As the Toxins-Are-Us audience well knows, one of the most important issues confronting purchasers and secured lenders is the “innocent landowner” and other safe-harbor provisions in federal environmental laws.¹ On Nov. 1, 2005, the U.S. Environmental Protection Agency (EPA) adopted a new rule called the “All Appropriate Inquiries Rule” (AAI Rule), which significantly changes the way a Phase I Environmental Site Assessment (Phase I ESA) must be conducted when commercial property is purchased. Congress directed the EPA to issue this new rule when it passed the Small Business Liability Relief and Brownfields Revitalization Act of 2002 (Pub.L 107-118). The new rule clarifies the requirements necessary to establish the original superfund “innocent landowner” defense, as well as the new “prospective purchaser” and “adjoining property owner” defenses created in the Brownfields Revitalization Act.²

Even though lending institutions and banks have the added protection of the “secured creditors exemption” to Superfund liability, they would be well-advised to apply the AAI Rule as the new standard for pre-loan environmental due diligence. Of course, protection for the lender remains a contingency until the borrower defaults on the loan and the lender wants to get full value for the mortgaged property. If the lender does not require conformance with the AAI Rule on the “front end” of the loan, the lender may be faced with the unsavory prospect of having to walk away from the property.

The AAI Rule is more stringent than the ASTM 1527-97 or 1527-00 standards that most environmental consultants have previously used to conduct a Phase I ESA. The AAI Rule defines, for the first time, the qualifications that an environmental professional (EP) must have to perform the environmental investigations. The AAI Rule also requires more extensive interviews and investigations of surrounding properties. The EP must now consider the relationship of the purchase price to the fair market value if the property was not contaminated and must identify and discuss the impact of any “data gaps,” such as the unavailability of historical information, that are identified during the investigations. Finally, the EP must declare that he/she qualifies as an EP as defined in the AAI Rule and that the investigation has been conducted in conformance with 40 CFR §312.

As petroleum and petroleum products are not “hazardous substances” under Superfund, they do not have to be considered under the AAI Rule. However, petroleum contamination is often an important component to the environmental condition of a property; therefore, the prospective purchaser, tenant or lender should seriously consider requiring that the EP include petroleum and petroleum products in the scope of any Phase I ESA investigation being conducted.

EPA also will require that the AAI Rule be followed when a party, generally a governmental entity, is conducting a property assessment that has been funded by an EPA Brownfields grant. In addition to the matters reviewed for a commercial property transaction, in the context of a Brownfields grant, the EP must also look for evidence of a release of petroleum or petroleum products, “controlled substances” and “pollutants and contaminants,” which is a very broad category that includes “disease-causing agents....” The requirement to assess an actual or threatened release of a “controlled substance” or “disease-causing agents” will place new, unfamiliar obligations on the EP.

The effective date of the AAI Rule is Nov. 1, 2006. In the meantime, the new AAI Rule or the old ASTM standard may be used to satisfy the inquiry standard required to claim the prospective purchaser, adjoining property-owner and the innocent landowner defenses to Superfund liability. However, in light of the AAI Rule, prospective purchasers, tenants and lenders should consider migrating toward the new rule in advance of its Nov. 1 effective date.

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Footnotes

1 See, generally, Kilpatrick and Coster, “The Environmental Primer-A Reprise: A General Compendim on Fundamental Environmental Statutes in Bankruptcy,” 16 ABI J. 8 (March 1977); Ames, Kilpatrick, Salerno and Coster, “Hemingway Revisited,” 14 ABI J. 8 (May 1995).
2 See, generally, 40 CFR §312.