Environmental Protection Agency
The Environmental Protection Agency's new rule setting forth the requirements for satisfying the "all appropriate inquiries" standard under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) will go into effect in a few months. Compliance with the new due diligence standard may conflict with deal objectives and impede efforts to assess critical environmental issues.
Under CERCLA, there are limited affirmative defenses available to property owners. These defenses are (i) the innocent landowner defense, (ii) the bona fide prospective purchaser defense, and (iii) the contiguous property owner defense. The innocent landowner defense is available only if the owner did not cause the contamination and did not know or have reason to know of its existence. The bona fide prospective purchaser defense applies when a purchaser did not cause the contamination, but knew of its existence prior to purchase. The contiguous property owner defense applies when the contamination did not originate on the site, but migrated from another contiguous site.
Each of these affirmative defenses requires purchasers of property to satisfy certain pre-closing and post-closing statutory criteria, including having made all appropriate inquiry into environmental conditions existing at the property prior to purchase. The new EPA rule establishes how parties are to comply with the requirements for conducting appropriate inquiries.
The new AAI standard, which goes into effect on November 1, 2006, alters the due diligence process traditionally employed by purchasers of property. Purchasers routinely commission a Phase I environmental site assessment on the property they plan to acquire. Environmental engineers preparing Phase I's focus on identifying recognized environmental conditions generally defined as conditions indicating an existing past, or material threat of a release of hazardous substances or petroleum products. To determine whether a recognized environmental condition is present, engineers typically review site records, inspect the site and interview knowledgeable personnel.
The new AAI Standard requires that engineers change some of their methodologies for conducting Phase I's. First, the new standard requires engineers to interview past and present owners, operators and occupants if they are likely to have material information regarding the potential for contamination at a property. Under the prior standard, only a reasonable attempt to interview the current key manager and current occupants of the property was necessary. These new interview requirements may compromise efforts to maintain the confidentiality of a transaction. When a company is contemplating an acquisition or sale, often informs only the highest level employees of the proposed transaction. There may be a variety of reasons as to why the company wants to maintain the confidentiality of the proposed transaction. The performance of the new required Phase 1 will give away that information when the transaction is contemplated. Second, the new standard requires engineers to obtain and review additional historical information about the site being acquired. For example, the engineer must now interview prior owners or neighbors of abandoned property. This illustrates the type of rigid rule-making incorporated into the new AAI regime. These changes may deprive the engineer of the valuable discretion that was the hallmark of traditional Phase I's.
Third, the EPA now defines the term "environmental professional" to include only those engineers and consultants with specific licensing, educational background or experience. The former standard simply required the engineer to possess sufficient training and experience necessary to conduct site reconnaissance, interviews and other activities and have the ability to develop opinions and conclusions relating to environmental conditions. A purchaser seeking to comply with the new AAI standard will now need to ensure that the environmental professional performing the Phase 1 meets these new requirements.