WHY YOU NEED TO ENGAGE IN DUE DILIGENCE PRE-ACQUISITION
Prior to purchasing or leasing property, it is necessary in most instances to engage in at least a screening environmental review. The purpose of a pre-transaction investigation is two-fold: first, to determine whether there are issues that must be dealt with in the relevant agreement (or post-agreement) that should be resolved as part of the deal making process, and second, in order to satisfy a number of statutory defenses that are available under federal law and some state statutes. Due diligence may be required for a lease in an industrial area and/or where there is existing contamination and a base-line is desired.
The 2002 Brownfields Amendments to CERCLA required the EPA to promulgate regulations establishing standards and practices for conducting inquiry into the previous ownership and uses of a property necessary to qualify for certain landowner liability protections. The “All Appropriate Inquiry” rule (“AAI”) was developed by EPA pursuant to the statute and applies to parties that seek to assert protection from CERCLA liability as an innocent landowner, a bona fide prospective purchaser, or a contiguous property owner. It also may impact secured creditors.
WHY YOU NEED TO BE AWARE OF THE ASTM STANDARD
The federally recognized objective standard for environmental review, AAI is mirrored in the ASTM E1527-05 [Note: ASTM Standards are only available on a fee basis; hyperlinks are to the ASTM web page]
The ASTM standard is drafted by ASTM International (formerly American Society for Testing and Materials), an international standards organization that develops and publishes voluntary consensus technical standards. AAI in turn refers to the process of evaluating a property’s environmental conditions and assessing potential liability for contamination per EPA regulations and the statutory provisions. Of particular significance is that new ASTM E1527-013 was recently (11/6/2013) released that will makes changes/improvements to the existing Standard, and make the requirements more stringent. In many situations it is the attorney’s job to work with a consultant to eliminate (literally and/or through the transaction) the Recognized Environmental Conditions (“RECs”) described below and to assure that the reports meet the relevant standard which may include ASTM and AAI.
- THE GOAL IS TO IDENTIFY RECOGNIZED ENVIRONMENTAL CONDITIONS
The goal of a Phase 1 Environmental Site Assessment is to identify, by whatever method, those items that in the ASTM standard are identified as RECs in connection with the property. RECs are defined as the presence or likely presence of any hazardous substances and/or petroleum products on a property and/or adjoining the property that indicate an existing release, a past release or a material threat of a release into the ground, groundwater or surface water. See ASTM 1527-13 (§ 3.2.78). The goal of both the buyer and seller should be to resolve the RECs either before or as part of their agreement. RECs can be resolved by remedying the condition, or making arrangements for remediation, or through financial arrangements or insurance.
- ALL APPROPRIATE INQUIRY RULE IS NECESSARY TO SUPPORT CERCLA DEFENSES
The defenses outlined in the statute required EPA to develop standards and practices for conducting “All Appropriate Inquiries.”
The following are the three CERCLA defenses that expressly rely on the All Appropriate Inquiry as well as a fourth in which it is implied:
- Original Third-Party Defense: The third-party defense alleges that the release of hazardous materials was caused solely by the act or omission of a third party with whom the new owner is not in privity. (42 U.S.C. §§ 9607(b)(3)). The Innocent Landowner Defense (“ILD”) established in 1986 is an offshoot of this defense and eliminates the contractual privity limitation assuming AAI is complied with (42 U.S.C. § 9601(35)(A)). There are three versions of the ILD: a person who did not know, or had no reason to know, that contamination existed on the property at the time they acquired the property; a government agency taking property by involuntary transfer or eminent domain; or a person who acquired the property by inheritance or bequest. AAI is required for each of these and the AAI cannot have resulted in the discovery of the contamination and still allow the party to reserve the defense.
- The Contiguous Property Defense relates to property owners that acquire property contaminated by other owners by substances moving under the property. The defense requires that the owners engage in AIA and have also has taken reasonable steps to prevent further migration. 42 U.S.C. § 9607(q). AAI cannot result in the discovery of the contamination and still allow the party to reserve the defense.
- Bona Fide Purchaser Defense applies to property purchased after January 11, 2002. A property owner may buy contaminated property, although all disposals must have occurred pre-purchase and appropriate care must be taken to stop continuing/threatened releases, human/environmental exposure. Further, the owner must cooperate with Responsible Parties or enforcement response actions. Compliance with the AIA and Continuing Obligations which are noted below are required. (42 U.S.C. 9601(46) (F)). There is an ASTM guidance for satisfying Post-Acquisition obligations. See ASTM E 2790-11. Here, knowledge obtained in the AAI does not necessarily defeat the defense.
