EPA's Proposed "“All Appropriate Inquiry" Rule: New and More Rigorous Site Assessment Standards for Persons Seeking CERCLA Liability Protection

Date: October 4, 2004

On August 26, 2004 the U.S. Environmental Protection Agency published in the Federal Register its proposed rule setting forth standards for conducting “all appropriate inquiry” into the previous ownership, uses, and environmental conditions of a property (the “Proposed AAI Rule”). Conducting all appropriate inquiry prior to acquisition of a property is a required component of qualifying for liability protection under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).

The Proposed AAI Rule is in response to the 2002 amendments to CERCLA, which among other things, created additional liability protections and required EPA to devise a uniform standard as to what constitutes all appropriate inquiry. The Proposed AAI Rule would have a significant impact on commercial real estate transactions, as it calls for a more rigorous investigation than the American Society of Testing and Materials’ Phase I Standard (E-1527-2000) (the “ASTM Phase I Standard”) and establishes specific requirements as to the qualifications of the environmental professional who conducts the investigation.

The Proposed AAI Rule may also impact recipients of Brownfields grants from EPA, as grant recipients may be obligated to evaluate releases or threatened releases of both hazardous substances and other pollutants and contaminants (e.g. petroleum). Such additional evaluation would be subject to the standards set forth in the Proposed AAI Rule. Although a final rule is not expected for several months, the Proposed AAI Rule provides a useful preview of how EPA intends to define all appropriate inquiry. Moreover, as explained in more detail below, the Proposed AAI Rule is the product of a lengthy negotiated rulemaking that involved a broad range of commercial, government and public interest representatives. Consequently, it appears unlikely that EPA will promulgate a final rule that is substantially different from the Proposed AAI Rule.

Statutory and Procedural Background. On January 11, 2002, President Bush signed into law The Small Business Liability Relief and Brownfields Revitalization Act (the “Brownfields Act”). The Brownfields Act amended CERCLA by establishing, among other things, two additional defenses to liability: the “Bona Fide Prospective Purchaser” and “Contiguous Property Owner” defenses. Including the “Innocent Purchaser” defense, CERCLA now contains three defenses to liability:

  • Bona Fide Prospective Purchaser: Persons who acquired property after January 11, 2002, and who may have acquired such property knowing, or having had reason to know, of contamination on their property may qualify for CERCLA liability protection by conducting all appropriate inquiry prior to acquisition and by complying with certain other post-acquisition requirements.
  • Contiguous Property Owner: Persons who own contaminated property that is contiguous to a property that is the source of such contamination may qualify for CERCLA liability protection by demonstrating that, prior to acquisition, they conducted all appropriate inquiry and had no reason to know that the property was contaminated.
  • Innocent Purchaser: Persons who own contaminated property may qualify for CERCLA liability protection by demonstrating that prior to acquisition they conducted all appropriate inquiry and had no knowledge, or reason to know, of such contamination In addition to certain post-acquisition requirements, the Innocent Purchaser defense imposes upon the property owner a number of post-acquisition requirements and other statutory criteria. In addition, certain other post-acquisition requirements must be complied with.

Common to each defense is the requirement that the owner conduct “all appropriate inquiry” prior to acquisition. The Brownfields Act directs EPA to issue regulations defining what constitutes all appropriate inquiry. In the interim, The Brownfields Act provides that the ASTM Phase I Standard shall be used to fulfill the requirement of conducting all appropriate inquiry. In April 2003 EPA initiated a negotiated rulemaking process to develop standards for all appropriate inquiry. Representatives of environmental interest groups, federal, state, local and tribal governments, real estate developers, lenders, and environmental consultants joined with EPA to form the Negotiated Rulemaking Committee On All Appropriate Inquiry (the “Negotiated Rulemaking Committee”). The Negotiated Rulemaking Committee was guided by ten criteria set forth in the Brownfields Act, which specifies that all appropriate inquiry should, at a minimum, consist of the following:

  • The results of an inquiry by an environmental professional.
  • Interviews with past and present owners, operators, and occupants of the facility for the purpose of gathering information regarding the potential for contamination at the facility.
  • Reviews of historical sources, such as chain of title documents, aerial photographs, building department records, and land use records, to determine previous uses and occupancies of the real property since the property was first developed.
  • Searches for recorded environmental cleanup liens against the facility that are filed under federal, state, or local law.
  • Reviews of government records, waste disposal records, underground storage tank records, and hazardous waste management records, concerning contamination at or near the facility.
  • Visual inspections of the facility and of adjoining properties.
  • Specialized knowledge or experience on the part of the user.
  • The relationship of the purchase price to the value of the property, if the property was not contaminated.
  • Commonly known or reasonably ascertainable information about the property.
  • The degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect the contamination by appropriate investigation.

