Purchaser’s Participation in Environmental Diligence — Securing BFPP Defenses Against CERCLA Liability

A new standard for Phase I Environmental Site Assessments (Phase I) went into effect this week. Beginning on February 13, if a Phase I is used to establish purchaser’s performance of “all appropriate inquiries” during its environmental diligence in order to establish a Bona Fide Prospective Purchaser defense under CERCLA, the Phase I must be performed pursuant to the new ASTM E1527-21 standard (ASTM Standard). Importantly, the ASTM Standard imposes requirements upon the real estate purchaser to make several disclosures in connection with the preparation of the Phase I. This Advisory is intended to provide practical tips for satisfying this lesser-known aspect of the “All Appropriate Inquiries” safe harbor for a Bona Fide Prospective Purchaser defense under CERCLA.

Jump Directly to Key Practice Tips

• ASTM Standards
• Best Practices for Phase I Reports

Bona Fide Prospective Purchaser

Generally, under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA),¹ also known as Superfund, any owner of a property can be held liable for the presence of hazardous substances, regardless of whether the property owner caused the release. However, CERCLA includes several defenses that limit property owner liability despite pre-existing contamination, including where property owners qualify as a Bona Fide Prospective Purchaser (BFPP).²

For a prospective purchaser to qualify as a BFPP, (1) any release of hazardous substances on the property must have occurred prior to acquisition;³ (2) the purchaser must not be affiliated with any potentially responsible party (PRP) for the property through a familial, commercial, or financial relationship; (3) the purchase must not impede the performance of a response action or natural resource restoration; and (4) the purchaser must meet all threshold criteria and ongoing obligations.⁴ Threshold criteria include conducting All Appropriate Inquiries (AAI) in accordance with the U.S. Environmental Protection Agency’s All Appropriate Inquiries Rule (AAI Rule).⁵ Similar state-specific defenses to Superfund liability also include AAI requirements with limited variation, discussed in greater detail below.

All Appropriate Inquiries

Conducting AAI requires both the prospective purchaser and the environmental professional to participate in the preparation of a Phase I.⁶ Beginning on February 13, if a Phase I is used to support AAI, it must be performed pursuant to the new ASTM E1527-21 standard.⁷ Importantly, while the ASTM Standards require the environmental professional to make inquiries of the current and past property owners and occupants, the prospective purchaser must independently provide the following items:⁸

• Environmental Liens/AULs. Within six months prior to the acquisition date, the prospective purchaser must perform a search for environmental liens and activity and use limitations (AULs) and provide any record thereof to the environmental professional.⁹ In most jurisdictions, a title commitment or title report would be likely to satisfy this requirement. Note the ASTM Standards do not require an environmental professional to perform a title search in preparing a Phase I. Instead, it is best practice for the prospective purchaser to provide a title commitment to the environmental professional.
• Commonly Known or Reasonably Ascertainable Information. The prospective purchase must provide any commonly known or reasonably ascertainable information from the local community, including, if known, past uses, past releases of hazardous substances, and past remediation efforts.¹⁰ This can include information derived from the owner or occupant of a property and neighboring properties, the local community, government officials, media sources, and local libraries and historical societies.¹¹
• Specialized Knowledge or Experience. The prospective purchaser must also provide any relevant specialized knowledge regarding the likelihood of a release or threatened release of hazardous substances at the property, adjacent properties, or the surrounding area to the environmental professional.¹² For example, the prospective purchaser should disclose if it generally is in the business of purchasing and remediating contaminated properties¹³ or, through its operation of a similar business, has specialized knowledge of the chemicals and processes used by the owner or occupant.¹⁴
• Deviation From Fair Market Value. The prospective purchaser must consider if the purchase price reasonably reflects the fair market value of an uncontaminated property, and if not, whether the price difference is due to the presence or threatened release of hazardous substances.¹⁵ An appraisal is not required. The determination may be made through a comparison of similar properties in the vicinity or by consulting a local real estate expert. In practice, the EPA’s rulemaking requires the prospective purchaser to note “significant differences in the purchaser price and fair market value of a property … and the reasons for any differences.”¹⁶
• Obvious Contamination. After considering all information available, the prospective purchaser must consider the degree of obviousness of potential contamination and the ability to detect contamination by appropriate investigation.¹⁷ In practice, the prospective purchaser should identify to the environmental professional any indications of hazardous substances on, at, in, or to the property.¹⁸

To easily satisfy the prospective purchaser’s requirement to make AAI, the revised ASTM Standards provide a simple questionnaire (included below) that prospective purchasers should complete when engaging an environmental professional and that the environmental professional should attach to the Phase I with a note that the consultant reviewed and relied upon the questionnaire in making its report.

Existing Phase I

A prospective purchaser need not commission their own Phase I to take advantage of the BFPP safe harbor. A prospective purchaser can rely on an existing Phase I, dated within one year of the acquisition date.¹⁹ However, a prospective purchaser must still make the independent inquiries as outlined above. When utilizing an existing Phase I, the best practice is to attach the ASTM Questionnaire to the environmental professional’s reliance letter with a note that the consultant reviewed and relied upon the questionnaire in affirming the report in the reliance letter.

