Buyer beware: EPA’s ‘All Appropriate Inquiry’ rule takes effect Nov. 1mp1

The saying “buyer beware,” is going to be more important than ever on Nov. 1, the date when a new rule issued by the U.S. Environmental Protection Agency takes effect.

The new rule is called the “All Appropriate Inquiry” rule.

“The bottom line is if you own a property you’re liable for any contamination there,” Allan M. Blanchard, president and CEO of EMS Environmental, Inc. Bethlehem, Pa., said in an interview this week with NPN MarketPulse.

As a property owner, one cannot avoid that liability, Blanchard said, “unless you’ve made this ‘all appropriate inquiry’ to show that you did everything you could to find out if there was contamination and there was no way you should have known that it was contaminated.”

Blanchard’s company offers environmental consulting and engineering services, including evaluating the environmental condition of sites that are being considered for acquisition.

The EPA published the rule one year before the Nov. 1, 2006, effective date.

Blanchard said, “Now, for the first time ever, there are actual guidelines on how to perform that inquiry.” (For more information about the U.S. EPA’s “All Appropriate Inquiry” rule, visit the agency’s Web page at epa.gov/brownfields/regneg.htm.)

Petroleum marketers seeking financing for the purchase of fuel stations can expect lenders to be paying close attention to the rule, Blanchard said. “The banks worry about it because they don’t want to foreclose on a site that’s contaminated and is going to cost more to clean up than the site’s worth,” he said.

For his clients who are buying gasoline stations, Blanchard said, he recommends borings to collect samples for analysis “so they really know what they’re getting into.”

Also, Blanchard has written a description of the rule and its requirements, which appears here with his permission:

The EPA’s “All Appropriate Inquiry” Rule is about to change owner liability and environmental due-diligence standards. Effective November 1, 2006, in order to obtain protection from potential liability under the Comprehensive Environmental Response, Compensation and Liability Act as an innocent landowner, a contiguous property owner, or a bona fide prospective purchaser, buyers must comply with the requirements of the All Appropriate Inquiries Rule.CERCLA liability defenses are very valuable, especially since a purchaser or lessee of contaminated property can be liable for environmental cleanup costs even if the leak, spill or release happened decades earlier, without regard to fault or negligence. The AAI rule applies to anyone who is:

  • purchasing commercial or industrial property;
  • financing or re-financing commercial or industrial property or;
  • seeking federal grant money for contaminated site characterization and assessment.
Background
The 1986 Superfund Amendments to CERCLA contained an “innocent landowner” defense provision. The innocent landowner provision provided a defense for those persons who could demonstrate that they had no reason to know, prior to purchasing a property, that any hazardous substance was released or disposed of at the property. Purchasers had to demonstrate that they had undertaken “all appropriate inquiries” into the previous ownership and uses of the property consistent with good commercial or customary standards and practices.

The 2002 Brownfields Amendments to CERCLA added specific criteria for conducting “all appropriate inquiry,” added potential liability protections for “contiguous property owners'' and “bona fide prospective purchasers,” and required EPA to develop regulations for conducting AAI. The EPA issued the Final Rule Standards and Practices for All Appropriate Inquiries on November 1, 2005, with an effective date of
November 1, 2006.

Requirements
The 2002 Brownfields Amendments identified 10 criteria that must be investigated in order to achieve compliance with the AAI Rule:

  1. Interviews with past and present site owners and occupants;
  2. Reviews of historical sources of information such as chain of title documents, aerial photographs and building department and land-use records since the property was first developed;
  3. Searches for recorded environmental cleanup liens;
  4. Reviews of federal, state, tribal and local government records, including waste disposal records, underground storage tank records and hazardous waste handling, generation, treatment, disposal and spill records concerning contamination at or near the facility;
  5. Visual inspections of the facility and adjoining properties;
  6. Any specialized knowledge or experience of the prospective landowner;
  7. Assessment of the relationship of the purchase price to the fair market value of the property, if the property was not contaminated;
  8. Commonly known or reasonable ascertainable information about the property;
  9. Degree of obviousness of the presence of contamination or the likely presence of contamination at the property and the ability to detect contamination by appropriate inquiry; and
  10. The AAI must be performed or supervised by an environmental professional. To qualify as an EP, the individual must meet the strict educational or experience requirements set forth in the rule.
The AAI Rule states that the report must be issued or updated within one year of the date of acquisition of a property. If the AAI is conducted more than 180 days prior to the acquisition date, certain aspects of the inquiries must be updated.

The final report documenting the results of the AAI process must include an opinion as to whether conditions indicative of a release has occurred, and an identification of any data gaps that may have affected the environmental professional’s ability to identify these conditions. The report must also include the qualifications of the environmental professional and his or her declaration that the inquiries were conducted in conformance with the AAI Rule.

Impact of the Rule
The EPA’s AAI Rule dramatically changes the nature and extent of environmental due diligence:
  • The Rule imposes tougher standards on pre-deal environmental assessments and could have serious consequences for property purchasers who fail to comply.
  • Buyers need to make sure that, as a condition to engagement, environmental experts performing Phase I assessments certify that they meet the heightened professional qualification requirements.
  • Lenders will expect that new Phase I environmental assessments will comply with the AAI Rule.
  • The AAI Rule’s inevitable impact will be to increase the need for due diligence and will result in more Phase II investigations.
Frequently asked Questions
Am I required by law to have an AAI?
No, only if you want CERCLA landowner liability protection. Your lender may require it. However, lenders already get liability protection from CERCLA, if they are not involved in the management of the property. Lenders must make a judgment about the due-diligence procedures and practices they think are appropriate for the business risk they will assume.

Does a Phase 1 Environmental Site Assessment meet the AAI Rule?
The AAI Rule established that the revised, 2005 version of the ASTM International E1527 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process” is consistent with the requirements of the 2002 amendments and may be used to comply with the AAI provisions of the rule.

Is sampling required as part of the AAI Rule?
Sampling is not required, but sampling may be valuable in determining the possible presence and extent of potential contamination at a property or to explain data gaps. EPA notes that a court may determine that a prospective purchaser should have conducted sampling to satisfy one of the statutory criteria.

Conclusion
Conducting an AAI into the previous ownership, uses and environmental conditions prior to purchasing property is one of the key statutory requirements for establishing innocent landowner liability defenses. Any parties participating in or financing these types of transactions will want to have professional guidance to understand the circumstances in which the AAI standard might be relevant, and to assess whether the scope of the diligence conducted will satisfy the pertinent regulatory and statutory criteria. Prospective purchasers should also evaluate whether their environmental diligence should investigate risks outside of the scope of the AAI rule.

The promulgation of the AAI Rule reinforces the pivotal role of the environmental professional in commercial real estate transactions. This Rule makes it clear that reliance on reports that are more than one year old will not allow the user to invoke a defense to CERCLA liability. Since these older reports will need to be updated, the demand for environmental professionals’ time will increase, reinforcing the need to engage their services early on in a transaction to make certain that all appropriate inquiry can be properly conducted.