After an extensive negotiated rulemaking process, the United States Environmental Protection Agency (EPA) issued its long-awaited Final Rule on November 1, 2005 setting forth federal standards and practices for performing "All Appropriate Inquiries" (the "AAI Rule"). The AAI Rule, which is codified in Part 312 of Title 40 of the Code of Federal Regulations, takes effect on November 1, 2006. The AAI Rule refines the federal standards for performing Phase I environmental site assessments (ESAs) and modifies the requirements for landowner liability relief from the federal Superfund law. The AAI Rule is available at 70 Federal Register 66070 (Nov. 1, 2005) and can be downloaded from EPA's website (see "Links to Key EPA Web Pages" below).

Background

On January 11, 2002, President Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act (Pub. L. 107-118, 115 Stat. 2356, the "Brownfields Amendments"), amending the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, also known as Superfund), 42 U.S.C. §§ 9601 et seq. In general, the Brownfields Amendments provided liability relief to three classes of landowners, but also imposed a "higher bar" to qualify for that relief. Specifically, the amendments revised the pre-existing requirements for landowners to qualify for the innocent landowner defense under CERCLA. In addition, the Brownfields Amendments expanded the liability protections under CERCLA to include two additional classes of prospective landowners: contiguous property owners and bona fide prospective purchasers.

To qualify for the conditional CERCLA immunity conferred upon an innocent landowner, contiguous property owner or bona fide prospective purchaser, a prospective landowner must perform all appropriate inquiries or "AAI," prior to the time the subject property is acquired in order to determine if contamination is located on or threatens the property. One of California's landowner liability relief statutes – the California Land Reuse and Revitalization Act of 2004 (AB 389) – also imposes the requirement to conduct AAI in a manner compliant with the EPA standards as one of its threshold requirements.

In addition, the Brownfields Amendments impose certain continuing obligations on the landowner to take "reasonable steps" and exercise "appropriate care" with respect to any contamination that is found at the property, even if such contamination was not discovered in the course of performing AAI, but instead, was discovered after the subject property was acquired (See "Don't Forget the Continuing Obligations!" below).

Satisfying the AAI Rule Requirements

Prior to the issuance of the AAI Rule last November, prospective landowners seeking to qualify as an innocent landowner, contiguous property owner or bona fide prospective purchaser under the Brownfield Amendments were required by statute to either follow the Phase 1 standards adopted by ASTM International (previously known as the American Society of Testing and Materials and referred to hereinafter as "ASTM") for all post-May 1997 property acquisitions, or meet the general statutory criteria for all pre-May 1997 acquisitions. The ASTM "E 1527" standard had been revised several times, with the 2000 version (E 1527-00) recognized as the industry standard for performing Phase I ESAs prior to EPA's issuance of the AAI Rule. Virtually concurrent with EPA's issuance of the AAI Rule, ASTM issued a revised E 1527 standard entitled, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, Designation: E 1527-05, to conform with the AAI Rule requirements.

After the issuance of the AAI Rule but before November 1, 2006, prospective landowners may comply by utilizing the standards set forth in either the AAI Rule, the prior 1997 or 2000 ASTM standard, or the revised ASTM E 1527-05 standard.

After November 1, 2006, prospective landowners may comply by meeting either the revised ASTM E 1527-05 standard or the specific AAI Rule requirements. In practical terms, the AAI Rule requirements and the revised ASTM E 1527-05 standard are very similar, with some of the differences highlighted below.

The ability to successfully assert one of the prospective landowner defenses to CERCLA liability will depend, in part, on the landowner's ability to successfully demonstrate to a court that they have complied with the detailed Phase I requirements set forth in the AAI Rule or ASTM E 1527 standard. The courts have not yet established a track record regarding how strictly they will construe the landowners' need to comply with these requirements. The few reported judicial decisions construing the Brownfield Amendments have addressed solely the retroactive application of those amendments, and found that they apply only to property acquisitions after January 11, 2002 (the effective date of the amendments). See e.g., 1325 "G" Street Associates, LP v. Rockwood Pigments NA, Inc., 2004 U.S. Dist. LEXIS 19178 (D.Md. 2004); U.S. v. Domenic Lombardi Realty, Inc., 290 F.Supp.2d 198 (D.R.I. 2003); and City of Wichita, Kansas v. Trustees of the APCO Oil Corporation Liquidating Trust, 306 F.Supp.2d 1040 (D.Kan. 2003)(retroactive application addressed as dicta).

