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CERCLA's New Environmental Due Diligence Standard Takes Effect November 1, 2006
October 10, 2006
- The U.S. Environmental Protection Agency (EPA) has altered the “all appropriate inquiries” standard that purchasers must meet in order to potentially avoid CERCLA liability for the cleanup of pre-existing environmental contamination.
- After November 1, 2006, purchasers must meet this new standard in order to qualify for CERCLA liability protections.
- The new due diligence requirements apply to all property transactions that close after November 1, 2006, even if environmental due diligence was conducted under the old all appropriate inquiry standard prior to November 1, 2006.
The Comprehensive Environmental Response, Compensation and Liability Act (commonly known as CERCLA or Superfund) provides that owners and operators of environmentally contaminated property are potentially liable for cleanup costs. CERCLA imposes a strict liability scheme on potentially liable parties, meaning that the owner of a contaminated property may be liable for the cleanup costs regardless of whether the owner caused or contributed to the contamination. However, purchasers of such property who have performed all appropriate inquiries may be able to avoid subsequent CERCLA liability.
Scope of All Appropriate Inquiry
According to EPA, the primary objective of the "all appropriate inquiries" review is to identify the following information about a subject property:
- Current and past uses, occupancies, and hazardous substance exposures
- Current and past waste disposal activities and corrective actions
- Current and past recorded environmental cleanup liens
- Waste management engineering and institutional controls
- Contamination status of neighboring properties.
The New All Appropriate Inquiries Standard
The new standard requires that the party seeking to satisfy All Appropriate Inquires must engage an environmental professional to conduct the review. The environmental professional must conduct interviews, review historical sources and government records, perform visual inspection of the property, and carry out other inquiries. The purchaser must research and assess, directly or through the environmental professional, such issues as environmental cleanup liens, fair market value of the property, and commonly known or reasonably ascertainable information. The initial investigation does not generally involve invasive testing (termed a Phase II investigation). The environmental professional must make a report to the purchaser or landowner about the full investigation and identify any information gaps. Ultimately, the owner must be able to defend the report and any information gaps that exist.
Both purchasers of potentially contaminated properties, and the institutions that finance such purchases, may wish to implement proactive steps to limit their CERCLA liability by following EPA's final rule:
- Lenders are not directly liable for property cleanup, but they may end up holding title to, and paying taxes on, a foreclosed property that cannot be developed or resold because of contamination. To manage the risk of potentially “dirty collateral,” lenders may wish to insist that their creditors (purchasers and developers of real estate) meet the due diligence standards contained in the final rule. This can provide protection for the lender, if only indirectly.
- Purchasers should ensure that the environmental professional who performs or oversees the due diligence investigation meets all of the qualifications for licensing, education and relevant work experience required by the final rule.
- Lenders and purchasers should know that the new rule applies to any property transaction that closes after the November 1, 2006 effective date – even if all appropriate inquiry was undertaken months before under the earlier standard. If there is any risk of contamination, it may be wise to update the earlier investigation so that it conforms to the final rule. EPA's final rule stipulates how and when past reports can be updated to meet the new standard.