| FEATURE ARTICLE, FEBRUARY 2006
A NEW RULE FOR PHASE I ENVIRONMENTAL SITE ASSESSMENTS
Fredda Benton
The Phase I environmental site assessment (ESA) as we know it today will be changing effective November 1, 2006. On November 2, 2005, the Environmental Protection Agency (EPA) completed the All Appropriate Inquiries (AAI) Final Rule and adopted this rule as the ESA standard. This final rule establishes a specific regulatory requirement for conducting all appropriate inquiries into the previous ownership, uses and environmental conditions of a property for the purposes of qualifying for certain landowner liability protections under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The interim standard is the American Society for Testing and Materials (ASTM) E1527-00 Phase I environmental site assessment process. Parties may also use the newly revised ASTM standard, ASTM E1527-05 Phase I environmental site assessment process, to satisfy the statutory requirements for conducting all appropriate inquiries. AAI must be conducted in compliance with either of these standards to obtain protection from potential liability under CERCLA as an innocent landowner, a contiguous property owner or a bona fide prospective purchaser.
Since 1986, CERCLA has provided an innocent landowner defense to protect owners from cleanup liability for pre-existing contamination, as long as all appropriate inquiry into the previous ownership and any uses of the property was conducted before purchase and did not reveal contamination. It was this requirement to conduct AAI that gave rise to the ESA industry. Today, ESAs are institutionalized in commercial real estate transactions using ASTM Standard Practices for Phase I environmental site assessments.
The AAI rule applies to a wider universe of properties than the ASTM standard. While the ASTM standard is limited solely to commercial properties, the AAI rule extends well beyond brownfield sites, and even beyond commercial properties. Owners of any residential property used for commercial purposes, as well as residential properties under government ownership, will now need to conduct a Phase I investigation under the AAI rule in order to be protected from a CERCLA liability.
The definition of an environmental professional (EP) in the AAI rule raises the bar beyond ASTM in an effort to discourage those who lack sufficient education, federal or state licensing, or relevant experience from conducting environmental inquiries. The AAI rule imposes specific educational, certification or licensing, and relevant experience requirements, for the EP tasked with overseeing the assessment.
In many aspects, the rules require that review of government records adopt the status quo represented by the minimum search distances in ASTM. In two areas, however, the AAI rule goes beyond that current practice. The first difference relates to the AAI rule's emphasis on engineering and institutional controls, both of which are “activity and use limitation” on the use of a property (such as deed restrictions and restrictive zoning). Under Section 312.26, the EP is required to search engineering and institutional controls on the subject property as well as any properties within half a mile. This provision is a significant departure from current industry practice under ASTM, which assigns responsibility to the “user” of the Phase I report to identify such records and report them to the EP.
The second significant expansion is the mandatory review of “reasonable ascertainable” records maintained by Indian tribes and local government agencies. ASTM categorizes federal and state government records as mandatory sources, but leaves the review of other sources, such as tribal and local government records, up to the EP's judgment.
The difference in historical research requirements between AAI and ASTM differ relating to how far back historical research must go. The AAI rule requires that historical documents and records must “cover a period of time as far back in the history of the subject property 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 purposes.” The EP's professional judgment comes into play in terms of determining just how far back in time it is necessary to reach a conclusion. This is unlike ASTM standard, which establishes an actual timeframe back to the property's obvious first developed use, or back to 1940, whichever is earlier. If the subject property was, for example, undeveloped prior to 1970, the EP under ASTM would still be required to research the properties' past uses back to 1940. Under the AAI rule, the research would only need to go back to 1970. With respect to conducting historical research, ASTM is more prescriptive on the sources that must be investigated and the process to be used, whereas AAI essentially leaves decisions about the sources and extent of research to the EP's discretion. ASTM also defines industry practice to review historical sources in 5-year intervals. AAI, on the other hand, provides no guidance and leaves the issue entirely up to what can be collected by the EP, as well as his or her opinion.
