'Final Rule': Know What You Are Buying

By Michelle A. Neumann

Most prospective purchasers of real property, particularly of commercial land, know it is important to determine whether a site is contaminated before deciding whether or not to buy it. This process, described in the past as an environmental site assessment or due diligence, serves two critical purposes: it helps a purchaser evaluate the property, and it can shield certain purchasers from liability for contamination under state and federal environmental laws. The latter concern is due, in part, to a key federal statute, CERCLA (the Comprehensive Environmental Response Compensation and Liability Act, also called the federal Superfund Law), which imposes strict liability on owners or operators of property for the cleanup of certain hazardous substances. A property owner has few defenses to CERCLA liability. Therefore, understanding the scope and application of its defenses is key to structuring a purchase transaction that will provide some protection to a purchaser.

The EPA's new "All Appropriate Inquiries Final Rule" (the "Final Rule") provides new regulations and guidance to help a purchaser investigate the previous ownership and uses of a property. Properly conducted and documented, such appropriate inquiries qualify the purchaser as a "bona fide prospective purchaser," eligible to claim immunity from liability under CERCLA for environmental contamination.

The EPA adopted its Final Rule on November 1, 2006, in response to the 2002 amendments to CERCLA. These amendments, commonly described as the Brownfields Amendments, added liability protection for purchasers who demonstrate that they have performed the required inquiry before closing the purchase and who demonstrate that they

• Did not acquire the property until the disposal of all hazardous substances at the property ceased;
• Took and/or are taking "reasonable steps" to stop continuing releases, prevent threatened future releases, and prevent or limit exposure to previously released hazardous substances;
• Have provided and will provide full cooperation and access to persons authorized to conduct response actions or restorations and complied with any land use restrictions;
• Have not impeded and will not impede any institutional controls required to protect human health and the environment;
• Have complied with and will comply with any CERCLA request for information or any administrative subpoena; and
• Are not potentially liable, or affiliated with any other person who is potentially liable, for addressing releases at the property.

Demonstrating compliance with the above listed conditions requires a purchaser to be able to prove its state of mind and the condition of the property at the time of closing. Therefore, the EPA's new Final Rule describes "all the appropriate inquiries" a purchaser must undertake to establish that preclosing record. The Final Rule also requires a purchaser to retain a qualified "environmental professional" to

• Interview present and past owners, operators, and occupants of the property;
• Review certain records (including chain of title, public records, and aerial photographs) to determine prior uses of the property;
• Search for any recorded environmental cleanup liens;
• Review available (including local) governmental records pertaining to site contamination;
• Inspect the property and adjoining properties;
• Apply any specialized knowledge that the potential purchaser may have regarding the property (or the type of property in general);
• Evaluate the purchase price in relation to disclosure of any discount received due to known contamination;
• Describe any common knowledge regarding the condition of the property; and
• Evaluate the likelihood of undiscovered contamination at the property and the difficulty of detecting it.

Additions to the Final Rule from prior versions include a definition of an "environmental professional," which specifies educational requirements, licenses or certifications, and relevant experience needed to qualify for that status. The obligation to interview now includes past owners, operators, and occupants of the property under certain circumstances. The record search requirement has been significantly expanded from earlier versions and now goes back at least fifty years. The disclosure of a purchase discount due to the property's environmental condition is brand new, as is a requirement that the environmental professional identify any "data gaps" that affect his or her analysis. A detailed comparison of the interim standards most familiar to investors and consultants with the Final Rule is available at the EPA's website, http://www.epa.gov/swerosps/bf/regneg.htm.

While an "all appropriate inquiries" process is not necessary for every real estate transaction, it will be implicated for almost any purchase of commercial or industrial land. Again, it always helps to know what you are buying and to insulate yourself from liability for problems you did not cause. Acquiring a liability that could have been avoided is just bad business.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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