Phase One and a Half – Expanded Due Diligence Standards for Real Property Transactions

by J. Kemper Will

In the Fall 2003 edition of Briefly, Scott Clark wrote about “Expect[ed] New Standards for Due Diligence in Real Estate Transactions”. Since then, the EPA negotiated rulemaking committee has completed its work with a “Final Consensus Document” for “Standards for Conducting All Appropriate Inquiries”, which is being published by EPA as a proposed rule in early 2004. The concept of all appropriate inquiry derived from the “innocent landowner exemption” of the Comprehensive Environmental Response Compensation and Liability Act, (“CERCLA”) enacted in 1980. To give flesh to the exemption, the American Society of Testing and Materials (“ASTM”) developed an ASTM standard for “Phase I” property assessments, which became the standard for environmental due diligence in property transactions.

It has been far from a perfect system. First of all, that exemption is only from CERCLA liability and did not protect a property purchaser from other bases of liability, such as other federal and state environmental statutes or common law claims. However, perhaps more importantly, Phase I’s tended to become a least-cost provider and checklist item, and commonly too little thought went into the real concept and purpose of all appropriate inquiry, namely to assure a buyer that it was not inheriting environmental problems which could materially impact the property, whether it be transaction costs or liability. I have reviewed hundreds of Phase I reports over the years, and sadly, more of those Phase I reports failed to meet that objective than met it.

The Brownfields Redevelopment Act intends to step beyond the Phase I standard and to refocus on the full scope of all appropriate inquiry. Also, it is important to note, that the all appropriate inquiry standard will be just one of several requirements for obtaining an exemption under the Brownfields Redevelopment Act. Other Brownfields Redevelopment Act criteria include exercising appropriate environmental care, preventing future releases, providing notices and cooperation with EPA.

The final consensus document will certainly be controversial and it likely will elicit much public comment during the comment period. A link to the proposed rule is available on the Burns, Figa & Will, P.C., website. This article focuses on only a few of the most significant provisions of the final consensus document.

The proposed rule goes beyond the former Phase I standards and imposes obligations on both the property buyer and the professional who is conducting the inquiry. Utilizing a ASTM- 2000 Phase I Environmental Site Assessment will no longer be sufficient for CERCLA exemption for any property purchased on or after January 11, 2002. For example, there is greater emphasis on the obligation of the property buyer to provide to the environmental professional conducting the all appropriate inquiry the following items:

• Information about any environmental clean up liens.
• Any relevant and applicable specialized knowledge and experience of the property buyer about the subject property and the area surrounding the subject property.
• Information about the relationship of the purchase price to the fair market value of the subject property, if the property were not contaminated.

In addition, the obligations for all appropriate inquiry are now the joint responsibility of the property buyer and the environmental professional conducting the all appropriate inquiry.

A key new term of the proposed rule is the definition of “environmental professional”, who will conduct the majority of the inquiries required for all appropriate inquiry. Several categories of licensing/certification, education and experience are established, and those standards exceed previous qualification standards of the ASTM Phase I Site Assessments.

In conducting the inquiry, the environmental professional must conduct information and record searches similar to those of an ASTM- 2000 Phase I. However, the performance standards of the proposed rule will require a more thorough and thoughtful evaluation of the information gathered, for example, the obligation to comment on the significance of any identified data gaps regarding the subject property. In appropriate circumstances, it may even be necessary to conduct sampling and analysis in order to address data gaps, especially if known or threatened releases would pose a threat to human health or the environment, a phrase which is not defined. In conducing all appropriate inquiry, the interviews conducted by the environmental professional will take a more prominent role than in past Phase I Site Assessments. The interviews must now include the current owner and occupant of the subject property and major occupants and chemical users, including those from the past, in the case of multiple occupants. The environmental professional may also need to interview current and past facility managers with relevant knowledge, past owners, occupants or operators of the subject property or employees of current or past occupants of the subject property.

The proposed rule also expands the scope of review of historical documents and records beyond that of an ASTM-2000 Phase I. Now the historical documents and records review must go back in history to when the property first contained structures or was shown to first be used for residential, agricultural, commercial, industrial or governmental purposes. Obtaining such information may be burdensome and expensive for a property with a long history.

The proposed rule also expands the chemicals of concern. Phase I’s only focused on hazardous substances and petroleum products, but the proposed rule will also address pollutants, contaminants and controlled substances.

Of course, as in prior Phase I searches, public database searches must be conducted. There are several commercial database providers which are usually used by the environmental professional to satisfy this requirement. However, the new database search requirements of the proposed rule will put increasing pressure on those database providers to assure the accuracy and reliability of their databases.

In many respects, the proposed regulations will refine and expand the scope of future all appropriate inquires beyond the scope of current Phase I Site Assessments. The expanded scope will no doubt significantly increase the costs of performing all appropriate inquiry and will require increased participation and diligence from the property buyer. As environmental due diligence is part of the core practice area of Burns, Figa & Will,the firm is highly qualified to assist property buyers and environmental professionals with these new evolving standards. We will continue to update you in future Briefly articles as the new standards become law.

Kemp Will heads the environmental and water law practice group at Burns, Figa & Will, P.C., and is active in environmental litigation and regulatory matters and contaminated property transactions. You can reach Kemp at 303-796-2626 or e-mail .