ALL APPROPRIATE INQUIRY REGULATIONS: A GUIDE FOR ENVIRONMENTAL LEGAL COUNSEL

EPA’s recently proposed changes to the environmental due diligence process will require additional effort and impose new obligations on virtually all real estate transactions to comply with the All Appropriate Inquiry standard mandated by the recent federal Brownfields Law.[1]  All Appropriate Inquiry (or environmental due diligence) is the process of evaluating a property for potential environmental contamination and assessing the potential for environmental impairment liability.  If adopted, the “quick and dirty” Phase I Environmental Site Assessment (ESA) of the past will no longer be sufficient to qualify for the Landowner Liability Protections provided in the new law, and additional effort will be required to avoid the sweeping legal liability net cast by Superfund.[2]  Early analysis of the proposed rule suggest that many of the proposed changes will lead to longer lead times and higher transactional costs, while injecting a degree of confusion and uncertainty into the real estate transaction process as the environmental consulting industry scrambles to develop meaningful ways to meet this evolving standard.  Whether the proposed rule, which is still subject to a formal comment period following publication in the Federal Register late in the summer of 2004, succeeds in facilitating the redevelopment of environmentally challenged sites remains to be seen.

Background

Since 1993, real estate developers, lenders, attorneys, buyers and sellers of commercial and industrial property have routinely relied on the American Society for Testing and Materials (ASTM) E1527 “Standard Practice for Conducting Phase I Environmental Site Assessments” in evaluating the potential for environmental impairment liability.[3] Indeed, this ASTM Standard is specifically recognized as “the” interim process in the Small Business Liability Relief and Brownfields Revitalization Act (the “Brownfields Law”) signed by President Bush in January 2002.[4] Among other important provisions, the Brownfields Law requires EPA to develop regulations that will establish standards and practices for conducting “all appropriate inquiry” into the past use of property to qualify for Landowner Liability Protections by January 2004 – a timeframe that has since passed.  In order to qualify for these protections, landowners must meet certain threshold criteria and satisfy certain continuing obligations associated with so-called “due care obligations.” [5] 

There are currently two different interim standards for conducting all appropriate inquiry depending on the date the property was purchased.  For properties purchased prior to May 31, 1997, the law requires that a court consider any specialized knowledge or expertise of the defendant, relationship of the purchase price to the value of the uncontaminated property, commonly known or reasonably ascertainable information, obviousness of contamination, and the ability to detect contamination through chemical and physical means.  For properties purchased after May 31, 1997, the law specifically references that the ASTM E1527-97 Standard will meet the all appropriate inquiry requirement for site characterization and assessment.

To meet its mandate, EPA developed a “Reg-Neg” Committee (think Regulation-by-Negotiation) comprised of 25 “stakeholders” representing the diverse interests of the regulated community, among other interested parties.  The Reg-Neg Committee held a series of Hearings in Washington, DC through most of 2003 to solicit input from interested, informed and affected parties.  Following the adage that “where one stands on an issue often depends upon where one sits” the Reg-Neg Committee was frequently challenged by debate that went well beyond the scope of the ASTM Phase I ESA process.  For example, some committee members sought to include a provision in the regulation that would require all private parties to contact adjoining landowners, announce their intention to purchase real estate and include the neighbor’s commentary in the ESA report.  Surprisingly, some of this proposed language actually appears in the proposed regulation in connection with the assessment of “abandoned” property.   

Originally, Congress’ intent appears to have been to let the EPA negotiate with the ASTM organization to work out a more long-term solution. Instead, EPA initially set out to develop its own regulation without relying on ASTM’s extensive, consensus-building approach and industry acceptance on this important standard.  Late in the negotiations, however, EPA realized that agreement would not be achieved on many of the substantive issues unless ASTM was brought back into the fold.[6]  Bringing ASTM and its industry-wide credibility back to the negotiating table was a critical step in moving the Committee’s efforts forward and had been aggressively pushed by industry insiders.  EPA and ASTM are now working cooperatively with an agency representative sitting on the organization’s committee that is re-writing the Environmental Site Assessment standard.

In the end, the current compromise was achieved through significant discussion and negotiation among the diverse committee members, the broader membership each stakeholder represents, and public comments present at the various Public Hearings.   

Important Proposed Revisions

Parties seeking to comply with EPA’s “all appropriate inquiry” rule will need to be aware of important changes to the Phase I ESA process that go beyond the existing practice considerations.  These changes, to include a restatement of objectives, new obligations imposed on the User, substantive changes, and the definition of who is an “Environmental Professional” capable of completing Phase I ESAs, will all need to be carefully considered by legal counsel.  While EPA staff is now in the process of gaining approval from other affected federal agencies, here’s what you can expect regarding the proposed revisions:

 
Objective the Proposed Rule – Rather than adopt the term “Recognized Environmental Condition” (REC) used in the ASTM Standard, the proposed rule states that “all appropriate inquiry” is intended to identify conditions that are “indicative of releases or threatened releases” of hazardous substances.  This change was offered to keep the proposed rule within the statutory framework of the Brownfields Law.[7]  The current ASTM standard defines a REC as “a condition that, if brought to the attention of a regulatory agency, would likely give rise to an enforcement action or cleanup obligation.”[8]  Many sophisticated Users have historically objected to the term REC as being too narrow.
 
