Change is in the air with regard. feature

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1 em feature Amy L. Edwards is a partner in the law firm of Holland & Knight LLP, Washington, DC, where she co-chairs the firm s national environmental team. Sarah C. Smith is an associate at Holland & Knight. amy.edwards@hklaw.com. Change is in the air with regard to how environmental due diligence will be conducted in the future. The changes stem from Congress enactment in 2002 of the Small Business Liability Relief and Brownfields Revitalization Act, which amended the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).1 As part of the 2002 law, Congress required the U.S. Environmental Protection Agency (EPA) to develop standards for parties to conduct all appropriate inquiries prior to taking title of a property to determine if there were conditions indicative of releases, or threatened releases, of hazardous substances or petroleum products on that property. EPA convened a negotiated rulemaking committee (the reg-neg committee) in 2003 to develop an all appropriate inquiry (AAI) rule. A proposed rule was published in August 2004,2 and the final rule was published on November 1, The AAI rule makes substantial changes to the way Phase I Environmental Site Assessments (ESAs) are conducted. It places new burdens on the user (i.e., prospective purchaser, seller, or lender), as well as more stringent requirements on the environmental professional (EP) conducting the assessment The 2002 Brownfields Act added or clarified three potential defenses to liability under CERCLA. The three potential defenses to CERCLA liability, which EPA describes collectively as landowner liability protections (LLPs), are as follows: 1. The bona fide prospective purchaser defense, which creates a potential defense to CERCLA liability for a prospective purchaser who purchases contaminated property with prior knowledge of the contamination, provided that, among other things, (a) the purchaser conducted all appropriate inquiries prior to taking title, (b) the contamination occurred prior to the purchaser s acquisition of the property, and (c) the purchaser takes reasonable steps and exercises appropriate care post-closing to prevent continuing releases and future releases. This defense is the one most likely to apply in most contaminated property transactions. The contiguous property owner defense, which creates a potential defense to CERCLA liability for a prospective purchaser of property if the purchaser did not know or have reason to know about the contamination at the time of purchase, provided that, among other things, (a) the purchaser conducted all appropriate inquiries prior to taking title, (b) the contamination was the result of the migration of hazardous substances from an adjacent property, and (c) the purchaser takes reasonable steps and exercises appropriate care post-closing to prevent continuing and future releases. The innocent landowner defense, which creates a potential defense to CERCLA liability if the prospective purchaser did not know or have reason to know about contamination on the property at the time of the purchase, provided that, among other things, (a) the purchaser conducted all appropriate inquiries prior to taking title, (b) no contractual relationship exists between the party that caused the contamination december 2005 em 11

2 and the purchaser, and (c) the purchaser exercised due care with respect to the hazardous substances and took precautions against foreseeable acts or omissions of third parties. The threshold step for qualifying for any of these defenses is that the user must have conducted all appropriate inquiries... into the previous ownership and uses of the facility in accordance with generally accepted good EPA s A AI rule will radically change the way Phase I ESAs are conducted. about reductions in the purchase price that may be attributable to contamination on the property, and information about any institutional controls that may have been placed on the property. KEY ISSUES User Obligations The AAI rule imposes a number of obligations on the user that either do not exist or are not rigorously enforced under the interim standard, ASTM E1527. Under the new rule, the user will have an obligation to identify institutional controls (ICs) and engineering controls (ECs) that have been placed on the property and to report that information to the EP. This information is often contained in the land records and, increasingly, in state government databases or registries. EPA s reg-neg committee agreed to require a database search for state IC/EC records, in part to support the development of state registries. commercial and customary standards and practices regarding environmental due diligence for a site.4 Additional obligations apply post-closing (e.g., taking reasonable steps and exercising appropriate care to prevent continuing releases, preserving the integrity of institutional and engineering controls, and complying with legally required release reporting obligations). Consequently, a Phase I ESA report should state that the report is being prepared so that the user may qualify for one or more LLPs. A report that states that it is being prepared solely to satisfy the innocent landowner defense does not provide the user with the full protection against CERCLA liability intended by the 2002 Brownfields Act. As this article goes to print, EPA s AAI rule has just been published. The rule will become effective on November 1, The interim standard is the ASTM standard, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, E , E , or E It should be noted that E is the result of ASTM s simultaneous efforts to make changes to the current standard (E ) to make it more consistent with EPA s AAI rule. The AAI rule follows current ASTM standard practice in many areas, but adds new burdens upon both the user and the EP. The rule imposes significant obligations upon the user to sustain information and documentation about the property and encourages the user to share this information with the EP before AAI will be deemed to be complete. If AAI are not deemed to be complete, the user may not qualify for any of the defenses to CERCLA liability. For these reasons, the user will need to become a more active participant in the process by sharing with the EP any specialized knowledge it Hazardous Waste Site Under the AAI rule, an EP must view surrounding may have about the property, information parcels from the property line, public right of way, or similar vantage point. 12 em december 2005

