EPA Issues Proposed Environmental Due Diligence Rule
The existing ASTM Phase I Environmental Site Assessment (E1527-2000) standard used to assess environmental risks in transactions will soon be history. Why? EPA published a proposed rule in the Federal Register on August 26, 2004 that establishes a federal standard for conducting due diligence in property transactions - otherwise know as the "All Appropriate Inquiry" Rule. The AAI Rule was mandated by Congress pursuant to the 2002 amendments to CERCLA (Superfund). It will affect all persons and businesses purchasing commercial and industrial property (or any residential property that will be used for such purposes) who wish to avoid CERCLA's strict liability scheme for releases or threatened releases of hazardous substances. The AAI Rule will be incorporated into the Code of Federal Regulations as Part 312- "Standards for Conducting All Appropriate Inquiries" after it is published as a final rule.
The "All Appropriate Inquiry" Rule will have a significant impact upon property and business transactions since it:
- will codify the practice for conducting due diligence; and
- delineates the specific procedures that must be conducted by an "Environmental Professional" (a new term defined by the Rule).
As relevant to anyone buying, selling or leasing property, the procedures and practices are substantially different from the current ASTM Standard. EPA concluded, during the negotiated rule-making process, that the ASTM Standard for Phase I Environmental Site Assessments, is inconsistent with the statutory requirements of CERCLA.
As noted, Congress amended CERCLA in January 2002 in several respects and directed EPA to consider 10 specific criteria to be used in promulgating a new due diligence standard. The current ASTM Standard, which is widely used throughout the business community for most transactions, does not address all of the required statutory criteria. The proposed Rule for conducting "All Appropriate Inquiry" includes standards and practices for conducting each activity required to address the statutory criteria. These criteria include: the results of an inquiry by an Environmental Professional; interviews with past and present owners and operators to learn about potential contamination; reviews of historical sources to determine previous uses and occupancies of the property; searches for recorded environmental liens; reviews of governmental records regarding waste disposal and environmental management activities relevant to assessing contamination; visual inspections of the facility and adjoining properties; specialized knowledge or experience on the part of the purchaser; relationship of the purchase price to the value of the property; commonly known or reasonably ascertainable information about the property; and the degree of obviousness as to the presence of contamination on the property, and the ability to detect the contamination by investigation.
Due diligence investigations, under the All Appropriate Inquiry Rule, must be conducted, for the most part, by an "Environmental Professional". Environmental Professionals must have sufficient, specific education, training and experience in order to develop opinions and conclusions regarding the environmental conditions of a property. An Environmental Professional under the Rule includes:
- a Professional Engineer or Geologist with three years of relevant experience;
- an individual with a scientific degree and five years of relevant experience; or
- an individual having 10 years of full-time relevant experience with a college degree.
Importantly, Environmental Professionals will be required to include two statements in their written All Appropriate Inquiry Reports. They must certify that they meet the definition of an Environmental Professional, and that they developed and performed the due diligence investigation in conformance with the standards and practices set forth in the Rule.
According to EPA, the objectives of the AAI Rule are the identification of: current and past property uses and occupancies, the presence of hazardous substances; waste management and disposal activities, current and past corrective actions and responses to address releases of hazardous substances; engineering and institutional controls; and adjacent and nearby properties that have "environmental conditions" that could affect the subject property.
Performance factors have also been incorporated into the AAI Rule. These factors require the Environmental Professional to obtain sufficient information for each standard and practice that is publicly available and/or obtainable from a source within a reasonable time and cost constraints. The performance factors further require the Environmental Professional to review and evaluate the thoroughness and reliability of the information gathered in complying with each standard and practice.
A consideration important to all purchasers who will be complying with the "All Appropriate Inquiry" Rule is EPA's advisement that should an environmental condition or release on, at, in, or migrating to a property not be identified by the Environmental Professional during the due diligence investigation, that landowners will still be obligated to undertake all "reasonable steps" to stop a release, prevent a threatened release, and prevent any exposure to releases or threatened releases. In short, conducting a due diligence investigation under the All Appropriate Inquiry Rule will not shield purchasers from post-acquisition obligations required by CERCLA to take reasonable steps; nonetheless, compliance with the AAI Rule could serve as an affirmative defense to minimize CERCLA liability.
EPA understands that Environmental Professionals will not always be able to obtain the necessary information required to identify all environmental conditions. EPA is therefore requiring Environmental Professionals to not only identify the data gaps, but the impact that such gaps have on their ability to identify the presence or absence of environmental conditions. Environmental Professionals will also be required to identify the sources of information they use to collect information to address or fill data gaps, and they will be required to comment upon the significance of any data gaps in their reports in connection with their ability to provide an opinion as to whether there are any conditions indicative of any release.
EPA's AAI Rule is clear with respect to placing the burden on prospective purchasers as to the potential significance of any data gaps. By way of example, EPA notes that if a leaking underground storage tank is not identified during the course of the due diligence investigation, the landowner will still be obligated to take reasonable steps to stop on-going releases after acquiring the property. The "reasonable steps" post-acquisition obligations were part of the 2002 CERCLA amendments.
As is apparent, the opinion of each Environmental Professional regarding the scope, extent and significance of data gaps will be extremely important in evaluating the adequacy of any report prepared under the "All Appropriate Inquiry" Rule. Although the AAI Rule does not require that any sampling and analysis be conducted by the Environmental Professional, it does suggest that soil and groundwater sampling may be the appropriate method by which to resolve any data gaps. Importantly, the result of an Environmental Professional's failure to identify and comment upon any data gaps related to an environmental condition may be exacerbated by the fact that the AAI Rule requires that the specialized knowledge of purchasers and Environmental Professionals be taken into account in determining whether the All Appropriate Inquiry standards have been met. Federal courts will obviously be the ultimate decision-maker in making this determination.
In this regard, EPA emphasizes in the preamble to the AAI Rule that Congress directed federal courts to consider any special knowledge or experience held by a purchaser or property owner in evaluating potential CERCLA liability. Existing case law demonstrates that the "specialized knowledge factor" will include an analysis by the courts as to the professional or personal experience of the party claiming the innocent landowner or purchaser defense under CERCLA. Real Estate developers and sophisticated purchasers to commercial transactions will need to be extremely cautious in conducting due diligence and complying with the new standards since the AAI Rule not only focuses upon "specialized knowledge" but since it also requires a more detailed investigation of the property (and adjacent property) then the existing ASTM Standard. Moreover, EPA will be anxious to clarify and define the scope and extent of the AAI Rule's requirements in the federal courts.
Although the AAI Rule will not be promulgated as a final rule until 2005, those involved in mergers and acquisitions, real estate development and commercial lending should review their current due diligence policies and procedures now to determine what modifications will be necessary. It is advisable to review your existing list of approved Environmental Professionals to ascertain their qualifications and experience, and further, to evaluate the scope, extent and quality of due diligence currently conducted by your company or organization in business transactions.
Blank Rome's Environmental Group has a significant level of experience in managing and conducting due diligence investigations and the related transactional knowledge required to assist our clients in understanding and implementing the AAI Rule. We look forward to being of service.