Key Differences Between the Proposed AAI Rule and the ASTM Phase I Standard. On November 14, 2003, after several months of negotiation, the Negotiated Rulemaking Committee reached consensus on the all appropriate inquiry standards. EPA subsequently issued the Proposed AAI Rule on August 24, 2004. The full text of the Proposed AAI Rule can be found at 69 Fed. Reg. 52,542 (Aug. 24, 2004).

The Proposed AAI Rule resembles the ASTM Phase I Standard in several respects, but requires a substantially broader scope of inquiry and vests increased judgment and responsibility in the person who prepares the report (the “Environmental Professional”). By way of background, the ASTM Phase I Standard requires a visual inspection and research concerning the property and neighboring properties, but does not include sampling or testing. The purpose of the ASTM Phase I Standard is to identify any “recognized environmental conditions” on the property. The term “recognized environmental conditions” means the actual or potential presence of hazardous substances as a result of past, present, or threatened releases into the ground, ground water, or surface water on the property.

Although the Proposed AAI Rule has the same overall objective as the ASTM Phase I Standard (i.e. to identify releases and threatened releases of hazardous substances), it mandates a significantly broader scope of environmental inquiry and establishes specific education and experience requirements for Environmental Professionals. With respect to the scope of the investigation, the Proposed AAI Rule differs from the ASTM Phase I Standard as follows:

  • Prior owners and operators must be interviewed. Although this will likely improve the quality of information regarding prior use of the property, it could prove to be a very cumbersome task, as prior owners may be difficult to locate and may not want to cooperate.
  • Adjacent properties must be visually inspected.
  • Adjacent property owners and operators may have to be interviewed. In instances where the subject property is abandoned or there appears to be unauthorized use of the property, adjacent property owners must be interviewed. As is the case with prior owners and operators, adjacent property owners may be unavailable or unwilling to cooperate.
  • The purchaser has a responsibility to share with the Environmental Professional any specialized knowledge it possesses regarding the property.
  • The relationship of the purchase price to the fair market value of the property if the property were not contaminated must be considered. According to EPA, this provision does not require that the subject property be appraised. Instead, the intent is to have the prospective purchaser consider whether a significant price discrepancy is due to the presence of contamination on the property.

In addition to expanding the scope of inquiry, the Proposed AAI Rule places significant emphasis on the credentials and independent judgment of the Environmental Professional. The Environmental Professional is, however, permitted to delegate responsibility to less-qualified individuals, provided that they remain under the Environmental Professional’s supervision. In distinct contrast to the ASTM Phase I Standard, the Proposed AAI Rule requires that:

  • The Environmental Professional possess certain minimum education and/or experience. The Proposed AAI Rule has detailed requirements for combined education, licensing and experience. Experience can be substituted for some of the education and licensing requirements.
  • The Environmental Professional must identify data gaps in the report and efforts to resolve such gaps.
  • The Environmental Professional must provide an opinion about the impact of data gaps on the integrity of the report.
  • The Environmental Professional must provide a written opinion regarding the overall integrity of the data underlying the report.
  • The Environmental Professional must make certain affirmative declarations in the report regarding the Environmental Professional’s credentials and qualifications.

Conclusion. In comparison to the ASTM Phase I Standard, the Proposed AAI Rule articulates a significantly expanded scope of investigation and elevates the role of the Environmental Professional who performs such investigation. Although the Proposed AAI Rule shares many similarities with the ASTM Phase I Standard, the amount of work and thus the cost of performing all appropriate inquiry will certainly increase.

Although it is uncertain whether and to what extent EPA will make changes to the Proposed AAI Rule before promulgating a final rule, given that the Proposed AAI Rule is the result of extensive stakeholder negotiation, it seems unlikely that EPA will promulgate a substantially different final rule. Accordingly, the Proposed AAI Rule provides a useful preview of the site assessment requirements required to qualify for CERCLA liability protection.

In the interim, parties seeking CERCLA liability protection must perform environmental site assessments in compliance with the ASTM Phase I Standard. Once the final AAI Rule is promulgated, the ASTM Phase I Standard will no longer be applicable for establishing CERCLA liability protection. Indeed, it is unclear what role the ASTM Phase I Standard will play in environmental due diligence once EPA issues a final rule, although state environmental laws may continue to rely upon the ASTM Phase I Standard in certain circumstances. This Alert has been prepared for general informational purposes only and is not intended as legal advice. Copyright © 2004 Whiteford, Taylor & Preston L.L.P.