Introduction

On November 1, 2005, the United States Environmental Protection Agency (“EPA”) issued its final rule establishing the federal standards for conducting “all appropriate inquiries” necessary to qualify for various defenses to liability under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).  The rule, which will become effective on November 1, 2006, sets forth guidelines that a prospective property purchaser must follow when conducting pre-acquisition due diligence.  Adherence to these guidelines is critical to ensure one’s qualification for landowner liability protections provided by CERCLA, including, among others, the CERCLA innocent landowner defense.  The all appropriate inquiries standards will also govern the site characterization and assessment activities of any party receiving a brownfields grant under CERCLA Section 104(k)(2)(B). 

This article analyzes the new standards for conducting all appropriate inquiries, outlines changes from the prior standards, and explains how the new guidelines apply to parties seeking protection under the landowner liability protections established by CERCLA.

PART I

 

Background on CERCLA Liability, the Innocent
Landowner Defense, and the Federal Brownfields Amendments

 

A.         Liability of Property Owners Under CERCLA

             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. 

             CERCLA imposes a standard of strict liability upon owners and operators of properties requiring remediation of hazardous substances regardless of any contribution to or responsibility for the hazardous substance release.  This liability extends to all current owners and operators and to all parties who owned or operated the property at the time of disposal. 

B.         Superfund Amendments and Reauthorization Act of 1986

             In 1986, the Superfund Amendments and Reauthorization Act (“SARA”) created the “innocent landowner defense” to CERCLA liability.  A new section 101(35)(B) was added to the statute that provides a defense from such 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 inquiries” into the previous ownership and uses of the property had been undertaken prior to acquisition. 

C.         Small Business Liability Relief and Brownfields Revitalization Act

             On January 11, 2002, the Small Business Liability Relief and Brownfields Revitalization Act (“Brownfields Amendments”) was signed into law.  The Brownfields Amendments provide funding to assess and remediate brownfields sites and provide additional clarification of the liability defenses involving all appropriate inquiries.  The Brownfields Amendments revised the definition of “innocent landowner” in section 101(35) of CERCLA and added liability protections for bona fide prospective purchasers and contiguous property owners.

             The Brownfields Amendments set forth a list of criteria that EPA was required to include in its standards for all appropriate inquiries, and instructed EPA to develop regulations that would incorporate these criteria  and establish practices for conducting all appropriate inquiries in accordance with generally accepted good commercial and customary standards and practices.  The criteria set forth in CERCLA section 101(35)(2)(B)(iii) include the following:

·      results of an inquiry by an environmental professional;

·      interviews with past and present owners, occupants, and operators of the facility;

·      reviews of historical sources, such as chain of title documents, aerial photographs, building department records, and land use records, to determine previous uses and occupancies of the property;

·      searches for environmental cleanup liens filed under federal, state, or local law;

·      reviews of federal, state, and local government records, waste disposal records, underground storage tank records, and hazardous waste handling generation, treatment, disposal, and spill records, concerning contamination at or near the facility;

·      visual inspections of the facility and adjoining properties;

·      specialized knowledge or experience;

·      relationship of the purchase price to the value of the property, if contaminated;

·      commonly known or reasonably ascertainable information about the property; and

·      the degree of obviousness of the presence or likely presence of contamination and the ability to detect such contamination by appropriate inquiries.

             All ten of these criteria have been incorporated into EPA’s final rule on all appropriate inquiries.  Until EPA published its new rule on November 1, 2005, these criteria for all appropriate inquiries were satisfied by compliance with the ASTM Standards for conducting Phase I Site Assessments.  Previously, compliance with these ASTM Standards has been considered sufficient for those parties seeking protection under the innocent landowner defense.    

PART II

New Standard for All Appropriate Inquiries

A.         Current Requirements for All Appropriate Inquiries

             1.         Documentation and Qualifications of the Environmental Professional

             The final rule on all appropriate inquiries requires that a written report outlining the results of the investigation into the past uses and current condition of the property be completed.  Such report should contain an opinion issued by an environmental professional as to whether the all appropriate inquiries identified any conditions suggesting the potential for a release or threatened release of hazardous substances that could impact the subject property.  The environmental professional is also required to 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 the definition of an “environmental professional,” has specific and relevant experience[1], and has performed all work consistent with the rule on all appropriate inquiries. 

             An environmental professional must meet one of the following criteria:

·      holds a current Professional Engineer’s or Professional Geologist’s license or registration from a state, tribe, or U.S. territory and has the equivalent of three years of full-time relevant experience;

·      is licensed or certified by the federal government, a state, tribe, or U.S. territory to perform environmental inquiries and has the equivalent of three years of full-time relevant experience;

·      has a Baccalaureate or higher degree from an accredited institution of higher education in science or engineering and the equivalent of five years of full-time relevant experience; or

·      has the equivalent of ten years of full-time relevant experience.

While delegation of tasks required by the all appropriate inquiries standard is permitted, the declarations and opinions contained in the report must be signed by a qualified environmental professional.                        

             2.         Investigation

             As noted above, the ten criteria set forth in the 2002 Brownfields Amendments have been incorporated into the final rule on all appropriate inquiries.  The primary objectives of the new regulation is to identify the following types of information about the subject property:

·      current and past property uses and occupancies;

·      current and past uses of hazardous substances;

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

·      current and past corrective actions and response activities;

·      engineering controls;

·      institutional controls (non-engineered instruments, such as administrative and legal controls); and

·      properties adjoining or located nearby the subject property that could have resulted in conditions indicative of releases or threatened releases of hazardous substances on, at, in, or to the subject property. 

