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.

Self Audits: The Value of Regular Environmental Spring Cleaning

Most experienced practitioners are aware of the need to assess the environmental condition of property before purchase, lease or financing. Due diligence performed before an acquisition or lease does not provide any ongoing comfort after the property has been purchased and is operational, however. Consequently, property owners, managers and lenders should consider periodic audits of the environmental compliance of properties.

By assessing ongoing compliance with environmental laws, audits serve as a valuable means of ensuring that the operation of a property will not lead to future environmental liability. Another value of environmental audits that many may not have considered is the use of audits as a means of addressing potential violations through disclosure to state and federal regulators. Although property owners and managers may at first recoil at the prospect of voluntarily disclosing potential violations, it can be in their best interests to do so. The primary reason is the adoption of state and federal environmental privilege laws that offer immunity from liability for violations discovered during the course of the audit. In essence, with such laws, one can avoid penalties by disclosing violations before regulators or third parties discover them.

Self-Audit Policies

A party wishing to come under EPA's self-audit policy must demonstrate systematic and voluntary discovery; prompt disclosure; discovery and disclosure independent of government or third parties; correction and remediation; prevention of recurrence and no repeat violations; exclusion of other violations; and cooperation. Twenty-six states have adopted environmental privilege laws to encourage parties to conduct voluntary audits. Although varying in scope, these laws generally make voluntary environmental audit reports inadmissible in certain court and administrative proceedings and provide for immunity from liability or reductions in penalties for violations disclosed as a result of the audit. For example, the EPA self-audit policy provides that parties may be eligible for a 100% reduction in civil penalties for violations voluntarily disclosed following the audit. Most states do not provide immunity for criminal violations.

Performing an Environmental Audit

What constitutes an approved environmental audit differs among the various jurisdictions, but some factors are almost universal: (1) the audit is self-initiated and voluntary; (2) the audit is for internal use and is systematic and comprehensive; and (3) the purpose of the audit is for assessing and improving compliance with environmental laws, and it was not performed to satisfy an environmental law. Thus, monitoring reports prepared as part of permit requirements would not be considered an audit. Under the EPA policy, the audit must be a systematic self-evaluation, designed to prevent, detect and correct any potential environmental violations. For example, an audit performed as a result of complaints by a tenant or under threat of an enforcement action would not be covered. Because of variances in state requirements, it is advisable to check for specific requirements such as pre-audit notifications and the form of the report.

Procedures for Disclosure

Parties hoping to take advantage of these laws must demonstrate that they have met all of the requirements. In particular, parties ought to make sure that disclosure is timely. Certain jurisdictions, as well as EPA, require that the violation be disclosed voluntarily and within a certain time period after discovery, or the privilege is lost. In addition, several jurisdictions require correction of the violation within a certain time period, prevention of recurrence and demonstration that the risk presented by the violation was minimal. Thus, parties discovering potential violations must be ready to take swift action to remedy the problem and ensure it does not happen again.

Is It Worth It?

Although the number of parties taking advantage of environmental audit privileges is increasing, many may remain reluctant to air their dirty laundry voluntarily. This is not surprising, as there are risks inherent in disclosure of environmental problems to any third party. For example, the disclosure will likely become public record. It is important to be aware of the current requirements of the different federal and state audit privileges. Some states have adopted privileges that are much broader than EPA's, and the immunities offered by the state do not necessarily apply to federal laws. Nonetheless, guidance is available, and increasing numbers of lawyers and consultants are familiar with the process.

The self-policing process is an effective, and some would argue essential, means of assessing and potentially avoiding environmental liability. Even experienced parties are occasionally surprised by what a comprehensive assessment uncovers. The point is that there are mechanisms to avoid liability for what is discovered. Moreover, that information can serve as a foundation for implementation of procedures designed to ensure that problems do not arise again. For these reasons, a little environmental spring cleaning may be in order.

With this issue, Rafe Petersen takes over the environment column from James Wikin. The editors of Probate & Property thank Jim for his service and wish him well in his future endeavors.

Environmental Law Update Editor: Rafe Petersen, Linowes and Blocher, 1010 Wayne Ave., Silver Spring, MD 20910.

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