New obligations emerge for environmental due diligence

The Comprehensive Environmental Response, Compensation and Liability Act, the Superfund law better known as CERCLA, as amended in January 2002 by the Small Business Liability Relief and Revitalization Act establishes certain liability protections for “innocent” landowners.

In brief, CERCLA establishes the following liability protections:

• Innocent landowner defense: Provides a defense from CERCLA liability if the landowner acquired the property after the release of a hazardous substance and the owner had no reason to know of the contamination at the time of purchase.

• Contiguous property exemption: Provides an exemption from liability for landowners who purchased property contaminated by hazardous substances released from a neighboring property, which the landowner did not know or had no reason to know about at the time of purchase.

• Bona fide prospective purchaser exemption: Provides a purchaser with knowledge of contamination protection from CERCLA liability, provided that the purchaser demonstrates that it made investigation into the contamination and took reasonable steps to control further contamination of the property.

To benefit from these defenses and exemptions from liability, the landowner is required to conduct “all appropriate inquiries” (also known as “environmental due diligence”) into the prior ownership and use of the property before purchasing the property.

The 2002 CERCLA amendments, or brownfields law, requires the U.S. Environmental Protection Agency to establish standards and criteria for conducting all appropriate inquiries, which the EPA is currently developing in its final stage based on public input.

If adopted, the proposed rule – known as the AAI rule — would significantly modify the standard for environmental due diligence conducted by prospective purchasers of commercial property. The proposed rule establishes more detailed investigation and reporting requirements for environmental professionals conducting site assessments. In addition, the proposed AAI rule establishes minimum qualifications for consultants performing site assessments.

In sum, the proposed rule would increase the burden on a buyer seeking to benefit from the CERCLA liability protections.

Current standards

There has been considerable litigation and debate about what constitutes “all appropriate inquiry” for CERCLA liability protections. At present, EPA has adopted the American Society for Testing and Materials Standard E1527-97 or ASTM Standard 1527-2000, both of which are entitled “Standard Practice for Environmental Site Assessment: Phase 1 Environmental Site Assessment Process” as the appropriate inquiry standard.

The ASTM standards apply to all properties purchased after May 31, 1997, and will continue to apply until the EPA adopts the final AAI rule.

In adopting the brownfields law in 2002, Congress sought to clarify the inquiries required for a purchaser of contaminated property to benefit from the CERCLA liability protections. Specifically, the law required the EPA to adopt AAI rules that included the following minimum standards and practices:

• Inquiry by a qualified “environmental professional.”

• Interviews with past and present owners, operators and occupants of the property to gather information regarding potential contaminants.

• Reviews of historical sources (chains of title, aerial photographs, land use records) to determine prior uses of the property.

• Searches for environmental cleanup liens against the property.

• Reviews of federal, state and local government records, waste disposal records, underground storage tank records and hazardous waste records concerning contamination at or near the property.

• Visual inspection of the property and neighboring properties.

• Inquiries regarding specialized knowledge of the seller.

• The relationship of the purchase price to the value of the property,
assuming no contamination.

• Commonly known or reasonably ascertainable information about the property.

• The degree of obviousness or the presence of contamination at the property and the ability to detect the contamination by appropriate investigation.

Professional qualifications

As required by the brownfields law, the AAI rule must clarify the inquiries required for a purchaser to benefit from CERCLA’s liability protections. The proposed AAI rule establishes environmental due diligence standards and practices that exceed the current ASTM standard. In particular, the proposed rule adds the following minimum requirements for environmental site assessments:

• Assessments must be supervised by a properly qualified environmental professional (EP) who meets detailed requirements for qualification, including minimum education, training and experience criteria.

• A prohibition against non-qualified EPs acting as responsible EPs.

• An increase in reliance upon an EP’s professional judgment.

• The EP must prepare a written report for the site assessment. The report must at least include a certification that the EP has conducted all appropriate inquiries and that the inquiry identified conditions potentially indicative of releases or threatened releases.

There also should be identification of data gaps developed during the investigation. Efforts used to resolve data gaps must be explained.

In general, the EP must make more detailed investigations into the current and past condition and uses of the property, including interviews with current and past owners, operators, and occupants of the property. If the property is abandoned, interviews with past and present neighbors of the property should be conducted.

The EP also will be required to make visual inspections of neighboring properties from the subject property and other public vantage points and conduct a title search for the purpose of discovering environmental cleanup liens.

In addition, any site assessment conducted pursuant to the proposed AAI rule must be conducted within a year of the purchase of the property. However, certain information (title searches, visual inspections, interviews) must be updated within six months of the purchase date.

If adopted, the proposed rule will significantly alter how inquiries are conducted for a purchaser of contaminated real estate to benefit from the CERCLA liability protections and will have an effect on real estate developers and investors, environmental consultants and lenders.

James D. Kerouac, an associate with the Concord law firm of Gallagher, Callahan & Gartrell P.A., is admitted in New Hampshire and Maine and works in the the land use, environmental and energy areas of the firm’s regulatory law practice. For more information, contact him at or 800-528-1181 ext. 235.

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