Under the 1980 Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, commonly known as Superfund), a party may be held liable for cleanup of hazardous substances at a property it owns or operates. Parties are sometimes liable even if they did not own or operate the property at the time contamination occurred. Because of the potential for liability, biodiesel developers need to perform some level of environmental due diligence before acquiring title.
The U.S. EPA's All Appropriate Inquiry (AAI) rule
1, which took effect in November 2006, contains a set of standards and guidelines that addresses the interplay between buyers' environmental due diligence and the ability to qualify for certain kinds of safe-harbor protection, such as the "innocent buyer" status. The rule also contains provisions for parties receiving EPA grants to conduct characterizations or assessments of former commercial and industrial properties.
To qualify for certain CERCLA safe-harbor liability defenses and protections, prospective purchasers must complete Phase I site assessments (which evaluate environmental liabilities associated with property sales and purchases) in accordance with the AAI rule. In most instances, compared to the prior rule, the AAI rule broadens the site assessment's scope of inquiry. The following are some of the AAI requirements
2 and their impacts on users of Phase I assessments.
Environmental practices: Phase I assessments must be performed by qualified environmental professionals (EPs), who must hold a specified license and/or have a defined level of higher education and experience.
Required activities: The EP must interview not only a property's current owner and occupants, but one or more of the past owners, occupants, tenants, operators, or current or past employees, as well as neighboring or nearby property owners or occupants. They must review historical sources of information dating to the first developed use of the property. The EPA must also review federal, state, tribal and local governmental records and environmental-cleanup liens against the property. The increased level of inquiry may give rise to issues of confidentiality for both the prospective buyer and the seller.
Shelf life: Only reports prepared within the preceding 12 months meet AAI requirements. Certain aspects of the report, such as those involving records review, site visits, interviews and environmental liens (that are more than six months old) must be updated before report submittal.
Written reports: The AAI requires Phase I results to be documented in a written report, which must be signed by the EP and include his or her qualifications and a statement that the all appropriate inquiries were conducted in accordance with the requirements of the final AAI rule.
Time and cost: Phase I assessments that comply with the AAI generally take longer to complete and cost more than Phase I assessments under the previous rules. Because the increased cost is justifiable mainly when the purchaser expects to be able to qualify as an "innocent buyer" or for other safe harbor, buyers should weigh the benefit of this cost if safe harbor is not available. For example, in a recent transaction, an assessment revealed the former presence of a dry cleaner and a gas station near an available piece of property. If prepared in accordance with the AAI rule, the Phase I would have called for additional water sampling and monitoring. Because of significant time pressure, the client ultimately decided that paying for a reduced-standard-of-inquiry Phase I, plus environmental insurance, was more economical and much faster than undertaking the full review required by the AAI. It is expected that the AAI rule will result in more buyers undertaking this kind of analysis.
Craig Kepler is a partner in the real estate practice group at Lindquist & Vennum PLLP, a leading provider of legal assistance on biofuels projects throughout the country. For more information visit www.lindquist.com or contact Kepler at (612) 371-3544.
1. See Final Rule, 40 Code of Federal Regulations Part 312, Standards and Practices for All Appropriate Inquiries, 70 Federal Register 66069 (Nov. 1, 2005).
2. See the EPA Web site at www.epa.gov/swerosps/bf/regneg.htm for additional information. The EPA summarized AAI rule requirements in the publication titled "Comparison of the Final All Appropriate Inquiries Standard and the ASTM E1527-00 Environmental Site Assessment Standard" (EPA-560-F-05-242, October 2005), available through the referenced Web site.