March 16, 2023

Is “All Appropriate Inquiries” Appropriate?

Posted on March 16, 2023 by Jeff Civins

On December 22, 2022, EPA authorized use of the latest version of the ASTM standard for performing Phase 1 environmental site investigationsE1527-21, as an option for satisfying Superfund’s all appropriate inquiries (AAI) requirements spelled out in 40 CFR Part 312.  Because AAI is a prerequisite to taking advantage of Superfund’s transactional defenses and because EPA has authorized reliance upon its various iterations, the ASTM standard has become the real estate industry’s gold standard for environmental due diligence.  But with this agency action, it’s a good time to reflect on whether either the ASTM standard or AAI itself is the appropriate inquiry for parties to a real estate transaction.  The short answer may be “not necessarily, although it’s a good place to start.”

The objective of an AAI Phase 1 is to identify the presence or potential presence of hazardous substances.  Although AAI is a prerequisite to Superfund’s transactional defenses, it is only one of 3 prerequisites.  To succeed in asserting the defense, the purchaser defendant also must show non-affiliation with a PRP and compliance with certain continuing obligations, including taking reasonable steps with respect to hazardous substances on the property to stop and prevent releases and prevent and limit exposure. Moreover, because the Superfund protections are defenses, the burden of proof is on the defendant, and, unlike a pre-transaction bona fide prospective purchaser agreement, there’s both a cost to asserting it and uncertainty whether the defendant will prevail in litigation.

Additionally, the Superfund transaction-related defenses do not protect against liability under other federal laws, including other federal environmental laws, state environmental laws (unless they have similar defenses), or the common law such as trespass, negligence, and nuisance.   Moreover, because the transaction-related defenses apply only to purchases of land, they provide no protection in stock acquisitions and mergers.

The investigation prescribed by the ASTM standard seeks to identify recognized environmental conditions or RECs, which are generally defined to include the presence or likely presence not only of hazardous substances, as prescribed by Part 312, but also of petroleum products.  But although an ASTM Phase 1 investigates petroleum products, its performance does not provide protection against liability relating to contamination by them, because petroleum is not within the universe of hazardous substances addressed by Superfund, falling within the act’s so-called petroleum exclusion. Similarly, both the ASTM standard and Part 312 focus on “hazardous substances,” but there are many contaminants of concern that do not fall within that rubric and consequently for which Superfund defenses are not available. The family of emerging contaminants, PFAS, presently are an example, although EPA has proposed to list two of its family members–PFOS and PFOA.

And RECs aren’t the only thing of environmental concern for a party to a real estate transaction. There are many other concerns that neither the ASTM standard nor AAI cover unless the user of the investigation expressly asks that they be.

If the property contains buildings, there are additional concerns, e.g., the presence of lead paint, lead in potable water, PCBs, toxic mold, and asbestos containing materials, as well as indoor air quality, including the potential presence of radon and vapor intrusion, which pose concerns for new construction as well.  For properties with ongoing operations, compliance is yet another, significant concern. 

For properties that are to be developed, pertinent land use restrictions also are of concern, including, for example, those relating to endangered species, wetlands, protected watersheds and aquifers, and flood plains.

If there is the potential for successor liability–as in a merger, the past as well as present liabilities, and offsite as well as onsite liabilities, e.g., for formerly owned or operated properties and for offsite disposal, are also of concern

With an understanding of these additional concerns and of the relevance and limitations of AAI and the transaction-related defenses, parties to real estate transactions can decide what environmental inquiry is appropriate–how best to employ AAI and to tailor their site investigations to address environmental concerns pertinent to them.