Alert

Avoiding Costly Cleanup: Mind Your Environmental Due Diligence

Winter 2009

The growing pains of the early industrial and technological revolutions are still with us in the form of a legacy of environmentally contaminated properties. Concerns about the cleanup costs and the extent of contamination at these sites have left many reluctant to purchase these properties. The potential for government enforcement actions have compounded this fear because the owner of the property is strictly liable for cleaning up hazardous substances discovered on the site. Fortunately, relief has finally come as the result of new Congressional legislation limiting purchaser liability to some extent.

The federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) imposes strict liability on property owners for the cleanup costs based solely on their ownership and without regard to actual fault or negligence. Furthermore, the liability is “joint and several,” meaning the current owners can be held liable for the entire costs of the cleanup. CERCLA has had the effect of essentially creating properties that cannot, for all intents and purposes, be transferred. Fortunately, Congress has recognized that contaminated properties blight local communities, pose public health hazards, and need to be put back into commerce. Thus, on January 11, 2002, President Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act (Pub.L. No. 107-118, 115 Stat. 2356), which amended CERCLA to provide limitations on liability for “innocent landowners,” contiguous property owners,” and “bona fide prospective purchasers.”

So who benefits from the new law? “Innocent landowners” are purchasers of property who acquire it without knowing the property is contaminated. “Contiguous property” owners are owners of property adjacent to property that is the source of the contamination and who purchased their property not knowing it was contaminated. “Bona fide prospective purchasers” are landowners who bought property knowing it was contaminated at the time of purchase, but followed certain procedures prior to purchase. Among other requirements, to be covered under the new limitations, each type of protected property owner must be able to establish that, on or before acquiring the property, “all appropriate inquires” have been made into the prior ownership and use of the property.

The “all appropriate inquiries” analysis is essentially an evaluation of the property for releases or threatened releases of CERCLA hazardous substances. It will protect landowners who have acquired property which is determined at a later date to have been contaminated at the time of purchase. The information collected will also allow EPA to determine whether someone qualifies as an innocent landowner or contiguous property owner or if they, instead, “knew or had reason to know” of the contamination of the property at the time of purchase and so will not satisfy the requirements for a limitation of CERCLA liability. It also indicates the extent of contamination of the property at the time of purchase. Prospective purchasers who learn of contamination as a result of an “all appropriate inquiries” analysis may still limit their liability as “bona fide prospective purchasers,” if they meet certain other conditions.

Congress directed EPA to include ten criteria within the standards for “all appropriate inquiries.” The inquiry must:

1. be conducted by an environmental professional;
2. include interviews with past and present owners, operators, and occupants of the property for the purpose of gathering information regarding the potential for contamination at the property;
3. review historical sources, such as chain of title documents, aerial photographs, building department records, and land-use records, to determine previous uses and occupancies of the property since the property was first developed;
4. search for recorded environmental clean-up liens against the property that are filed under federal, state, or local law;
5. review federal, state, and local government records, waste disposal records, underground storage tank records, and hazardous waste handling, generation, treatment, disposal, and spill records concerning contamination at or near the property;
6. include a visual inspection of the property and adjoining properties;
7. consider any specialized knowledge or experience on the part of the purchaser;
8. consider the relationship of the purchase price to the value of the property if the property was not contaminated;
9. include any commonly known or reasonably ascertainable information about the property; and
10. consider the degree of obviousness of the presence or likely presence of contamination at the property and the ability to detect the contamination by appropriate investigation.

Again, what the EPA is looking to see is whether the purchaser “knew or had reason to know” of the environmental contamination at the site at the time it was purchased or, with regard to bona fide prospective purchasers, to document the extent of that contamination.

The EPA has published regulations governing the “all appropriates inquiries” requirement. These rules can be found at 40 CFR 312. According to EPA, as of November 1, 2006, parties must comply with the requirements of the “All Appropriate Inquiries Final Rule,” or follow the standards set forth in the American Society for Testing and Materials (ASTM) E1527-05 “Phase I Environmental Site Assessment Process,” to satisfy the statutory requirements for conducting “all appropriate inquiries.”

CERCLA liability can unwittingly impose enormous remediation costs on an unwary landowner. Performing a qualifying “all appropriate inquires” can significantly limit liability for these costs. But it is critical to remember that the “all appropriate inquiries” must be performed on or before acquiring the property. It is strongly recommended that a professional environmental consultant be engaged to perform the “all appropriate inquiries.”