U.S. EPA Finalizes “All Appropriate Inquiries” Rule

November 2005

On November 1, 2005, U.S. EPA finalized its much-anticipated All Appropriate Inquiries (AAI) Rule. It is expected that the AAI Rule will impact many real estate transactions, particularly those involving commercial or industrial property. Anyone buying, lending, leasing or otherwise taking an interest in real estate should be aware of the AAI Rule.

The AAI Rule flows from 2002 amendments to the innocent purchaser defense and establishment of the new bona fide prospective purchaser defense to CERCLA or Superfund cleanup liability. These defenses were created to protect a purchaser of previously contaminated real estate from potentially being saddled with a costly cleanup. Numerous conditions must be satisfied to claim the defense. One of those conditions is that the purchaser establishes that it conducted all appropriate inquiries into potential contamination of the property in accordance with standards established by U.S. EPA. The new AAI Rule provides these standards.

Since its enactment in 1980, the Superfund law cast a wide net of liability for cleanup of contaminated properties. Caught in that net are current owners and operators of the property, regardless of whether they caused or contributed to the contamination. Because of this potential liability, buyers often would not buy and lenders often would not lend on potentially contaminated properties. While cleaning up contaminated property is important, the unintended consequences of the Superfund law have included abandoned, inner city property and idled infrastructure, coupled with high infrastructure costs to develop greenfield sites.

In 2002, Congress clarified the innocent purchaser defense (for a purchaser who conducts due diligence before buying property but did not find or cause the contamination) and added the bona fide prospective purchaser defense (for a purchaser who conducts due diligence before the purchase, finds the contamination and either addresses it or does not exacerbate it). Along with other measures, these amendments are helping fuel brownfield redevelopment.

To obtain liability protection under either defense, the purchaser must prove it conducted all appropriate inquiries into the previous ownership and uses of the property. Until 2002, what constituted all appropriate inquiries has largely been left to the courts. Phase I Environmental Site Assessments conducted in accordance with an ASTM standard became the accepted industry practice to satisfy the requirement. However, since these defenses are necessarily raised in a litigation context, the results were varied.

In the 2002 Superfund amendments, Congress specifically stated that until U.S. EPA promulgated its AAI Rule, an ASTM Phase I constituted all appropriate inquiries. Because the AAI Rule will not become effective until one year from now, U.S. EPA has said that either an ASTM Phase I or an assessment meeting the new AAI Rule will be satisfactory until November 1, 2006. For any property transaction closing on or after November 1, 2006, the pre-purchase environmental due diligence must meet the AAI Rule in order for the buyer to assert the innocent purchaser or bona fide prospective purchaser defenses to liability.

Assuming the AAI Rule stands and is not legally challenged, it is too soon to tell whether the rule will be embraced in the market or reserved only for limited transactions. The cost and time needed to conduct an AAI Phase I is expected to be higher and longer than an ASTM Phase I, but how much higher and how much longer will need to be settled in the marketplace.

Because Phase I assessments are rarely conducted just to obtain a theoretical defense to a potential future lawsuit, we predict each transaction will present its own case for using or not using an AAI level assessment. Frost Brown Todd's Environmental attorneys stand ready to assist clients in navigating through these issues.

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