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EPA’s Final “All Appropriate Inquiry” Rule Changes Owner Liability/Environmental Due Diligence Standards

This alert brings important issues to the attention of friends and colleagues about recent changes made by the Environmental Protection Agency in the environmental "due diligence" required to take advantage of the "innocent landowner" protections afforded by the Superfund law. Anyone who anticipates buying real estate needs to become familiar with changes to the Phase I environmental assessment process.

11/15/2005

Open PDF: EPA’s Final “All Appropriate Inquiry” Rule Changes Owner Liability/Environmental Due Diligence Standards

Background

By now, most property owners are familiar with the need to conduct so-called Phase I environmental assessments before acquiring property. These assessments are performed under technical guidance issued in 2000 by the American Society for Testing and Methods (“ASTM”). On November 1, 2005, the United States Environmental Protection Agency (“EPA”) issued the Final Rule Standards and Practices for All Appropriate Inquiries (the “Rule”) (70 Fed. Reg. 66070). The Rule adopts the revised 2005 version of the ASTM Phase I standard (E-1527-05) (the “2005 Standard”), makes the old 2000 ASTM standard obsolete, and sets forth the regulatory “standards and practices” for conducting “all appropriate inquiries” into a property’s previous ownership and operations.

Specifically, the Rule establishes the level of environmental due diligence required of landowners wishing to qualify for certain protections from strict liability for cleanup costs under CERCLA. In order to qualify for liability exemptions as an innocent landowner, contiguous property owner, and bona fide prospective purchaser, property buyers will now have to adhere to the Rule’s “all appropriate inquiries” standards and practices as well as other statutory criteria. For the full text of the Rule and other related materials, please see the EPA’s All Appropriate Inquiry Rulemaking Web site: http://www.epa.gov/swerosps/bf/regneg.htm.

The Impact of the Rule

The Rule dramatically changes the nature and extent of Phase I environmental assessments and environmental due diligence generally Among these changes are the following:

• The Rule imposes heightened professional qualification requirements on persons conducting Phase I assessments. The Rule takes into account academic and field experience and sets forth certain minimum qualifications. Buyers need to make sure that, as a condition to employment, environmental experts performing Phase I environmental assessments certify that they meet these requirements.
• The investigation performed by the environmental professional must be fully documented, including preparation of a formal “environmental opinion” that identifies any conditions that indicate a release or threatened release of hazardous substances on, at, in, or to the subject property. The opinion must also identify any “data gaps” that affect the environmental professional’s ability to render such an opinion.
• The necessary investigation must be conducted or updated within one year prior to the date of the property acquisition. Certain components of the investigation, such as searches with past and present owners and operators and searches of environmental lien records, must be updated within 180 days prior to the acquisition date.

Rule’s Effects

The Rule will have far-reaching effects on most large-scale real estate transactions, including most transactions involving multifamily housing developments. Aside from the regulatory impact, however, lenders will expect that new Phase I environmental assessments will comply with the 2005 Standard, so it is important that persons contemplating the sale or acquisition of multifamily property immediately become familiar with the Rule and the 2005 Standard. The Rule’s inevitable impact will be to increase due diligence costs and time frames and it is likely to drive more Phase II investigations.

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The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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