient time to complete a compliant Phase I, but not so soon that the Phase I would be completed more than 180 days before the property is acquired, resulting in a requirement that several portions of the assessment be updated.
After years of calling for specific criteria to meet the requirements of all appropriate inquiry before purchase, the regulated community now has them. It remains to be seen, however, whether the new rule and revised ASTM standard will accomplish the objective of providing a level of certainty to the environmental due diligence process or simply create more confusion by requiring expanded levels of inquiry into virtually all of the categories of environmental due diligence currently being performed. One thing appears clear, however- failure to comply with the requirements of the AAI rule will foreclose the opportunity for a purchaser to establish the threshold requirement for any of the three owner defenses to CERCLA liability.
Crystal Kennedy is a Partner in the Environmental Practice Group of Thompson Coburn LLP, the largest law firm in St. Louis, Missouri. She has particular expertise in identifying and resolving environmental liability risks associated with buying, selling, developing and insuring environmentally-challenged commercial and industrial property and is a frequent speaker on those issues. She was the 2004 President of the Commercial Real Estate Women (CREW) St. Louis and is the Co-Chair of the Environmental and Conservation Law Committee of the Bar Association of Metropolitan St. Louis (BAMSL).