Best Practices for Phase I Reports

Environmental professionals generally limit their liability under a Phase I to its cost or some other small amount. This limitation means that there is very limited recourse for a prospective purchaser if a Phase I contains inaccuracies or fails to follow ASTM guidelines. As such, prospective purchasers should take care in reviewing an environmental professional’s Phase I, including confirming that (1) the ASTM Questionnaire has been included in the Phase I (or reliance letter, as applicable);²⁰ (2) the Phase I notes any environmental liens or AULs uncovered in a title report; and (3) the Phase I (or reliance letter) states that the report was prepared for the purpose of achieving BFPP status. The ASTM Standards require an environmental professional to assume that the purpose is to qualify for landowner liability protections, if no other reason is given, and to state as much in the Phase I.²¹

Separate State and Local Requirements in the Washington, D.C. Metropolitan Area

The BFPP status outlined above operates as a safe harbor with respect to the federal Superfund law. The District of Columbia, Maryland, and Virginia incorporate and apply similar defenses from Superfund liability under state/local law.

• District of Columbia. To qualify as a BFPP under Washington, D.C.’s Brownfields Revitalization Act, a person (purchaser or tenant) must establish several threshold criteria that align with federal Superfund BFPP requirements, including that (1) the person must have acquired the facility after June 13, 2001; (2) the disposal of hazardous substances occurred prior to facility acquisition; (3) the person undertook at time of acquisition all appropriate inquiry²² into the previous ownership and use of the property; (4) the person must exercise appropriate care regarding identified hazardous substances by taking reasonable steps to stop any continuing release, prevent future releases, and prevent or limit exposure; and (5) the person is not potentially liable, or affiliated with any other person that is potentially liable, for response costs at the facility.²³
• Maryland. Maryland’s corollary to CERCLA, the Brownfields Redevelopment Reform Act, incorporates CERCLA defenses through its definition of a “responsible person,” which states that “any person claiming an exemption from liability … must establish that the person had no reason to know, in accordance with §101(35)(B) of [CERCLA, which directly references AAI], and that the person satisfied the requirements of §107(b)(3)(a) of [CERCLA].”²⁴ The Maryland Department of the Environment’s (MDE) August 2017 fact sheet on Inculpable and Responsible Person Status for the state’s Voluntary Cleanup Program clarifies that Section 101(35)(B) of CERCLA pertains to AAI and states that “[a]ny documentation submitted to MDE in support of the innocent purchaser defense must show that all points of AAI and the American Society of Testing and Materials (ASTM) were met.”
• Virginia. To satisfy the BFPP defense under Virginia’s Brownfields Restoration and Land Renewal Act, the purchaser must (1) not have contributed to a release or threatened release of hazardous substances, (2) have any familial, contractual, or financial relationship with a potentially liable entity, (3) take reasonable steps to mitigate any existing release and prevent any threatened future release, and (4) not impede any remediation action.²⁵ Virginia does not require a Phase I or any other purchaser inquiries to qualify as a BFPP. In addition, Virginia law requires that a person seeking to apply the innocent landowner defense demonstrate, among other requirements, that “the person made all appropriate inquiries into the previous uses of the facility in accordance with generally accepted good commercial and customary standards and practices, including those established by federal law.”²⁶

Conclusion

Ordering a Phase I is not enough for a purchaser to satisfy the All Appropriate Inquiries test to achieve Bona Fide Prospective Purchaser status. The prospective purchaser must ensure the Environmental Professional is executing the Phase I pursuant to the new ASTM E1527-21 standards and document its own disclosures in connection with the Phase I. For further information, please reach out to any author of this Advisory or to your normal Arnold & Porter contact.

ASTM E1527-21 User Questionnaire*

(1.) Environmental liens that are filed or recorded against the subject property (40 C.F.R. § 312.25).
Did a search of land title records (or judicial records where appropriate)²⁷ identify any environmental liens filed or recorded against the subject property under federal, tribal, state, or local law?

(2.) Activity and use limitations that are in place on the subject property or that have been filed or recorded against the subject property.
Did a search of land title records (or judicial records where appropriate) identify any AULs, such as engineering controls, land use restrictions, or institutional controls that are in place at the subject property and/or have been filed or recorded against the subject property under federal, tribal, state, or local law?

(3.) Specialized knowledge or experience of the person seeking to qualify for the LLP (40 C.F.R. § 312.28).
Do you have any specialized knowledge or experience related to the subject property or nearby properties? For example, are you involved in the same line of business as the current or former occupants of the subject property or an adjoining property so that you would have specialized knowledge of the chemicals and processes used by this type of business?

(4.) Relationship of the purchase price to the fair market value of the subject property if it were not contaminated (40 C.F.R. § 312.29).
Does the purchase price being paid for this subject property reasonably reflect the fair market value of the property? If you conclude that there is a difference, have you considered whether the lower purchase price is because contamination is known or believed to be present at the subject property?

(5.) Commonly known or reasonably ascertainable information about the subject property (40 C.F.R. § 312.30).
Are you aware of commonly known or reasonably ascertainable information about the subject property that would help the environmental professional to identify conditions indicative of releases or threatened releases? For example:
(a.) Do you know the past uses of the subject property?
(b.) Do you know of specific chemicals that are present or once were present at the subject property?
(c.) Do you know of spills or other chemical releases that have taken place at the subject property?
(d.) Do you know of any environmental cleanups that have taken place at the subject property?

(6.) The degree of obviousness of the presence or likely presence of contamination at the subject property, and the ability to detect the contamination by appropriate investigation (40 C.F.R. § 312.31).
Based on your knowledge and experience related to the subject property, are there any obvious indicators that point to the presence or likely presence of releases at the subject property?

*Reprinted, with permission, from ASTM E1527-21, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, copyright ASTM International. A copy of the complete standard may be obtained from www.astm.org. 

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.