Thinking about acquiring property in the near future? If so, keep in mind that due diligence requirements for the acquisition of property are expected to become more rigorous as a result of requirements specified in the Small Business Liability Relief and Brownfields Revitalization Act of 2002, also known as the Brownfields Act.
The Brownfields Act created new defenses to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in an attempt to encourage the redevelopment of brownfield properties. However, in order to claim one of the new defenses, property owners must be able to demonstrate that they performed “all appropriate inquiry” prior to taking ownership of the property – that is, exercising appropriate care and reasonable steps to prevent continuing releases and preventing any threatened future release, and preventing or limiting human, environmental or natural resource exposure to a previously released hazardous substance.
But what specifically is considered all appropriate inquiry? The Brownfields Act identifies 10 statutory criteria for conducting all appropriate inquiry and requires the Environmental Protection Agency to develop regulatory standards incorporating the statutory criteria by 2004. In the interim, Congress designated the American Society for Testing Materials (ASTM) Phase I Environmental Site Assessment Standard as the standard for meeting all appropriate inquiry until the EPA issues its regulations.
For years, the ASTM standards have been used as commercial guidance for the performance of due diligence audits, but they are now recognized as the legal standard for all due diligence property acquisition audits. To develop the new regulatory standards, the EPA and a group of stakeholders comprised of business, real estate, legal and environmental professionals completed a negotiated rule process and developed a regulatory proposal.
The EPA is reviewing the negotiated rulemaking proposal and drafting the preamble and guidance documents prior to proceeding through the rulemaking process.
When compared with the ASTM standard, the new negotiated rulemaking proposal calls for a more detailed review of properties. Some of the new requirements are the inclusion of the environmental professional’s qualifications, an expansion of the types of records and historical information required for review, an expansion of interview requirements for historical site operations, requirements to review potential impacts from adjoining properties and stricter transfer limitations of prior site assessments to meet due diligence requirements.
The proposed standard also requires that environmental professionals and the report recipient use professional judgment to evaluate the significance of data gaps, account for specialized knowledge of the site or adjoining properties, evaluate the relationship between the purchase price and the value of the property to determine the likelihood of the presence of hazardous substances and account for the obviousness and ability to detect contamination.
So what do the new requirements mean for property transactions? The good news is that the Brownfields Act has expanded CERCLA liability defenses for purchasers of contaminated property, provided the purchaser performs all appropriate inquiry of the environmental condition of the property. Based upon a review of the negotiated rulemaking proposal, the all appropriate inquiry standard is more stringent than the current commercial practice for performing due diligence audits.
As a result, prospective purchasers should include the expense of performing due diligence audits in the purchase price of any property. It’s also important to hire qualified and experienced professionals who are familiar with the all appropriate inquiry standards in addition to having an extensive knowledge of commercial and industrial operations. Reach Karen L. Walter at (330) 535-5711 or [email protected].
