Giving diligence its due
On Nov. 1, the U.S. Environmental Protection Agency issued its final rule establishing the level of environmental due diligence required of landowners wishing to qualify for certain protections from strict liability for cleanup costs under the Comprehensive Environmental Response, Compensation, and Liability Act — the federal Superfund law. The rule - which covers the “standards and practices” for conducting all appropriate inquiries into a property’s previous ownership and operations - clarifies what previously was a matter of fact-specific case law as to whether a party qualified for liability defenses. In order to qualify for liability exemptions as an innocent landowner, contiguous property owner and bona fide prospective purchaser, property buyers will have to adhere to the rule’s “all appropriate inquiries” standards and practices, as well as other statutory criteria. For properties acquired after Nov. 1, 2006 — the effective date of the rule — the revised 2005 version of the ASTM Phase I standard (E-1527-05), has been adopted, meaning the 2000 version commonly in use for industrial and commercial transactions no longer constitutes adequate due diligence. There are substantial differences between the standards. Among them, buyers will have to make sure that their environmental consultants meet the rule’s heightened professional qualification requirements to conduct all appropriate inquiries and to render the required opinions as to the environmental condition of the target property (and, in some cases, as to adjacent and surrounding properties). In spite of the real estate market’s trend to close deals more quickly and with increasingly shortened due diligence periods, the rule’s inevitable impact will be to increase due-diligence costs and time frames, and it is likely to drive more Phase II investigations. The rule will have far-reaching effects on transactions involving commercial property and property to be used for public purposes, but it does not apply to residential properties. The rule will expand the scope of environmental due diligence to include, among other things: • Mandatory interviews with current owners and operators, and to some extent former owners and operators • Visual inspections of the subject property and adjoining properties • An analysis of the actual purchase price compared with the fair market value of the property if it was not contaminated • Evaluation of engineering and institutional controls any specialized knowledge of the prospective purchaser • A requirement for an “environmental professional” to perform and analyze the all appropriate inquiries, and to sign off on a written report documenting the due diligence performed • A requirement for an “environmental professional” to identify whether any “data gaps” in the information collected affect the professional’s ability to render an opinion about the environmental conditions at a property, and to comment on the significance of such “data gaps” The rule - which also is expected to result in more property appraisals to establish fair market value relative to the purchase price - should affect the real estate, finance, insurance, manufacturing and utilities industries as well as real estate transactions involving government entities. ‘Environmental professional’ The rule also sets higher and more specific standards for the environmental professional than contained in the ASTM standards. The rule takes into account both academic and field experience, and sets forth certain minimum qualifications. It also establishes alternatives for a consultant to qualify as an environmental professional, which also are based on a combination of academic and field experience, and the consultant’s “relevant experience.” Under the rule, results of an investigation must be documented in a written report. The report need not be submitted to any other government agency or retained on site. The purpose of the report is to “back up” an owner’s claim that the “all appropriate inquiry” requirements and standards were met, in case of a future need to rely on a liability exemption in connection with environmental conditions (known or unknown). At minimum, the written report must: • Document the results of the all appropriate inquiries • Be signed by the environmental professional who conducted or oversaw the investigation • Include an opinion by the environmental professional as to whether any conditions have been identified that indicate a release or threatened release of hazardous substances on, at, in or to the subject property. If the report identifies any “data gaps” in information collected that affect the environmental professional’s ability to render such an opinion, the professional must comment on the significance of the gaps. All appropriate inquiries must be conducted or updated within one year prior to the date on which the purchaser acquires the subject property. Certain components of the investigation, however, must be updated within 180 days prior to the date the property is purchased, including: • Interviews with past and present owners, operators and occupants • Searches for recorded environmental cleanup liens • Reviews of federal, tribal, state, and local records • Visual inspections of the facility and of adjoining properties • The declaration of the environmental professional. Attorney James Kerouac, an associate with the Manchester office of Nixon Peabody LLP, focuses his practice on real estate transactions, commercial leasing, the permitting of complex real estate development projects, condominium development and energy and environmental law. For a more detailed analysis of the rule and its potential ramifications on buyers and sellers of property, visit nixonpeabody.com.