Definition of Environmental Professional – This portion of the proposed rule generated a significant amount of debate among the certain groups of stakeholders.  Suffice it to say, some parties within the environmental consulting community sought to limit the definition to “Professional Engineers”, “Professional Geologists” or other state licenses.  The proposed rule recognizes such registrations, but tempers the definition by adding other state sanctioned qualifications and provided the individual meets certain additional relevant experience requirements of 3 years.  The definition also extends to those who possess a Baccalaureate or higher degree in the areas of environmental science, earth science and/or engineering with 5 years of experience; and those with a Baccalaureate or higher degree (in any area) and 10 years of relevant experience are also acceptable.[9]  Importantly, the Environmental Professional will need to “Certify” that the report was prepared in accordance with the standards and practices of the proposed rule, and the report must contain an opinion as to whether sampling and testing is necessary or appropriate.  It remains unclear what effect, if any, the added requirements for Environmental Professionals will have on the cost of Errors & Omission liability insurance, and, correspondingly, the cost of the Environmental Site Assessment Report.   
 
New User Obligations – Under the proposed rule, the User will be required to divulge any information it has relating to the environmental condition of the property.  Such information may include, but not be limited, to the history and use of both the site and adjoining properties; cleanup activities (both past and ongoing); existence of any environmental liens; specialized knowledge or experience of the User; relationship to the purchase price to the FMV if the property were not contaminated; commonly known or reasonably ascertainable information about the property; and the existence of any institutional or engineering controls.  Many commentators believe that significant additional time and resources will be required to obtain the information mandated by EPA’s proposed rule.  Failure of the User to provide any of the foregoing information to the Environmental Professional responsible for completing the assessment may result in the denial of liability protections.  Such User obligations also raise several important legal issues that may present significant complications beyond the context of the Phase I.  For example, Sellers frequently complete Phase I studies when preparing a property for divestiture.  The effect of disclosure to potential buyers should be carefully considered by legal counsel, as such disclosures may rise to the level of Representations and Warranties in the Purchase and Sale Agreement. 
 
 
Substantive Changes – The User and/or Environmental Professional will be required to consider the reliability of the information provided; the cost and time associated with obtaining the information; data gaps and their significance; and specifically identify any and all releases or threatened releases to the environment, including those from adjoining properties.  De Minimus releases and threatened releases that do not pose a threat to human health or the environment are exempt.  To the extent that insufficient data exists to determine whether a release or threatened release has occurred, the User and/or Environmental Professional must document the existence of such knowledge limitations and determine whether sampling is warranted.  Note that the proposed rule does not mandate that sampling be completed.  The Environmental Professional is also charged with the responsibility of interviewing past owners, operators and occupants of the property.  Where the site is abandoned, the Environmental Professional must interview adjoining landowners and occupants.  The quality and significance of information obtained from adjoining landowners should naturally be viewed with a healthy dose of skepticism.[10]  Most experienced real estate professionals would agree that local and state regulatory agencies provide a more reliable source of information. In any event, the requirement to contact adjoining landowners would eviscerate the confidential nature of many pre-acquisition deliberations. 
 
 
Time for Completion – All Appropriate Inquiry must be conducted within 1 year prior to acquisition; however, after 180 days certain aspects of the ESA, to include interviews, cleanup liens, government records review, and visual inspection, must be updated.   Any changes in the condition of the property must be noted.  For practical purposes, this means that the Phase I ESA should be completed within 6 months prior to transfer.       
 
Institutional and Engineering Controls – As many states sought to develop their own Brownfield-type laws, an important concept to emerge is the roll of institutional and engineering controls in achieving cleanup goals.  Typically, these controls involve the use of barriers, such as paved parking lots, berms, etc., and use limitations (e.g. deed restrictions, etc.) to protect the public from environmentally impaired areas and substantially reduce cleanup costs.  Such controls and limitations are typically recorded in Deed Records for the site.  What remains unclear, however, is the proposed requirement that such records be reviewed for all properties within ½ mile of the study site.  There is currently no comprehensive database that tracks such Deed restrictions or other mechanism that is capable of being reviewed in a timely or cost-effective manner beyond an assessment of the target property.  Given the current fiscal crisis that exists in many state treasuries, it is unlikely that this portion of the proposed regulation can be complied with near term.  

While EPA offers prospective purchasers of Brownfield sites potentially significant liability protections, each of the foregoing contributes to the inevitable cost and delay that will be passed on to the real estate community.  Environmental legal practitioners should consider such uncertainties in the transactional context, particularly in the case of time sensitive deals.  It is also worth noting that the completion of Phase I Environmental Site Assessments is important for a number of reasons that go well beyond the ability to establish Landowner Liability Protections or otherwise comply with EPA’s proposed rule. For example, a thorough understanding of the environmental issues helps buyers and sellers allocate risk and avoid costly construction and permitting delays.  In many cases, these benefits will remain the most important consideration for completing high-quality environmental assessments.  

Conclusion

The concept behind Brownfields is to facilitate the redevelopment of real property, the expansion, redevelopment or reuse of which is complicated by the presence of hazardous substances, pollutants or contaminates.  Legal counsel should take note of the impact of EPA’s proposed rule and its affect on real estate transactions. 

The Reg-Neg Committee reached consensus on its proposed rule on November 14, 2003.  In January, 2004, EPA drafted a preamble and regulatory impact analysis, and submitted its findings to the Office of Management and Budget, among other agencies for review and comment.  In the past, EPA has taken the position that it reserves the right to proceed with its own rulemaking notwithstanding the outcome of the Reg-Neg Process. Patricia Overmeyer, who is spearheading EPA’s efforts through the Office of Brownfields Cleanup and Redevelopment, stated OMB, among other federal agencies, would review the proposed rule before being finalized.[11]  EPA will then publish its proposed Final Rule in the Federal Register for a 60-day public review and comment period within the next several months.  EPA will craft the Final Rule after considering and responding to all public comments.  Stay tuned.