Buying Contaminated Property: New Rules, New Twists

by J. Kemper Will

New rules related to buying contaminated property are now final. Both EPA and the American Society of Testing and Materials (“ASTM”) published due diligence rules in November, revising standards for conducting environmental site assessments prior to purchasing a contaminated property, steps that are necessary to avoid environmental liability.

Previous articles in Briefly by Scott Clark (Fall, 2003) and J. Kemper Will (Spring, 2004) have tracked the development of these standards. The publication of these revised standards introduces new twists by both EPA and ASTM.

The context of these standards is the due diligence a person must conduct when acquiring potentially contaminated property to minimize liability for any environmental issues encountered. At its root, the standards address liability under the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), enacted in 1980. As interpretation of CERCLA evolved through court decisions, it became clear that persons acquiring contaminated property could assume significant environmental liability if they did not make “all appropriate inquiries” into the environmental conditions of the property prior to purchase. Since the early 1980’s, there has been an evolution of law and science related to environmental liability. On the science side, buyers have learned methods to manage environmental risk through thoughtful Phase I and Phase II site assessments, through addressing environmental concerns in the regulatory context by risk-based remediations, and by continuing diligence with the property after purchase.

There has also been an evolution of legal environmental risk-management through property acquisition, contractual provisions and using available federal, state and local regulatory tools. One of the most useful new tools has been the “bona fide prospective purchaser” exemption to CERCLA liability, enacted in January, 2002 by the Brownfield Amendments to CERCLA. A person can qualify as a bona fide prospective purchaser if they satisfy each of the statutory criteria:

The property is acquired after January 11, 2002.
Prior to purchase, the purchaser has conducted a Phase I site assessment fully compliant with the new EPA and ASTM standards.
After closing, the purchaser takes “reasonable steps” to exercise appropriate care with regard to the environmental conditions.
The person cooperates with regulatory agencies.
If the buyer complies with each of the steps summarized above, the buyer will not have environmental liability pursuant to CERCLA. However, if the federal government spends money to investigate or clean up the property, those costs can be recovered by means of a lien on the property if the buyer, as a result of the federal action, receives a “windfall” in value.

I would like to focus on the “reasonable steps” aspect of the new standards, because EPA’s explanation of their “all appropriate inquiry” standard suggested some new twists. CERCLA, in the context of a bona fide prospective purchaser’s obligations states:

. . . the person exercises appropriate care with respect to hazardous substances found at the facility by taking reasonable steps to –

(i) stop any continuing release;
(ii) prevent any threatened future release; and
(iii) prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substance.

The “appropriate care” and “reasonable steps” language has been an ambiguity. Most buyers easily understand what is required by performance of a Phase I site assessment as a criterion for bona fide prospective purchaser status. However, the obligation to continue “appropriate care” and to take “reasonable steps” after buying the property has been ambiguous.

One of the questions was whether it might be necessary to conduct soil or groundwater sampling as part of a Phase I site assessment. In its preamble, EPA almost definitively states that “[the] rule does not require sampling and analysis as part of the [Phase I] inquiry”. However, equally almost definitively, EPA, again in its preamble, states that post acquisition sampling and even control mechanisms may be necessary as part of the continuing obligations of “appropriate care” or “reasonable steps”. Here is a quotation from the EPA preamble, which does not seem to clear up the ambiguity:

It may be necessary to conduct sampling and analysis, either pre- or post-acquisition, to fully understand the conditions at a property, and fully comply with [the reasonable steps] requirement.

Certainly, this EPA preamble discussion is a wake-up call for those wishing to comply with the bona fide prospective purchaser liability exemption of CERCLA. EPA emphasizes that not only must a fully compliant Phase I site assessment be performed, but that a bona fide prospective purchaser must continue to be diligent about environmental conditions after the property is acquired.

J. Kemper Will
For more information, please contact J. Kemper Will at (303)796-2626 or e-mail . Mr. Will heads the Firm’s Environmental Group. He began his environmental practice 30 years ago, when the environmental field was nascent, as an attorney with the U.S. Environmental Protection Agency in Washington D.C. and Denver. In addition to being one of the most experienced “Superfund” lawyers in the United States, he has represented hundreds of parties regarding contaminated properties:

Sales, purchases and other contaminated property transactions;
Mergers and acquisitions;
Redevelopment, voluntary clean-up, brownfields;
Permitting and regulatory compliance;
Managing environmental litigation.