- Lender Liability provisions (42 U.S.C.§9601(20)(i)) that allow secured lenders to protect their secured interests without becoming liable, also suggest that pre-foreclosure due diligence under the ASTM standard is necessary to provide the eventual owner, whether it is the lender or a third party, asserting the defense to have engaged AAI. It could also provide the holder of a security interest the knowledge to determine whether to avoid foreclosure if the perceived risk is too great.
- WHAT IS ALL APPROPRIATE INQUIRY?
Prior to the CERCLA 2002 amendments, an innocent landowner had to follow five statutory criteria for due diligence. However, after the 2002 Brownfield Amendments the Congress added another five criteria and required EPA to develop express regulations establishing standards and practices for conducting AAI in accordance with statutory criteria and generally accepted good commercial and customary standards and practices. 42 U.S.C § 960(35) (B) (iii). Per regulation after November 1, 2006 ASTM E1527-05 would meet the AAI regulations. Currently with the advent of ASTM E1527-13 there is a dispute as to which or whether both standards apply.
- GENERAL SCOPE OF DUE DILIGENCE UNDER ASTM E1527-05 AND E1527-13
The requirements under ASTM E1527-05/13 are extensive. In summary, however, they require the following:
- Scope of services describing all services performed;
- Including interviews with owners, operators and occupants;
- Reviews of historical documents;
- Reviews of recorded documents;
- Review of government documents;
- Visual Inspections, including adjoining properties;
- Other Commonly Known issues.
- Findings identifying recognized environmental conditions and historical recognize conditions and minutes conditions opinion;
- The Environmental Professionals’ opinion of the impact on the property of the RECs identified;
- A section identifying additional investigation, if any, that the professional recommends;
- Opinion regarding additional investigation, if any, detected presence of hazardous substance of petroleum products;
- Data gaps in conclusion reports included;
- Conclusion section that summarizes all recognizing environmental conditions connected with the property; and
- Specific language with respect to the Consultants’ certification.
- WHAT IS IN THE NEW STANDARD ASTM ?
The newest version of the ASTM Standard ASTM E1527-13 was released on November 6, 2013. The key changes in the new standard include:
- The new standard clarifies the definitions of “Recognized Environmental Condition”, including the definition of a Historical REC, which is essentially a past release that has been remedied to the satisfaction of the relevant agencies
- There is also a definition of a new term “Controlled” Recognized Environmental Condition: that will refer to contamination that has been remediated but still maybe the basis for ongoing future land use or exposure control obligations;
- There are new provisions with respect to vapor intrusion and vapor mitigation risks; and
- Finally the amended standard places greater emphasis on conducting regulatory file reviews, in particular with respect to adjacent properties.
The EPA proposed AAI rule was circulated and it proposed to allow both the existing ASTM standard ASTM E1527-05 standard and the new standard, however due to the adverse comments the proposed regulations were recently withdrawn. 78 FR 64403 (2013).
- CONTINUING DUTIES TO MAINTAIN THE DEFENSE
In July 2011, the American Society for Testing and Materials (“ASTM”) issued (the “Continuing Obligations Standard”), which was developed to further assist parties seeking to establish CERCLA defenses to satisfy certain continuing obligations requirements. The party must:
- Cooperate, assist, and provide access to persons that are authorized to conduct response actions or natural resource restoration at the property.
- They must also comply with any land use restrictions established or relied on in connection with the response action at a vessel or facility and must not impede the effectiveness or integrity of any institutional control employed at the vessel or facility in connection with a response action; and
- Provide access to persons authorized to conduct response actions at the facility to operate, maintain, or otherwise ensure the integrity of land use controls that may be a part of a response action.
- OTHER ISSUES
It is necessary to recognize that these defenses were developed under Federal law, and therefore:
(a) States or other local agencies may or may not recognize these defenses;
(b) The federal defenses under CERCLA do not apply to petroleum contamination;
(c) The defenses are fact specific and each case will turn on these facts;
(d) It is very difficult to meet all the requirements, particularly the post-ownership responsibilities;
(e) The practical reasons for engaging in a pre-acquisition review are more significant in most instances, and the scope of the investigation may be less than is required under the ASTM standards; and
(f) Even if a party can meet the pre-acquisition standards, there are ongoing requirements that may be difficult to address.
- WHAT YOU NEED TO DO
There is no question that companies need to engage in pre-acquisition/pre-lease due diligence. The scope of that due diligence will depend on the time of transaction, the type of business and other factual issues including demands by potential and future lenders. If the decision is made that the federal and related state defenses need to be protected then an ASTM type investigation is required. Attorneys should review such reports, preferably under the Attorney Work Product protection and help determine whether such standards are being met. The other role for an attorney is to assist in resolving any RECS that may arise in such a way as to not impact the entire transaction. If both ASTM standards are considered appropriate a more in depth view of the differences between the two standards may be necessary.