AAI Rule Refines Existing Phase I ESA Requirements

The AAI Rule does not represent a paradigm shift from the prior ASTM E 1527-00 standard for performing Phase I ESAs. However, the AAI Rule and its conforming ASTM E 1527-05 standard provide several important refinements to and enlarged requirements for how Phase I ESAs are to be performed and who performs them.

What Are the Stated Objectives for Conducting the Phase I ESA?

[AAI Rule Section 312.20(e); ASTM E 1527-05 Sections 1.1.1 and 7.1]

The primary objective of the Phase I ESA process pursuant to the ASTM E 1527-05 standard is to identify recognized environmental conditions or RECs. The ASTM E 1527-05 standard defines RECs as the "presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, ground water, or surface water of the property." Hence, Phase I reports issued pursuant to the ASTM process (including Phase I reports issued prior to the AAI Rule) typically concluded with an itemization of identified RECs.

The AAI Rule changed the stated objective of conducting a Phase I ESA. It does not use such "REC" terminology, but instead, indicates that the primary objective of the AAI process is to "identify conditions indicative of releases and threatened releases of hazardous substances on, at, in, or to the subject property." Unlike the ASTM E 1527-05 standard, the AAI Rule does not require that petroleum and petroleum products be evaluated as part of the Phase I ESA process (because CERCLA exempts such substances), except where the investigation is being funded by and is required as a condition of receiving a federal Brownfields grant. Such an assessment may also need to evaluate the presence of controlled substances. 70 Fed. Reg. 66086. Of course, the due diligence criteria of lenders, investors, and others involved in property transactions often compel the inclusion of an evaluation of petroleum, notwithstanding the limitation in the AAI Rule. Other than these distinctions, the objectives of the ASTM E 1527-05 standard and the AAI Rule processes are functionally the same.

Who may conduct the Phase I ESAs?

[AAI Rule Section 312.10; ASTM E 1527-05 Section 3.2.29 and Appendix X2]

Perhaps the most controversial part of EPA's new AAI Rule is the establishment of minimum qualifications for Environmental Professionals performing Phase I ESAs. To qualify as an Environmental Professional, a person must meet any of the following requirements:

  • Hold a current Professional Engineer's or Professional Geologist's license or registration from a state, tribe, or U.S. territory and have the equivalent of 3 years of full-time relevant experience; or

  • Be licensed or certified by the federal government, a state, tribe, or U.S. territory to perform environmental inquiries and have the equivalent of 3 years of full-time relevant experience; or

  • Have a Baccalaureate or higher degree from an accredited institution of higher education in science or engineering and have the equivalent of 5 years of full-time relevant experience; or

  • Have the equivalent of 10 years of full-time relevant experience.

A person who does not qualify as an Environmental Professional may nevertheless assist in performing Phase I ESA activities, provided that such person performs such work under the supervision of an Environmental Professional.

We would expect that most, if not all, reputable environmental consulting firms that have routinely performed Phase I ESAs in the past should readily be able to meet these new qualification standards. Nevertheless, parties should confirm that their Phase I ESA consultant is appropriately qualified to perform such assessment in accordance with the AAI Rule requirements.

The AAI Rule also requires that the Environmental Professional include a signed declaration in the written report, which states that the person performing the Phase I ESA meets the definition of Environmental Professional set forth in the AAI Rule. The Environmental Professional must also include a signed declaration which states that all appropriate inquires were carried out in accordance with the requirement of the AAI Rule.

What Information is the Prospective Landowner Required to Collect and Must Such Information be Shared with the Environmental Professional?

