The Brink of Change

• By Anthony J. Buonicore, Dianne Crocker
• May 01, 2004

The forces that govern the way environmental due diligence is conducted are changing; significantly, in some respects. The U.S Environmental Protection Agency (EPA) is now in the final stages of drafting the first rule for "all appropriate inquiry" (AAI), a term for the investigation into a property's potential for environmental contamination prior to purchase.

All appropriate inquiry is not a new term. Since 1986, property owners have had protection from liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which is also commonly known as Superfund, for pre-existing contamination under the "innocent landowner defense." This protection exists provided a pre-purchase investigation into the "previous ownership and uses of the property" did not reveal the presence of contamination on the property. Out of this requirement to conduct "all appropriate inquiry" evolved a niche market in the environmental industry: the annual $500 million Phase I environmental site assessment (ESA) market. ESAs are now institutionalized in commercial real estate transactions, and yet the specific steps necessary to conduct sufficient environmental due diligence before purchase had never been codified in a federal regulation until now.

Federal Brownfields Law
The impetus came when President George W. Bush signed the Small Business Liability Relief and Brownfields Revitalization Act (the Federal Brownfields Law) on January 11, 2002. Within the provisions of the law, the U.S. Congress sought to address uncertainty about environmental due diligence in the commercial real estate market by giving EPA two years to write the first "all appropriate inquiry" rule.

EPA decided to exercise its authority to write the rule using "regulatory negotiation," an approach used for only 20 agency rules to date. The agency's selection of this consensus-based approach reflects its attempt to involve stakeholders directly in the rulemaking process in an effort to minimize future disruption to commercial real estate markets. EPA's 25-member Negotiated Rulemaking Committee met six times in Washington, DC between April and November 2003 for often impassioned debate and negotiation that resulted in a consensus draft AAI rule on November 14, 2003. If the draft rule is any indication, the new federal regulation is likely to reshape today's environmental due diligence practices. The question on everyone's mind is: "How?"

AAI Applicability
The AAI rule, to be eventually codified as Part 312 - Standards for Conducting All Appropriate Inquiries, will have a number of different applications. The first, and most significant, relates to CERCLA liability protection. The Negotiated Rulemaking Committee's draft AAI regulation will apply not only to the traditional "innocent landowner defense," but also to two new defenses that property owners have at their disposal. To ease developers' fears about purchasing contaminated properties or sites adjacent to such properties, the Federal Brownfields Law granted property owners two new landowner liability protections: the bona fide prospective purchaser defense and the contiguous property owner defense. A property owner now has three avenues of liability protection, provided he/she meets a series of obligations, not the least of which is conducting AAI prior to purchase. Any parties receiving EPA brownfields grants to conduct their ESAs must also comply with the AAI rule.

To serve as sufficient protocol for AAI in the interim until EPA finalizes its rule, the Brownfields Law recognized another consensus-based practice: the American Society for Testing and Material's (ASTM) Standard E1527-97, which is entitled "Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process." EPA later clarified in the new federal regulation (68 Federal Register 3430-3435, May 9, 2003.) that the more recent 2000 version of E 1527-00 also meets AAI requirements.

AAI Action Items
The draft AAI rule, once enacted, will implement new requirements for each of the four "action items" of an ESA (i.e., government records review, historical research, site inspections and interviews). As such, the rule will affect the way ESAs are conducted, as well as how results are reported, how long they are valid and even which environmental professionals can (and cannot) do the job. Although the draft AAI rule is not nearly as prescriptive as the ASTM E 1527-00 standard, it does add some new layers of research beyond current industry practice. In a number of distinct ways, the draft rule expands the objective and scope of an environmental site assessment while narrowing the field of people qualified to perform the work.

AAI Scope
In conducting an ESA (or "environmental inquiry") in accordance with the draft AAI rule, an environmental professional must seek to identify "conditions indicative of releases or threatened releases" of CERCLA hazardous substances at the subject property and surrounding area. The rule identifies specific information that the environmental professional must identify (e.g., current and past property uses, waste management and disposal activities, current and past corrective actions, etc.) to the extent that such information is "publicly available, obtainable from its source within reasonable time and cost constraints, and which can practicably be reviewed." Then, if any gaps in the research remain, the environmental professional must document the attempts made to fill those data gaps, as well as comment upon the significance of such gaps with respect to the inquiry. If the presence of data gaps makes it impossible for the environmental professional to reach an opinion on the subject property, such findings also must be documented in the written report.

Government Records Review
The rule's requirements for reviewing government agency records and databases closely follows current practice with two notable exceptions. The first difference relates to engineering and institutional controls. Both types of controls are "activity and use limitations," a term used to describe any legal or physical limitations on the use of a property, such as deed restrictions and restrictive zoning. Such records are often contained in land title records or deeds, and to a lesser extent, in state government records. Given that a growing number of states now have efforts underway to track engineering and institutional controls, it was important to the AAI committee that the new rule account for the availability of such databases in the future. The draft rule therefore includes a specific requirement for the environmental professional conducting the ESA to search reasonably ascertainable registries of engineering and institutional controls for both the subject property and properties within a 1/2-mile radius. This requirement is a significant departure from current industry practice under ASTM E 1527-00's Section 5.2, under which the "user" bears full responsibility for identifying such records and reporting them to the environmental professional.