3 Table 1. Key differences between the ASTM E1527 standard and the EPA AAI rule. Issue ASTM E AAI Rule User obligations Minimum EP qualifications The user may perform tasks that will help identify recognized environmental conditions (RECs) on the property, including (1) checking title records for environmental liens, (2) communicating specialized knowledge or experience to the EP, (3) communicating the reason for a low purchase price, and (4) communicating why the user wants the Phase I ESA. The definition of an EP is very broad: a person possessing sufficient training and experience necessary to conduct a site reconnaissance, interviews, and other activities [and]... having the ability to develop opinions and conclusions The user must perform certain activities, such as providing (1) information regarding purchase price compared to fair market value, (2) an assessment of commonly known or reasonably ascertainable information, (3) specialized knowledge, and (4) information about environmental liens. The user is not required to share these additional inquiries with the EP. EP is defined as (a) a person who possesses sufficient specific education, training, and experience necessary to exercise professional judgment to develop opinions and conclusions regarding the presence of releases or threatened releases... sufficient to meet the objectives and performance factors and (b) a combination of professional qualifications and years of full-time relevant experience ranging from a maximum of 10 years full-time relevant experience to a minimum of a P.E. or P.G. license or registration and three years experience. Shelf life of the Phase I ESA Specialized knowledge or experience Purchase price of the property A Phase I ESA conducted within the prior 180 days is presumed to be valid. The user must communicate any specialized knowledge or experience that it has to the EP. The user should try to explain a reduced purchase price if he/she has actual knowledge that the purchase price is significantly lower than the purchase price of comparable properties. Reports older than one year will not satisfy AAI. Certain information in the report that is more than six months old must always be updated (e.g., regulatory records review, site visit, interviews, specialized knowledge, and environmental liens). AAI is not deemed complete unless the assessment takes into account the relevant and applicable specialized knowledge and experience of both the user and the EP. The user must evaluate whether the purchase price is lower than the fair market value of the property as a result of contamination. This does not mean that an appraisal must be conducted or that this information be shared with the EP. ICs and ECs (aka activity and use limitations, or AULs) The user is encouraged to check recorded land title records for AULs. Both the user and the EP have independent obligations to identify whether AULs have been placed on the property. Environmental liens on the property Data gaps The user is encouraged to check land title records for environmental liens. The current standard contains limited requirements for documenting data gaps. The user must provide the EP with documentation of any environmental liens filed against the property. Data gaps must be identified in the report, and the EP must provide an opinion whether those data gaps affect his/her ability to identify conditions indicative of a release or threatened release on the property. Sampling is not required to fill data gaps. Historical records Objective of the ESA The EP must search records back to 1940 or first developed use, whichever is earlier. The ASTM standard identifies eight standard historical sources that should be reviewed. To identify RECs. The EP must search back to first developed use of the property (i.e., as far back as it can be shown that the property contained structures or from the time the property was first used for residential, agricultural, commercial, industrial, or governmental purpose ). The EP is given substantial discretion in identifying which historical sources should be consulted. To identify conditions indicative of releases or threatened releases of hazardous substances or petroleum products, if such releases would pose a threat to human health or the environment. On-site reconnaissance The EP must indicate a failure to perform an on-site visit as a limitation of the assessment. The visual on-site inspection must be conducted in all but a few extraordinary cases. If the on-site reconnaissance cannot be performed, the EP must (1) conduct the inspection by another method, (2) document his or her efforts to obtain access to the property, and (3) document other sources he or she consulted for information. Note: The inability to gain access to inspect a property is viewed by the reg-neg committee as a huge red flag. december 2005 em 13

