AAI Update

Proposed "all appropriate inquiries" rule will have far-reaching effects on real estate due diligence efforts

• By Jon E. Kallen, Donald F. Allen
• Mar 01, 2005

On January 11, 2002, President George W. Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act ("SBLR&BRA" or "Brownfields Amendments"). The act amends the innocent landowner defense against liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which is also known as Superfund, and extends liability protection to new categories of landowner, i.e. the "bona fide prospective purchaser" and "contiguous property" owner. The act requires persons seeking these protections to conduct "all appropriate inquiries" (AAI) into the previous ownership, uses, and environmental conditions of subject properties before acquiring them.

The act amends CERCLA section 101(35) to require that within two years of its enactment the U.S. Environmental Protection Agency (EPA) promulgate regulations establishing standards and practices for satisfying the requirement to conduct AAI. It lists 10 criteria that EPA must include in those regulations, and specifies interim standards and practices pending issuance of the new regulations. For property acquired before May 31, 1997, courts are directed to consider five factors in determining whether all appropriate inquiries were made. For property acquired on or after May 31, 1997, the AAI requirement is satisfied if landowners follow the procedures of American Society for Testing and Materials (ASTM) Standard E1527-97, "Standard Practice for Environmental Site Assessment: Phase I Environmental Site Assessment Process." EPA subsequently published a final rule stating that the requirement could also be satisfied by complying with ASTM Standard E1527-00 of the same title.¹

Key Provisions
EPA published the proposed rule and a lengthy preamble in the Federal Register (FR) on August 26, 2004 69 FR 52542; 40 Code of Federal Regulations (CFR) part 312. The preamble declares that "the objective of the conduct of all appropriate inquiries is to develop an understanding of the conditions of the property and determine whether or not there are conditions indicative of releases and threatened releases of hazardous substances (and pollutants, contaminants, controlled substances, and petroleum and petroleum products, if applicable) on, at, in, or to the subject property." The rule is likely to have far-reaching effects on the due diligence process associated with commercial property transactions because it differs in certain respects from the interim standards and practices found in ASTM E 1527-97 and E 1527-00. The discussion below focuses on three areas of difference that are likely to prove more onerous than the current interim standards: 1) the role of the "environmental professional"; 2) institutional controls and other continuing obligations; and 3) interviews and visual inspections.

The Environmental Professional
The Brownfields Amendments require that AAI include "the results of an inquiry by an environmental professional." Since the statute does not define environmental professional, the proposed rule undertakes to do so by establishing minimum qualifications for education and experience. To be considered an environmental professional, an individual must satisfy one of the following requirements listed below.

The proposed rule calls for "relevant experience" but does not to define this term or provide any concrete examples of it. Relevant experience likely includes conducting environmental site assessments under the ASTM standards and guidelines, but it is not clear whether other types of environmental due diligence experience, e.g., conducting transaction screens or underground storage tank site investigations, could also be considered relevant experience.

The proposed rule requires that environmental professionals remain current in their fields through participation in continuing education or other activities, and be able to document their efforts. People who do not qualify as environmental professionals may assist in conducting AAI if they work under the supervision or responsible charge of an environmental professional. Several inquiries or activities may be conducted by the purchaser or landowner instead of the environmental professional as long as the results are provided to the environmental professional. The proposed rule requires the environmental professional to document the results of the AAI in a written report. This report must include his or her opinion as to whether the inquiries identify conditions indicative of releases or threatened releases of hazardous substances on, at, in, or to the subject property; sign the report; and make the following declarations: 1) that he or she satisfies the definition of an environmental professional; 2) that he or she has "specific qualifications" to assess the subject property and has conducted the AAI in conformity with the rule. The report also must identify any "data gaps" in the information collected about the property and comment on how they affect the environmental professional's ability either to render an opinion as to whether the AAI identified conditions indicative of releases or threatened releases of hazardous substances or to determine the significance of the data gaps.

Although parts of the due diligence process may be conducted under the environmental professional's supervision, the proposed rule requires that visual inspections of the subject property and adjoining properties be conducted by the environmental professional. EPA determined that the environmental professional is the person best qualified to conduct visual inspections and to locate and interpret information regarding the physical and geological characteristics of individual properties.

Institutional Controls
The proposed rule defines institutional controls (ICs) as "non-engineered instruments, such as administrative and/or legal controls, that help to minimize the potential for human exposure to contamination and/or protect the integrity of a remedy." ICs are typically used whenever contamination precludes unlimited use of and unrestricted exposure to a property. They may be needed both before and after completion of a remedial action, often need to remain in place indefinitely, and generally need to survive changes in property ownership. Specific examples include zoning restrictions, easements, covenants, and well-drilling prohibitions.