[AAI Rule Section 312.22; ASTM E 1527-05 Section 6.1 and Appendix X3]

The AAI Rule provides that the prospective landowner, rather than the Environmental Professional, will conduct inquiries into certain matters, including whether environmental liens have been filed against the property, whether the prospective landowner has any specialized knowledge or commonly known or reasonably ascertainable information concerning environmental conditions at the property, and how the purchase price of the property compares against the fair market value if the property was not otherwise contaminated, and that such information will be provided to the Environmental Professional. However, the preamble to the AAI Rule makes clear that it does not per se require that prospective landowners disclose such information to the Environmental Professional in order to meet the statutory criteria of the AAI Rule. In fact, EPA acknowledged that there may be business reasons why the prospective purchaser does not want to reveal confidential information, such as the purchase price, to the Environmental Professional for publication in Phase I ESA. In such case, unless the Environmental Professional obtains the information elsewhere, they may identify the lack of such information as "data gaps" in the ESA report (as described further below) and opine whether the data gap affects the professional's opinion about the condition of the property. Because the burden is on new landowners to establish that they qualify for the conditional CERCLA immunity through performance of AAI that meets the standards of conduct set forth in the AAI Rule, new landowners who fail to disclose such information to the Environmental Professional must be cognizant that they may need to demonstrate to a court that they have complied with the AAI requirements notwithstanding such nondisclosure.

Like the AAI Rule, the ASTM E1527-05 Standards require the prospective landowner to make such inquiries, and an optional User Questionnaire is provided in the ASTM Standards to facilitate the Environmental Professional's collection of such information from the prospective landowner. Because the questionnaire is optional, prospective landowners are not required to complete such form.

How Extensive Are the Owner and Occupant Interview Requirements?

[AAI Rule Section 312.23; ASTM E 1527-05 Section 10]

In addition to the standard practice of interviewing current owners and occupants of the property to be acquired, the AAI Rule now requires that additional interviews be conducted with current facility managers and employees, as well as past owners, operators, occupants, facility managers and employees, as may be necessary to assist in the identification of prior uses of the property and possible contamination. The AAI Rule also requires interviews with owners and occupants of neighboring and nearby properties in cases where the property being acquired is abandoned, and there is evidence of potential unauthorized uses or uncontrolled access on such property. While the AAI Rule sets forth these steps as "required," it also provides some discretion to the Environmental Professional to decide whether such prior and adjacent owner/occupant interviews are necessary to evaluate the environmental condition of the property. This discretionary decision by the professional is likely to be a focus of judicial challenges to a landowner's asserted compliance with the AAI Rule.

How Have the Visual Site Inspections Been Expanded?

[AAI Rule Section 312.27; ASTM E 1527-05 Section 9]

Prior to the issuance of the AAI Rule, Phase I ESAs conducted pursuant to the ASTM E 1527-00 and earlier standards required a visual inspection of the property to be acquired, but not adjacent properties. The AAI Rule does not extend the scope of such on-site visual inspection, but now requires the Environmental Professional to undertake the following efforts in the event that access to the property to be acquired cannot be obtained to conduct a visual inspection:

  • Visually inspect the subject property by another method (e.g., aerial imagery) or from an alternate vantage point (e.g., walking the property line);

  • Document the efforts taken to gain access to the subject property;

  • Document the use of other sources of information to determine the existence of potential environmental contamination; and

  • Express an opinion about the significance of the failure to conduct an on-site visual inspection.

The AAI Rule also requires that a visual inspection of adjoining properties be performed from the property line, public rights-of-way, or another vantage point (e.g., aerial imagery) to assess the potential for environmental contamination from the adjoining property to impact the property to be acquired.

Must the Environmental Professional Comment on Data Gaps?

[AAI Rule Section 312.20(g); ASTM E 1527-05 Section 12.7]

The AAI Rule requires a more extensive assessment of data gaps than was previously required under the ASTM E 1527-00 standard. Now, the Environmental Professional must identify any data gaps that remain after conducting the ESA and comment on the significance of such data gaps with regard to the ability to identify potential environmental contamination. Data gaps could potentially include any of the prospective landowner-required inquiry items (as described above) should the landowner decide not to provide such information to the Environmental Professional. Phase II-type sampling and analysis may be conducted, where appropriate, to fill identified data gaps. However, according to the AAI Rule, such sampling need not be performed prior to acquiring the property in order to satisfy AAI requirements (although the preamble to the AAI Rule, 70 Federal Register 66101, states that failure to sample may, in appropriate circumstances, disqualify the landowner from meeting other criteria necessary for liability protection).

May the Prospective Landowner Rely on Prior Due Diligence Reports Conducted for It or for Others?