4 Table 1. Cont. Issue ASTM E AAI Rule Neighboring site The EP should view the surrounding parcels from the The EP must view the surrounding parcels from one of the reconnaissance vantage point of the subject parcel. following vantage points: the property line, public right-of-way, or similar vantage point. Interviews with neighboring Left to the discretion of the EP. If the subject property is abandoned, the EP must interview property owners neighboring property owners. Interviews with prior There is no requirement to interview past owners or The EP must interview one or more of the following people: owners or tenants tenants. current and past facility managers; past owners, occupants, or operators of the property; or employees of current and past occupants of the property if they are likely to have material information about releases. Qualifications of the Environmental Professional One of the most controversial provisions in EPA s AAI rule is the definition of environmental professional. The reg-neg committee tried to balance competing interests by requiring EPs to have specific minimum technical qualifications and several years of relevant experience, versus allowing current professionals who have been conducting ESAs for many years to be included within the definition of an EP. The definition in EPA s rule tries to strike a balance by creating a sliding scale, so that those with strong technical qualifications do not need to have been practicing in the field for as long, whereas those who have a less technical background may nevertheless qualify if they have been performing ESAs for a number of years. For instance, an individual with at least 10 years of relevant full-time experience conducting ESAs may qualify as an EP. More than half of the comments that were submitted to EPA on the proposed rule concerned the EP definition. University of Maryland s Twenty-Fifth Annual International Conference on Incineration & Thermal Treatment Technologies (IT3) May 16-18, 2006 Savannah, GA The IT3 Conference is an annual symposium on thermal treatment technologies for the management of special waste streams, including radioactive, hazardous chemical, mixed, medical/infectious, explosives, and chemical munitions. The conference will address a variety of topics with perspectives from regulators, designers, operators, program managers, and research scientists. Presentations will discuss monitoring techniques, risk assessment and management technologies, institutional management, and regulatory programs and their impacts. For more information, visit the Web site at Presented by: 14 em december 2005

5 Institutional and Engineering Controls REFERENCES 1. Small Business Liability Relief and To retain the liability protecbrownfields Revitalization Act of 2002 (115 Stat. 2356). tions offered by the LLPs, 2. See Standards and Practices for All property owners must be Appropriate Inquiries; Fed. Regist. 2004, 69 52,542 (August 26, able to show that they did not 2004)(to be codified at 40 C.F.R. do anything to interfere with Part 312). 3. All Appropriate Inquiry, Final Rule; the integrity or effectiveness Fed. Regist. 2005, 70, 66, 070 (Nov 1). of ICs/ECs placed on the 4. Comprehensive Environmental Response, Compensation, and property. For this reason, the Liability Act of 1980 AAI rule contains an in( 9601(35)(A)(i)). creased emphasis upon both the user and the EP, making more concerted efforts to identify these types of controls on the property. Gasoline Tank Under the AAI rule, an EP must search historical records as far back as it can be shown that the property contained structures, such as storage tanks (above), or from the time the property was first used for agricultural, commercial, industrial or residential purposes. EP Declaration EPA s AAI rule imposes two declaration requirements on an EP: (1) that he/she meets the definition of an EP, and (2) that he/she has conducted the ESA in accordance with the proposed rule. Users should carefully amend their scopes of work and inspect all Phase I ESAs conducted in accordance with the final AAI rule to be sure that they contain these EP declarations. Data Gaps An EP must identify any data gaps in his/her assessment and evaluate whether those gaps have affected his/her ability to provide an opinion on whether there are any conditions indicative of releases, or threatened releases, on the property. A data gap is an inability to obtain information required by the standards and practices, despite a good faith effort by the EP or user. This may be due to a physical barrier (e.g., snow, locked door), lack of time (e.g., a regulatory agency will not respond to a Freedom of Information Act [FOIA] request in less than 45 days), or other consideration (e.g., could not find any aerial photographs for a given 15-year time interval, even though photographs exist prior to and after that time). A data failure, on the other hand, is the absence of a specific type of information (e.g., no aerial photographs or city directories exist for the property prior to 1960). Shelf Life of the Phase I ESA The AAI rule clarifies that a user may not rely on a Phase I ESA that is more than 12 months old to satisfy the AAI standard. In addition, while a user may, to some degree, rely on older reports, certain aspects of those reports must be updated within a six-month window, namely, the site visit, the regulatory agency records review, interviews, and specialized knowledge of the user. The date of these activities, not the date of the report, is key; the activities themselves must have taken place within six months of closing on the property. As a practical matter, any Phase I ESA that is more than six months old is not likely to satisfy the AAI threshold. Table 1 compares some of the key differences between the AAI rule and the ASTM E1527 standard. Note that it does not address all of the issues that may affect the environmental due diligence process. CONCLUSION Hazardous Waste Storage Under the AAI rule, certain information must always be updated after six months. The report should reflect the current condition of the property, including any new storage of hazardous wastes. Change is indeed in the air change that is likely to significantly affect the way in which Phase I ESAs are conducted. It behooves every potential owner of commercial property (user) and EP to become familiar with these changes before EPA s final AAI rule goes into effect next November. A user s ability to qualify for a defense to CERCLA liability is what is ultimately at stake under these new rules. em december 2005 em 15