Identifying and maintaining ICs are important tasks because ICs are components of many site remedies and are being used with increasing frequency in view of the often prohibitive expense of cleaning up soil and groundwater to residential or background levels. Failure to comply with ICs may result in liability.

The Brownfields Amendments do not expressly require searching for or reviewing ICs as part of the AAI standards and practices. They do address ICs, however, as one of several obligations that continue after the subject property is acquired. Included among these continuing obligations is the requirement to not impede the effectiveness or integrity of any IC employed in connection with a response action. The landowner's claim to liability protection depends on satisfying these continuing obligations just as much as on conducting AAI. Characterizing AAI as a "threshold" requirement, EPA warns that conducting AAI "alone does not provide a landowner with protection against CERCLA liability." Landowners "must comply with all the statutory requirements to qualify for the liability protections." While some continuing obligations, such as complying with EPA information requests, are reactive in nature, those applicable to ICs require affirmative knowledge of circumstances affecting the property. These considerations may have persuaded EPA to include efforts to collect information about ICs in the proposed rule's AAI standards and practices 69 FR 52577; 40 CFR §312.20(d)(1)(vi).

Collecting information about ICs requires additional effort and expertise on the part of the environmental professional. EPA notes that information about ICs may be collected in the course of observing several of the standards and practices set forth in the proposed rule, including reviewing historical sources such as chain of title documents, reviewing government records, and interviewing owners, operators, and occupants of the property. The proposed rule does not require that persons conducting AAI obtain the actual chain of title documents for a property (69 FR 52562), however, instead expecting the environmental professional to use his or her professional judgment to determine what types of historical documentation may provide the most useful information about a property. Likewise, the proposed rule lists types of government records or databases of records that should be searched (69 FR 52563), but specifies only one where IC information may be found, namely EPA's Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS). The authors submit that identifying others and tracking down the ICs in place at CERCLA sites, even with the help of CERCLIS, are tasks best left to the judgment, expertise, and experience of environmental professionals.

Interviews and Visual Inspections
The proposed AAI rule contains more burdensome interview and site inspection requirements than the ASTM standard. Specifically, it calls for interviews with past and present owners, operators, and occupants in order to gather information regarding the potential for contamination at a facility. This differs from ASTM E 1527-00, which requires interviews only of current owners and occupants, including the key site manager or any other person "with good knowledge of the uses and physical characteristics of the property." The proposed rule regards conducting interviews as a task entirely within the scope of the environmental professional's duties. Moreover, the proposed rule does not prescribe particular questions that must be asked during interviews, recognizing that the type and content of any questions will depend on site-specific conditions and circumstances and the environmental professional's knowledge of the property.

The proposed rule also requires visual inspection of adjacent properties (69 FR 52565; 40 CFR § 312. 27). EPA recommends that visual inspections of adjoining properties be conducted on site where practicable, and that visual inspections of both subject and adjoining properties be conducted by the environmental professional in person rather than by someone under his or her supervision. EPA believes that on-site inspection "may be the most important aspect of the inquiries and the primary source of information regarding the environmental conditions on the property"(69 FR 52564). Accordingly, "the professional judgment of an individual meeting the proposed definition of an environmental professional is vital to ensuring that all circumstances at the property indicative of environmental conditions and potential releases or threatened releases are properly identified and analyzed"(69 FR 52565).

Conclusion
On September 17, 2004, EPA extended the comment period on the proposed AAI rule from October 25 to November 30, 2004 (69 FR 56016). Regardless of how EPA responds to the comments it receives, the final rule is likely to mandate more rigorous and extensive inquiries than those required under ASTM's Phase I standard. The increased difficulty and the added time and other costs of complying with the new rule will inevitably have a significant impact on commercial real estate transactions.

The environmental professional will likely remain central to the final rule as he or she is written into the Brownfields Amendments as one of the criteria for AAI standards and practices, and plays a leading role in effecting the other criteria. Both the act's continuing obligation requirements and the proposed rule's recommendations for conducting interviews and site inspections underline the importance of the environmental professional's expertise and experience. Anyone planning to acquire commercial real estate will be well advised to secure the assistance of an environmental professional who satisfies the proposed rule's definition and also possesses the training and experience necessary to assess the specific property slated for acquisition.

Reference
1. 68 Federal Register 24888, May 9, 2004; 40 CFR §312.1 and §312.2

This article originally appeared in the 03/01/2005 issue of Environmental Protection.