The United States Environmental Protection Agency ("EPA") has proposed a new package of regulations that will, if adopted, significantly affect any sale of commercial or industrial real estate. The proposed rules are supposed to implement changes to the federal Superfund law enacted by Congress in 2002. The purpose of these Superfund amendments was to facilitate the purchase and redevelopment of environmentally impacted properties. As explained below, however, the EPA's proposed rules are likely to make all commercial and industrial real estate transactions more complicated and expensive.
In 2002, Congress amended the Superfund law to create or expand upon liability defenses for innocent landowners, bona fide prospective purchasers, and contiguous property owners. Each of these defenses requires "all appropriate inquiry" ("AAI") into current and historical uses of the property at issue. The amendments required the U.S. EPA to promulgate regulations by January 2004 containing standards and practices for satisfying the required "AAI." In the meantime, the amendments stated that the procedures of the American Society for Testing and Materials for environmental site assessments (the "ASTM Standard") would satisfy the requirement for AAI.
Anyone who has been involved in the purchase or sale of commercial or industrial real estate will be familiar with "Phase I" site assessments, which are typically based on the ASTM standard. Compliance with the ASTM standard has never been legally required under federal or Michigan law, but has found general acceptance among purchasers, sellers, the environmental legal community, consultants, lenders, and real estate professionals.
The EPA's proposed AAI regulations were published in August. The regulations mandate many of the same types of practices that are included in the ASTM Standard, including interviews with owners and operators, review of available historical records, site inspections, and characteristics of nearby properties. However, the AAI regulations introduce a number of new concepts, and expand upon a variety of the practices taken from the ASTM Standard. Several key provisions of the proposed regulations contain vague language that is bound to create uncertainty. As anyone involved in real estate transactions knows, uncertainty frequently expresses itself by complicating the already complex issues of pricing, loan underwriting, and timing requirements.
Some of the new requirements found in the proposed AAI rules are:
- Increased qualifications for an "Environmental Professional" performing AAI.
- Increased scope of interviews. The "Environmental Professional" must now interview current and former facility managers, past owners or occupants, or employees of current and past occupants or, in some circumstances, with one or more owners or occupants of neighboring properties.
- Possible extension of the time period for which the Environmental Professional must review "historical documents and records."
- A new requirement to consider "commonly known or readily ascertainable information within the local community." No one is certain what this may mean, or what types of inquiries may be required to meet this requirement.
- The written report must include the Environmental Professional's opinion as to "whether the inquiry has identified conditions indicative of releases or threatened releases." The report must also describe the existence and significance of any data gaps in the inquiry.
These issues, among others, could increase the time and cost associated with performing environmental site assessments in order to qualify for liability defenses under CERCLA. In Michigan, the EPA and the Michigan Department of Environmental Quality ("DEQ") have entered into a Memorandum of Understanding under which the EPA agreed to defer to the DEQ at most sites. Currently, the ASTM Standard satisfies the Phase I requirement of a "baseline environmental assessment," or "BEA," that provides protection from certain liabilities under Michigan's environmental cleanup law. The sufficiency of the ASTM Phase I assessment for BEA purposes is provided in the DEQ's regulations. It is unclear how the EPA's proposed regulations will interact with the existing Michigan BEA rules.
There are a number of unresolved issues concerning the proposed AAI regulations. For example, will it be necessary to comply with the AAI regulations in order to satisfy the BEA standard under Michigan law? Will compliance with the existing ASTM Standard be sufficient for a BEA, but not for federal protection? Will the ASTM organization modify the ASTM Standard to reflect the AAI regulations? Perhaps most importantly, will the EPA continue to honor the Memorandum of Understanding or will the EPA require parties in Michigan to comply with the AAI regulations?
These and other issues should be resolved before the EPA issues its AAI regulations in final form. The only alternative is to inject a hefty measure of uncertainty and risk into the purchase and sale of commercial and industrial real estate. The EPA should use the public comment process to clarify how the rules will be applied and how they are intended to relate to analogous state laws and regulations. Hopefully the DEQ will also weigh in with some guidance for the regulated community.
This article presents a greatly simplified and generalized summary of the draft AAI regulations, and should not be considered as legal advice. The reader should consult environmental counsel for advice on the details of the proposed regulations.
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Scott D. Hubbard is a partner in the Environmental Group of Warner Norcross & Judd LLP. He practices exclusively in environmental law, focusing on wastewater management issues, solid and hazardous waste, site cleanups, lender liability and environmental issues affecting business transactions. He represents a wide variety of industrial, institutional and municipal clients in matters before federal and state agencies and in private transactions. Scott may be reached in the Grand Rapids office at 616.752.2157.
Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Holland, Metro Detroit and Muskegon. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.