On November 1, 2005, the U.S. Environmental Protection Agency (EPA) published its long-awaited final “All Appropriate Inquiry” (AAI) Rule that must be followed by persons receiving federal Brownfield grants and any property buyer seeking eligibility for defenses against federal superfund [Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)] liability as an “innocent landowner,” “contiguous property owner” or “bona fide prospective purchaser.” As expected, in late November ASTM published a new Phase I Environmental Site Assessment Standard known as ASTM E1527-05. Because most lenders are expected to require compliance with the new ASTM Standard, every buyer, seller and developer of real estate needs to understand the AAI Rule, the ASTM Standard, and their differences.

CERCLA has always required AAI to qualify for the “innocent landowner” defense, but it was not clear precisely what such inquiry entailed. ASTM had previously worked to fill that void with its E1527 Phase I standard, which subsequently was widely adopted as the standard for commercial due diligence whether or not a party ever contemplated using a superfund liability defense. The 2002 Brownfields Amendments to CERCLA required EPA to develop the AAI Rule, and ASTM recognized that its own E1527 Standard would then need to be updated to conform to EPA’s Rule. In order to prevent confusion in the marketplace, EPA and ASTM collaborated to ensure that the two Standards would be nearly — though not completely — identical. ASTM’s Standard contains more detailed steps for an environmental assessment than the AAI Rule. ASTM is a private entity, however, and its Standard must be purchased and is subject to copyright protection.

What does all of this mean to property buyers and their lenders? First, while the AAI Rule is final and can be followed immediately, it will not be effective until November 1, 2006. Until that effective date, compliance with either old (1997 or 2000) or new (2005) ASTM Standards will be deemed to satisfy AAI. After that date, EPA will accept compliance with either the AAI Rule or the 2005 Standard to satisfy AAI. Note, however, that because any purchases after November 1, 2006 will be subject to the new standards, buyers will want any site assessment done now for a closing that might not occur before next November to follow the new standards.

How much more onerous is the new AAI Standard than the prior industry standard? In truth, ASTM’s 2000 Standard contained a lot of flexibility, leaving a good deal of discretion up to the environmental professional so that investigations of varying thoroughness arguably could meet ASTM Standards. As a consequence, many banks and buyers of multiple properties developed their own more specific due diligence standards which allowed less discretion to omit information sources and inquiries. For those entities, the new Rule and the 2005 ASTM Standard may not mean a significant change in scope or increase in cost. Nonetheless, at least some of the following requirements will likely be new for everyone:

  • a strict limit of one year on the “shelf life” of a report, together with a requirement that certain items be updated to within six months of purchase;

  • specific qualifications for “Environmental Professionals” performing the investigation;

  • no longer discretionary, but mandatory interviews of current property owner or occupants; past owners and others, if necessary; and neighboring property owners if property is abandoned;

  • mandatory visual inspection of the property and adjoining properties (without actually entering adjoining properties);

  • no longer discretionary, but mandatory review of federal, state and local governmental records (or data bases), including for institutional and engineering controls and recorded environmental cleanup liens; and

  • identification and discussion of the significance of data gaps or uncertainties that affect the Environmental Professional’s ability to form conclusions.

As to what effect the new standards will have on the cost and timing to perform Phase I assessments, some consultants predict a significant rise in both, and others believe changes will be less dramatic, particularly where prior practice was to perform a very thorough assessment. It is clear, however, that there will need to be more coordination at the beginning of the process between client and consultant to determine which party will perform certain tasks, such as searching land records for environmental cleanup liens and arranging access to current property owners and occupants. Also, the client will need to share with the consultant the client’s knowledge of property conditions, including but not limited to a purchase price discount due to environmental conditions, in order for the assessment to meet AAI.

It is important to consider what due diligence is intended to accomplish. If the property at issue is or could become a CERCLA site, following the AAI Rule to the letter will be critical in order to preserve eligibility for certain CERCLA liability defenses. Of course, most sites will not be CERCLA sites, so it is also crucial to understand the cleanup programs, liability provisions and requirements of the state in which the property is located, which may require something different from either AAI or ASTM (e.g., New Jersey’s Technical Requirements). Above all, whatever standard is used, environmental due diligence should always be designed to provide sufficient information on environmental issues to permit negotiations with the seller over any necessary remediation, to develop a budget for costs involved in remediation and construction, and to provide a good understanding of the risks of future on-site and off-site liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.