A second significant expansion in the draft AAI rule's requirements is the mandatory review of records maintained by Indian tribes and local government agencies. Section 312.26(a) of the draft AAI rule is not ambiguous in assigning the same weight to tribal and local agency records as federal and state records: "Federal, tribal, state, and local government records or databases of government records of the subject property and adjoining properties must be reviewed for the purposes of achieving the objectives and performance factors?" This language is much stronger than that of ASTM E 1527-00, which lists mandatory federal and state sources in Section 7.2.1, but leaves the review of other state and local sources up to the environmental professional's judgment. (Tribal records are not included in the ASTM standard.) Under AAI, to the extent that local government agencies or tribal records have readily available information about the subject property or surrounding area (e.g., records of leaking underground storage tanks, priority cleanup sites, etc.), the environmental professional must include such information in the assessment.

Historical Research
The big question surrounding historical research during a Phase I ESA is always: How much is enough? The AAI rule's provisions for investigating the past uses of the subject property and adjoining properties is broad; the environmental professional can use his or her judgment to determine how far back it is necessary to search historical records for the purpose of meeting the objectives and performance factors of the inquiry. To meet ASTM requirements, however, an environmental professional must identify "all obvious uses of the property?from the present, back to the property's obvious first developed use, or back to 1940, whichever is earlier."

Phase I professionals today typically conduct historical research using the ASTM E 1527-00 standard's five-year research interval or gap (i.e., "review of standard historical sources at less than approximately five-year intervals is not required"). The draft AAI rule does not specify a particular research interval, but instead allows the environmental professional to determine which sources of historical data are "publicly available, obtainable from its source within reasonable time and cost constraints and which can practicably be reviewed." As discussed earlier, under AAI, the environmental professional's report must not only identify data gaps, but also explain the reason for such gaps, the sources consulted to fill them, and the significance of those gaps on the findings of the inquiry. Comprehensive historical research using all "reasonably ascertainable" sources is critical under AAI, particularly given that charges of inadequate historical research are one of the most common causes of litigation against environmental professionals.

Who Can Perform Phase I ESAs?
The draft AAI rule is performance based, rather than prescriptive, meaning that many decisions are left up to the judgment of the environmental professional. As a result, the committee sought to define "environmental professional" in a way that would discourage those who lack sufficient education, federal/state licensing or relevant experience from conducting environmental assessments. The committee's compromise, achieved after many hours of negotiation, gives an environmental professional four avenues to qualify for conducting Phase Is. In each of the four categories, qualified environmental professionals must possess a minimum amount of "relevant experience," based on "past participation in the performance of ESAs that may include environmental analyses, investigations and remediation which involve the understanding of surface and subsurface environmental conditions..." The definition recognizes government licenses and registrations, but not private certifications commonly held by Phase I professionals today.

The only environmental professionals who are "grandfathered" under the draft AAI rule are those with a baccalaureate degree or higher and at least ten years of relevant experience. An environmental professional must remain "current in his or her field through participation in continuing education or other activities" and be able to demonstrate such efforts. The regulatory negotiation committee agreed to allow individuals who do not meet the EP definition to perform AAI tasks, provided they are under "the supervision or responsible charge" of someone who does.

In practice, it will be difficult to enforce the draft rule's environmental professional definition. "Caveat emptor" will always be the guiding principle; it is unlikely that sophisticated buyers will risk their ability to qualify for CERCLA liability protection by hiring someone unqualified to perform their Phase I. Nonetheless, if a Phase I is being conducted to comply with AAI requirements under CERCLA, the report must contain a written declaration that the inquiry was performed by one or more qualified environmental professionals in compliance with the federal rule.

Timeline for Final AAI Rule
EPA is now in the process of finalizing a proposed rule that incorporates the recommendations of the Negotiated Rulemaking Committee. The draft rule, including a preamble with interpretation and guidance on how the rule applies to CERCLA's landowner liability protections, is expected to appear in the Federal Register in May or June 2004. At that time, every member of the public will have an opportunity to comment. EPA will then make any necessary revisions before promulgating the final regulation, most likely in late 2004.

To ensure that the ASTM standard will continue to be used, the ASTM E 50.02.06 Task Group is currently revising its standard for consistency with the federal rule. If, after ASTM makes the revision (anticipated to become E 1527-04), EPA determines that the ASTM E 1527-04 standard is at least as stringent as the final federal rule (which is expected), EPA will include in the references section of its rule recognition of the revised standard as complying with the federal rule. This will enable the ASTM standard to remain the industry's benchmark for property environmental due diligence.

It is clear that the AAI rule will alter the way that environmental due diligence is conducted for property owners seeking any of the three CERCLA liability protections. Any environmental professionals involved in conducting Phase Is should therefore familiarize themselves with the draft rule now, check their qualifications against the environmental professional definition, and keep clients up to speed on the CERCLA safe harbors that are now available and the steps that must be taken to take advantage of them in the future.

This article originally appeared in the 05/01/2004 issue of Environmental Protection.