Lawyer Article

I. Application to Banking and Lending Institutions

On August 26, 2004 the United States Environmental Protection Agency (“USEPA”) issued a proposed rule setting forth the “all appropriate inquiry” standard and practices under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA” or “Superfund”), 42 U.S.C. § 9601 et seq. See 69 Fed. Reg. 52542. By adding substantial new requirements for conducting environmental due diligence prior to purchasing property, the proposed rule would have a significant impact on the ability of prospective purchasers of property to assert a defense to CERCLA liability.

Although banking and lending institutions generally enjoy a defense to CERCLA liability for property acquired pursuant to a foreclosure, the proposed rule could nevertheless have a significant effect on their ability to deflect CERCLA liability in other circumstances. First, when purchasing property at a foreclosure sale, banking and lending institutions are treated in the same manner as other prospective purchasers of property with regard to potential CERCLA liability. Second, banking and lending institutions should verify that customers follow these new standards and practices when purchasing commercial property in order to assure that customers are shielded from CERCLA liability as a safeguard to the security of the loan in the event that environmental problems surface.

II. The “All Appropriate Inquiry” as a Part of the Defenses to CERCLA Liability

The extremely broad reach of CERCLA has stood as a major impediment to the cleanup and redevelopment of contaminated industrial property by private business. In an attempt to ease some of the barriers created by Superfund, Congress passed the Small Business Liability Relief and Brownfields Revitalization Act (“Brownfields Amendments”) in January 2002, creating two defenses to CERCLA liability in addition to the already existing “innocent landowner” defense—“bona fide prospective purchasers” and “contiguous property owners.” In order to qualify for one of these three exemptions, a prospective purchaser of property must comply with the criteria set forth in Superfund and the Brownfields Amendments, most important of which is the requirement that a prospective purchaser of property conduct “all appropriate inquiries” into the past history and environmental condition of the property in order to identify conditions indicative of releases and threatened releases of hazardous substances affecting that property.ⁱ

Exactly what is meant by the all-important “all appropriate inquiry” standard has been the subject of much debate, and in an attempt to give some clarity to prospective purchasers of property, Congress directed the USEPA to promulgate federal regulations establishing standards and practices for conducting “all appropriate inquiries” into the prior uses of potentially contaminated property. In response to this Congressional mandate, the USEPA convened a committee comprised of 25 interested organizations, including real estate developers, banking and lending institutions, environmental conservation and public interest groups, environmental consultants and engineers, and state and local governments. Beginning in early 2002, the committee conducted a number of public hearings in order to settle on appropriate language for the “all appropriate inquiry” regulations, with a consensus finally being reached in late 2003.

III. Changes from the Existing Environmental Due Diligence Standard

Currently, prospective purchasers of property must comply with the procedures of the American Society for Testing and Materials (“ASTM”) Standards E1527-97 or ASTM E1527-00 (collectively, “ASTM Standards”) in order to satisfy environmental due diligence prior to a sale. The proposed rule would go far beyond the ASTM Standards, establishing specific regulatory requirements and standards for conducting “all appropriate inquiries” into the past history and uses of the property, previous ownership of the property, and present environmental conditions of the property for the purposes of seeking shelter under one of the three aforementioned defenses to CERCLA liability. Some of the more significant requirements of the proposed rule are as follows:

• The establishment of specific standards for environmental professionals who are responsible for conducting the “all appropriate inquiry” activities set forth in the proposed rule, arguably limiting the universe of consultants that may be authorized to perform these assessments. Additionally, the proposed rule would require greater oversight and a report certification by the senior engineer conducting the inquiry.
• Expanded obligations to interview current and past owners and occupants of the property, particularly those persons most likely to be knowledgeable about the current and past uses of the property and any handling of hazardous substances.
• Affirmative requirements to interview neighboring and nearby property owners and/or occupants in the case of abandoned properties.
• Require not only a visual inspection of the property itself, but of adjoining properties from the subject property’s property line, public rights of way, and any other vantage point.
• Review of historical sources of information dating back to the first use of the property for residential, agricultural or commercial/industrial purposes.
• In addition to a normal title review, a mandate to search for any environmental cleanup liens recorded under any federal, state or local laws.
• Any specialized knowledge of the prospective purchaser—knowledge regarding the subject property, adjoining properties, or the surrounding area—is taken into account, as is the balance of the actual purchase price compared to the value of the property if it were not contaminated.
• Substantially increased report drafting and documentation requirements imposed on environmental consultants, including obligations to document the extent of the review. If any “data gaps” are identified affecting the ability to identify conditions indicative of releases or threatened releases of hazardous substances, the proposed rule would require the environmental consultant to provide opinions regarding the significance of such “data gaps” on the identification of potential releases of hazardous substances.

IV. Potential Effects of the Proposed Standard

If adopted, the proposed rule would represent a significant expansion of the existing ASTM Standards, increasing the burden on both prospective purchasers of property as well as the environmental consultants conducting the “all appropriate inquiry” activities. Two immediate effects of the proposed regulations, if approved, are an increase in both the cost and time required to perform environmental due diligence. While the USEPA forecasts immediate price increases for environmental assessments of only $41 to $47, industry experts expect increases in excess of $1,500, potentially doubling the existing cost under the existing ASTM Standards. Additionally, more time will be required to abide by the specific requirements set forth in the proposed rule.

While the immediate impact of the proposed rule may mean a headache for both prospective purchasers of property and environmental consultants, the creation of specific regulatory requirements and standards for conducting “all appropriate inquiries” potentially expands the breadth of the “innocent landowner,” “bona fide prospective purchaser,” and “contiguous property owner” defenses to CERCLA liability. Consequently, it is imperative that prospective purchasers of property work closely with their environmental consultants and legal counsel before, during, and after the “all appropriate inquiry” assessment to ensure the appropriate assessment scope, the proper documentation of the inquiry, and the post-acquisition strategy for taking advantage of one of these three defenses to CERCLA liability.

Note

The remaining criteria set forth in Superfund and the Brownfields Amendments are as follows:

• Not being potentially liable or affiliated with any other person potentially liable for the release;
• Exercising appropriate care with respect to any release of a hazardous substance;
• Providing full cooperation, assistance, and access to persons authorized to undertake response actions or natural resource restoration;
• Complying with land use restrictions and not impeding performance of institutional controls;
• Complying with all EPA information requests; and
• Providing all legally required notices regarding releases of hazardous substances.

For further information on this or any other environmental issue call: Howard Grubbs
(864) 255-5413, email, or Michael Bogle (864) 255-5426, email.