EPA’s Rule For “All Appropriate Inquiry” for Commercial Property Transactions
On November 1, 2006 the U.S. Environmental Protection Agency’s much-anticipated “All Appropriate Inquiries” rule establishing mandatory requirements for assessing commercial real estate for environmental contamination became effective. An environmental investigation known as a Phase I Environmental Site Assessment is the minimum level environmental “due diligence” for any buyer, investor, or lender of commercial real estate that has the potential to be contaminated by hazardous substances or petroleum products.
The reason for conducting a Phase I Environmental Site Assessment is to qualify for cleanup liability protections against the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Under CERCLA an owner of environmentally impaired commercial real estate can be held financially liable for all cleanup costs at the property even if they did not know of, cause or contribute to the contamination. Cleanup costs associated with contaminated real property often exceed the value of the property. Many property owners, faced with the extremely high cleanup costs at these sites, default on their loans. A properly conducted pre-acquisition Phase I Environmental Site Assessment provides a significant degree of protection from CERCLA liability for lenders, prospective purchasers of the property, and investors.
The “All Appropriate Inquiries” rule was mandated by the Small Business Liability Relief and Brownfields Revitalization Act of 2002 (Brownfields Amendments). Congress recognized a need to protect businesses involved in real property acquisitions from CERCLA liability. The Brownfields Amendments added two new cleanup liability protections to CERCLA; the Bona Fide Prospective Purchaser and Contiguous Property Owner protections. An Innocent Landowner liability defense already existed in the CERCLA statute. Congress required the U.S. Environmental Protection Agency (EPA) to establish “standards and practices for the purpose of satisfying the requirement to carry out all appropriate inquires into the previous ownership and uses of the property consistent with good commercial or customary practice”.
The EPA rule allows lenders, borrowers, investors, and others to secure cleanup liability protection if they conduct a pre-acquisition Phase I Environmental Site Assessment that follows the All Appropriate Inquires rule or the American Society for Testing and Materials ASTM E 1527-05 standard. Purchasers of commercial real estate can no longer establish protection against CERCLA cleanup liability by conducting the ASTM Transaction Screen (checklist) analysis (ASTM E 1528-06).
All Appropriate Inquiries and ASTM E 1527-05 Environmental Professional Requirements
Under both the All Appropriate Inquiry rule and the ASTM Phase I standard, only an environmental professional (EP) meeting stringent requirements for education, experience, and registration/certification can conduct a Phase I Environmental Site Assessment/All Appropriate Inquiries investigation. EPA requires that environmental professionals are competent environmental consultants who have a sufficient degree of expertise to render opinions and conclusions regarding “releases or threatened releases of hazardous substances” or about the potential for contaminants migrating from neighboring properties.
Bona Fide Prospective Purchaser Liability Protection
The CERCLA rule also provides liability protection for business entities and persons that qualify as Bona Fide Prospective Purchasers. Rather than acquiring direct cleanup liability costs for environmentally impaired real estate, EPA can only impose a windfall lien on the contaminated property for the increase in fair market value that results from any site cleanup conducted at EPA’s expense at the property.
For the first time, a person or business entity qualifying as a Bona Fide Prospective Purchaser may acquire commercial real estate with knowledge of contamination after conducting a pre-acquisition Phase I Environmental Site Assessment and not incur CERCLA liability for cleanup costs.
Contiguous Property Owner Liability Protection
CERCLA provides protection for businesses and persons that qualify as Contiguous Property Owners. A Contiguous Property Owner is “A person that owns real property that is contiguous to or similarly situated with respect to, and that is or may be contaminated by a release or threatened release of a hazardous substance from, real property that is not owned by that person shall not be considered to be liable under CERCLA for cleanup of the owned property”.
A requirement for a Contiguous Property Owner to secure protection from CERCLA liability is that “at the time the person acquired the property, the person…conducted All Appropriate Inquiry…and did not know or have reason to know that the property was or could be contaminated by a release or threatened release of one or more hazardous substances from other real property not owned or operated by the person”.
If you would like more information regarding All Appropriate Inquires and the new ASTM E 1527-05 please contact: Will Davis, REA, Davis Environmental at 707.367-0398 or Email ehsservices@sbcglobal.net.