On November 1, 2006, the United States Environmental Protection Agency’s (U.S.EPA) final rule defining the standard for conducting "All Appropriate Inquiry" (AAI) for Phase I Environmental Site Assessments (Phase I ESAs) goes into effect. Under the terms of the new regulations, purchasers of property with transactions closing on or after November 1, 2006, must have a Phase I ESA conducted under the new AAI standards in order to qualify for i) bona fide purchaser, ii) contiguous property owner, and iii) innocent purchaser defenses provided for under Superfund (the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA).

Even recent Phase I ESAs conducted according to American Society of Testing Materials (ASTM) 1527-00 standard are not necessarily adequate to satisfy the AAI standards as of November 1, 2006, unless they have specifically been supplemented to satisfy AAI. Purchasers should have their environmental consultant warrant that a Phase I ESA that will be relied upon for a transaction closing on or after November 1, 2006, meets the new AAI standards.

U.S.EPA developed and promulgated the AAI rule pursuant to the Small Business Liability Relief and Brownfields Revitalization Act of 2002 of Superfund to clarify the following defenses or exemptions to CERCLA liability:

  • Bona fide prospective purchasers: Parties who now conduct AAI prior to purchasing a contaminated property can qualify for this CERCLA exemption, provided they meet a number of other statutory requirements;

  • Contiguous property owners: Owners of property contaminated by releases at a contiguous parcel, but whose property is not a source of contamination, may benefit from this defense provided they conduct AAI, and had no knowledge of contamination prior to purchase; and

  • Innocent purchasers/landowners: Parties who perform AAI prior to purchase of a property and buy without knowing, or having reason to know, of contamination on the property may qualify for this defense.

AAI will also be a mandatory part of any site characterizations or assessments conducted by parties seeking grants from U.S.EPA to perform Brownfields investigation or remediation activities under CERCLA.

As anticipated, ASTM released an updated Phase I standard set forth in ASTM 1527-05 on November 21, 2005 to conform with the new AAI rule. This standard is the applicable standard for all Phase I ESAs for transactions closing on or after November 1, 2006.

Certain elements of the AAI rule may provide some challenges to users and purchasers of Phase I ESAs. For example:

  • New Investigation Requirements: An AAI compliant investigation will need to seek additional information not otherwise required by the current ASTM 1527-00 standard. This might raise confidentiality concerns for clients on either side of a transaction. For example, while the current ASTM requires an environmental consultant to make reasonable efforts to gather certain information, the final AAI rule requires interviews with current and past owners of a facility, as well as occupants, managers and, where necessary, even employees. A prospective purchaser will have a stronger basis to push a seller for increased site access during a Phase I ESA; a seller, conversely, may have new concerns over maintaining the confidentiality of a pending deal during due diligence.

  • Definition of an "Environmental Professional": The AAI standard requires that the ESA be performed by a qualified Environmental Professional (EP). The standard sets forth requirements for an EP in terms of minimum education and/or relevant experience for conducting ESAs. Obviously, purchasers and others obtaining Phase I ESA services will need to use additional care when selecting a consulting firm and, in particular, when reviewing the qualifications of the individuals who will be performing the work.

  • New Documentation Requirements: The rule requires an EP to document in the report any "data gaps," i.e. areas of inquiry the EP was unable to complete for any reason. This raises concerns over the level of effort necessary to resolve data gaps and whether an acknowledgment of data gaps can impact the validity of an AAI-compliant investigation.

  • Purchaser Responsibilities: U.S.EPA’s final rule requires documentation of the specialized knowledge of the purchaser, such as whether he or she is a real estate developer or Brownfields professional. Such an acknowledgment of specialized knowledge could threaten the viability of the "innocent" purchaser defense AAI is meant to support. The rule also requires an AAI Phase I to "consider" the relationship between the purchase price and the value of the property. For purposes of business transactions, written documentation of such strategic information could certainly impact current or future negotiations, as well as litigation, regarding the property.

  • Role of an EP: In certain circumstances, the AAI standard permits the EP more discretion than the old ASTM 1527-00 standard. For example the EP may in his or her professional judgment limit the geographical distance for a records search. This highlights an area of increased reliance on the role of the EP.

Because environmental due diligence is a critical element of most property and business transactions, and, further, because the exemptions or protections afforded by an AAI compliant investigation are so substantial, parties who might qualify for these protections should require confirmation that their Phase I ESAs, and the EPs performing the studies, satisfy the AAI (and ASTM 1527-05) thresholds. However, it is important to note that compliance with AAI does not necessarily provide protection in the context of petroleum cleanups (CERCLA does not generally apply to petroleum), state cleanup laws or toxic torts.

U.S.EPA published the AAI standard at 70 Fed. Reg. 6670. The final rule will be found at 40 CFR Part 312.

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.