            Information that is publicly available, obtainable within reasonable time and cost constraints, and which can be practicably reviewed, should be gathered and reviewed to determine the thoroughness and reliability of such information.  If the environmental professional conducting the investigation determines that such information is either not thorough or is not reliable, further inquiries should be made until such information can be deemed both thorough and reliable. 

             Interviews:      

            Under the final rule, interviews should be conducted with current owners and occupants (or current or past major occupants or occupants likely to use, store, treat, handle or dispose of hazardous substances if there are multiple occupants), current and past facility managers with relevant knowledge of the property, and neighboring owners or occupants if the property is abandoned.  The environmental professional is given discretion over what questions to ask during interviews.   

             Historic Sources:

             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 of some form.  If documentation of previous uses cannot be traced back this far, it must be noted as a data gap to the inquiries.  The ASTM Standards required a search back to the property’s first developed use, or back to 1940, whichever is earlier.  Under the final rule, the environmental professional is given discretion over what types of historical documentation will be most useful to the inquiries.  

             Cleanup Liens:

             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.  EPA also warns that in certain instances, environmental liens may not be recorded until actual Superfund money is spent, and therefore a search may not turn up such liens.

             Review of Federal, State, and Local Records:

             Government records and available lists for institutional and engineering controls must be searched if reasonably ascertainable.  These records are slightly different from the previous ASTM search requirements, in that they include tribal records, public health records, and registries of institutional and engineering controls at the property.  Additionally, the search distances for various databases are slightly different under the final rule on all appropriate inquiries than they are under the ASTM Standards. 

             Visual Inspection:

             Visual on-site inspections must be completed of the property, particularly any areas where hazardous substances may currently be or in the past may have been used, stored, treated, handled, or disposed of.  Visual inspections of adjoining properties should also be conducted, but can be completed from the subject property or from public rights-of-way. 

             Specialized Knowledge:

             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.  Any such specialized knowledge will be considered when determining whether the purchaser made all appropriate inquiries.   

             Purchase Price:

             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.  This analysis does not have to be completed by the environmental professional, but must be provided for inclusion in the report.  This requirement does not mandate that a real estate appraisal be conducted, but merely that a general determination be made of whether the purchase price is reflective of the fair market value based upon similar properties purchased in the area. 

             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.  Such information might include undocumented uses of the property while unoccupied and should be provided to the environmental professional if obtained by the prospective purchaser. 

             Degree of Obviousness:

             Persons conducting all appropriate inquiries 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.  While sampling and analysis may be helpful in making such a determination, they are not required by the final rule.  The degree of obviousness consideration does not require the collection of any additional information beyond that set forth above. 

             Time Frame:

             All appropriate inquiries must be conducted within one year prior to the date on which a person or entity acquires a property.  Additionally, prior investigations may be updated within one year of acquisition to satisfy the all appropriate inquiries standard, but several components of the investigation must be updated within 180 days prior to the date the property is purchased.  The components, which must be updated within 180 days of purchase, 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.

             3.         Changes From Previous Reliance on ASTM Standards[2]

             Phase I Site Assessments completed in accordance with the 1997 and 2000 ASTM Standards have historically been intended to address additional property risks beyond CERCLA liability, including such concerns as asbestos, lead paint, drinking water standards, and petroleum issues.  Such concerns are not relevant to the all appropriate inquiries standard, nor are issues such as environmental compliance and permitting requirements or worker health and safety issues which might also be addressed under the ASTM Standards.

            While the all appropriate inquiries standard does not take into consideration these other environmental risks that a property owner might be exposed to, it does require more analysis in many respects than the ASTM Standards, because of the provisions against data gaps. Additionally, the ASTM Standards do not address any of the post-acquisition continuing obligations that must be complied with in order to qualify for liability defenses under CERCLA.   

            It is expected that this more stringent all appropriate inquiries standard will lead to an increase in the cost and time required to obtain Phase I Site Assessments, and will result in an increased number of recommendations by environmental professionals that Phase II Site Assessments be undertaken.   

B.        Applicable Standards Based Upon Date That Property Was Purchased

            Different standards for all appropriate inquiries will be applicable to property owners depending upon the date that the property in question was purchased.[3]  The following time frames are relevant under the new rule:

             1.  Property purchased prior to May 31, 1997:  such parties must demonstrate that they carried out all appropriate inquiries in accordance with generally accepted good commercial and customary standards and practices in place at the time of acquisition;

             2.  Property purchased between May 31, 1997 and November 1, 2005:  such parties can demonstrate that they carried out all appropriate inquiries through compliance with the procedures of ASTM Standard E1527-97 or E1527-2000, both entitled “Standard Practice for Environmental Site Assessments:  Phase 1 Environmental Site Assessment Process;” 

             3.  Property purchased between November 1, 2005 and November 1, 2006:  such parties can demonstrate that they carried out all appropriate inquiries through compliance with the ASTM Standards or with compliance with the new rule on all appropriate inquiries; and

             4.  Property purchased after November 1, 2006:  such parties can demonstrate that they carried out all appropriate inquiries only through compliance with the new rule on all appropriate inquiries.

C.         Additional Requirements for Avoidance of Liability

             Additionally, continuing obligations required in order to qualify for the CERCLA liability defenses 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.  All parties seeking immunity from liability under the various CERCLA defenses, including the innocent landowner defense, must demonstrate compliance with these continuing obligations as well as compliance with the all appropriate inquiries standard.

 

Conclusion

 

            The primary objective of the all appropriate inquiries standard is to identify any conditions indicative of a release or threatened release of hazardous substances that might impact the subject property.  Additionally, by complying with the all appropriate inquiries standards, a property owner lays the groundwork for qualifying for various CERCLA defenses and avoiding costly remediation obligations.  It is critical to engage a qualified environmental professional to ensure that all requirements of the new rule are complied with in order to insure that the full protections of these defenses are available.