[AAI Rule Section 312.20(a)-(c); ASTM E 1527-05 Sections 4.6-4.7]

The AAI Rule permits a prospective landowner to use a previously-conducted Phase I ESA report, if the information was collected and updated within one year prior to the date of acquisition of the subject property (i.e., the date the landowner obtains title to the property). However, certain aspects of the previously-conducted assessment must be conducted or updated within 180 days prior to the date of acquisition of the subject property, including the conducting of interviews, visual inspections, historical records review and the search for environmental liens.

What is the Revised "Look-Back" Period for Historical Sources of Information?

[AAI Rule Section 312.24; ASTM E 1527-05 Section 8.3]

The AAI Rule requires that historical documents be reviewed as far back in time as the property contained structures or the property was used for agricultural, residential, commercial, industrial, or governmental purposes. Under the prior ASTM E 1527-00 standard, such review would need to go back to, at a minimum, 1940, in the event the property was first developed later than such date. The AAI Rule does not impose such a minimum time requirement.

Don't Forget The Continuing Obligations!

As previously indicated, in addition to complying with the AAI requirements, there are several continuing obligations that a landowner must meet in order to achieve and maintain landowner liability protection under CERCLA. Such obligations apply even if environmental contamination is not identified during the AAI process prior to acquiring the property. Those obligations include:

  • Taking reasonable steps to stop any contaminant release, prevent any threatened release, and prevent or limit any human or environmental exposure to such release; and

  • Exercising appropriate care with respect to hazardous substances at the property, including complying with any land use restrictions and institutional controls; providing full cooperation, assistance, and access to persons that are authorized to conduct response actions or natural resource restoration; complying with agency information requests and administrative subpoenas; and providing legally-required notices to site occupants.

Landowners' compliance with these requirements are, at least in the first instance, "self-certified," without any need for official regulatory concurrence. However, the inherent ambiguity of the "reasonable steps" and "appropriate care" obligations creates uncertainty, particularly in situations involving significant contamination, that a court will retrospectively concur that such steps and care were adequately taken by the landowner for purposes of maintaining the liability relief. Unfortunately, while EPA policy contemplates that it would in appropriate cases issue "reasonable steps" comfort letters to landowners, EPA has done so only in a handful of cases. See, EPA's March 6, 2003 Interim Guidance Regarding Criteria Landowners Must Meet to Qualify for Bona Fide Prospective Purchaser, Contiguous Property Owner, or Innocent Landowner Limitations on CERCLA Liability.

Conclusion

Prospective landowners must conduct environmental due diligence prior to acquisition of potentially-impacted properties to satisfy many needs: establishing an appropriate purchase price, confirming suitability for the intended land use, avoiding potential tort liabilities, avoiding (or planning for) increased construction costs and delays, and complying with the due diligence requirements imposed by lenders and investors, to name a few. Qualifying for the conditional liability relief accorded certain classes of landowners in the Brownfield Amendments to the Superfund Law is certainly one of the paramount reasons, and the conduct of "all appropriate inquiry" in a manner that complies with the prevailing legal standards is the cornerstone of the qualifying criteria.

With the AAI Rule taking effect on November 1, 2006, any prospective landowner or investor evaluating the potential acquisition of property whose closing occurs after that date is advised to comply with the AAI Rule requisites (or the revised ASTM E 1527-05 standard) in all pending environmental due diligence for that transaction.

OTHER CONSIDERATIONS

Phase I ESAs performed under either EPA's AAI Rule or the ASTM E 1527-05 Standard do not address several notable environmental media. Depending on the nature of your transaction, consider expanding your Phase I ESA to address these additional areas, where appropriate:

  • Asbestos (naturally occurring and in buildings)



  • Mold



  • Lead (in paint and drinking water)



  • Radon



  • Indoor air quality (vapor intrusion issues)



  • Wetlands



  • Endangered species



For properties with ongoing hazardous materials operations, also consider performing a regulatory compliance audit to assess potential permitting, environmental and health & safety compliance.

LINKS TO KEY EPA WEB PAGES

Provides links to Federal Register Notice for AAI Rule, Facts Sheets on the AAI Rule and Definition of Environmental Professional, and Comparison of AAI Rule to ASTM E 1527-00 Standard

Provides link to legislation, legislative history and other background documents

Provides links to EPA guidance for innocent landowners, contiguous property owners and bona fide prospective purchasers; enforcement, comfort letter and prospective purchaser guidance and other cleanup liability-related guidance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.