The EP is required under the AAI rule to document data gaps and explain the reason for such gaps. The AAI rule requires the EP's report to identify the sources consulted to address such data gaps and comment upon their significance with respect to the inquiry.
Both ASTM and AAI are consistent in giving the site visit, interviews and records review a 6-month shelf life. However, the AAI rule is more stringent than ASTM. A 5-year-old Phase I ESA report could still be used under ASTM if the necessary updates are made, but under the AAI rule, if the assessment is more than 1 year old, the user may no longer rely on it without completing a new ESA.
In summary, it appears as if the EPA has now established specific guidelines and requirements for conducting the Phase I environmental site assessment. One thing is for certain, the Phase I ESA practice and the ownership of real property will now more than ever be significant in protecting your financial real estate interests.
Fredda Benton is president of Dallas/Fort Worth-based Envirophase.
WHAT TO MAKE OF THE NEW RULE
An excerpt from “Doing Environmental Due Diligence” by Jeff Civins
The Environmental Protection Agency (EPA) recently announced its All Appropriate Inquiries (AAI) rules that will change how Phase Is are performed and the type of information they produce. But the question remains whether and to what extent AAI should be undertaken.
EPA's new rule becomes effective this November, but in the meantime, prospective purchasers may use either the new rule or the current practice. Under current practice, a so-called American Society for Testing and Materials (ASTM) Phase I, comprising a checklist of pertinent inquiries, is satisfactory; the new rule, embodied in a new ASTM standard, injects a significant degree of subjectivity on the part of the environmental professional conducting AAI.
The changes put into effect by the new rule raise a number of practical concerns. The lack of a prescribed checklist and the requirement for a data gap evaluation create uncertainty as to whether a particular assessment has met the performance-based standard. The “freshness” requirement may affect the timing and logistics of transactions involving multiple properties and therefore the feasibility of conducting AAI. The interview requirement not only creates additional uncertainties regarding whether AAI has been performed, but also raises issues with regard to the ability of the parties to a transaction to maintain confidentiality. But beyond these concerns, there are significant reasons why purchasers should not blindly conduct AAI and instead should consider each particular transaction in light of their own risk management objectives.
EPA's AAI rule identifies the procedures a prospective purchaser must follow to satisfy only one of the prerequisites to taking advantage of certain transaction-related defenses (innocent landowner, bona fide prospective purchaser and contiguous landowner) under Superfund. The purchaser also must comply with certain continuing obligations, including taking reasonable steps with respect to hazardous substances on the property to stop and prevent releases and to prevent and limit exposure. So, to take advantage of the transaction-related defenses, the defendant may end up having to spend a lot of money to address the release.
Another significant concern with the AAI prerequisite in particular and the transaction-related defenses in general is that they become relevant only with respect to Superfund liability; they do not protect against liability under other federal laws, including other federal environmental laws, state environmental laws or the common law, such as trespass, negligence and nuisance. Moreover, because the transaction-related defenses apply only to purchases of land, they provide no protection in stock acquisitions or mergers.
The investigation that AAI contemplates, because it is focused on hazardous substances, does not address numerous concerns that should be addressed as part of a meaningful environmental due diligence. Finally, because AAI is focused on asset acquisitions, it does not address concerns relating to stock acquisitions and other transactions with the potential for successor liability, such as liabilities associated with formerly owned or operated properties and offsite disposal.
For these reasons, a sophisticated purchaser in a transaction involving real estate will look at the unique circumstances of the particular transaction in order to insure that all potential significant environmental concerns are addressed and will not focus only on AAI.
— Jeff Civins is head of the environmental practice group in Haynes and Boone's Austin office. To view the full article, please visit http://www.rebusinessonline.com/article_archive/01-17-06.shtml. |
©2006 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints of
this article contact Barbara
Sherer at (630) 554-6054.
|
