New EPA "All Appropriate Inquiry" Regulations
On November 1, 2006, the United States Environmental Protection Agency’s “All Appropriate Inquiry (or “AAI”) regulations became effective. The AAI regulations will have an immediate and direct impact on virtually all transactions involving the sale of commercial real property. In particular, the AAI regulations will result in significant changes to the form and content of Phase I Environmental Site Assessments (“Phase I’s”).
THE PHASE I
The term “Phase I,” as used in this bulletin, refers to an Environmental Site Assessment prepared in accordance with standards promulgated by ASTM (a voluntary standards development organization).
A Phase I is a standardized environmental review of a parcel of property. It is always important to remember that a Phase I does not involve invasive testing.
The original ASTM Phase I standard was published in 1993. Significant changes to the standard were made in 2000 and again in 2005. The 2005 changes to the standard made it consistent with the AAI regulations.
There are at least three reasons to conduct a Phase I in transactions involving the sale of commercial real property: (1) to assess the environmental condition of the property; (2) to identify environmental liabilities and facilitate the contractual allocation of those liabilities; and (3) to qualify for one of the CERCLA defenses. The third purpose merits further discussion.
CERCLA: STATUTORY & REGULATORY BACKGROUND
Owners and operators of facilities are potentially liable under the federal Comprehensive Environmental Response, Compensation, and Liability Act (or “CERCLA”) for historical releases of hazardous materials from those facilities. This liability is strict, retroactive, and joint and several. Accordingly, it is of critical importance for landowners to find a way to avoid that liability.
There are three important exceptions to CERCLA liability: (1) the innocent landowner defense, (2) the bona fide prospective purchaser defense, and (3) the contiguous property owner defense. All three of these defenses require that the landowner conduct “all appropriate inquiry” of the property prior to its purchase.
THE FINAL AAI REGULATIONS
EPA undertook a negotiated rule-making process whereby a group of stakeholders worked in a cooperative manner to develop the AAI regulations. The draft AAI regulations were published on August 26, 2004, and the final regulations on November 1, 2005. The final regulations became effective on November 1, 2006.
While the AAI regulations envision an environmental assessment that has many similarities to the old-style Phase I, there are a few important differences. For example: the AAI must: (1) be conducted by an “environmental professional” (a term defined in the AAI regulations), (2) identify “data gaps” (where specific information is missing), (3) include a consideration of the purchase price of the property as it compares to other comparable properties, and (4) have been conducted within a year of the transaction (although some components must be updated more frequently). These new AAI Phase I’s will cost more than the old-style Phase I’s and may take some additional time to prepare. Because the AAI regulations are only now becoming effective, it may take some time for consultants to become comfortable with the new format.
The net result of the AAI regulations is that, for any transaction involving the sale of commercial real property after November 1, 2006, the purchaser should ensure that it is obtaining a Phase I which complies with the new AAI regulations. Failure to do so could result in the purchaser losing the protection of the all-important CERCLA statutory defenses.
