IX Environmental Due Diligence

• Library: Illinois Environmental Law for Non-Environmental Lawyers (2017 Ed.)

IX. Environmental Due Diligence Eugene P. Schmittgens, Jr.

A. Overview

As discussed elsewhere, the liability scheme of CERCLA often ensnares the owners of contaminated real property for remediation costs, toxic tort actions and enforcement actions, regardless of when they acquired the property or whether they contributed to the contamination. Owners may be liable for the actions of tenants, and, on occasion, lenders have been liable for cooperating with borrowers.

Because the Superfund Amendments and Reauthorization Act (SARA) provided that environmental investigation could form the basis for avoiding liability, the use of pre-purchase environmental due diligence investigations became the norm as those acquiring commercial real estate struggled with trying to define what constituted the requisite appropriate due diligence to avoid liability. The Small Business Liability Relief and Brownfields Revitalization Act ("Amendment") has clarified the liability issues with respect to the acquisition of real estate that were outlined in Chapter 8 on Real Estate Transactions. It specifically defines what steps must be taken by a purchaser to protect itself from CERCLA liability. A purchaser is also required to take specific steps regarding contamination discovered after acquisition, including taking reasonable steps to stop any continuing release; preventing any threatened future release; and preventing or limiting any human, environmental, or natural resource exposure to any previous releases of contaminants.

The nature of an environmental site assessment is a function of the transaction itself and the parties' objectives. Among the components of the due diligence, now referred to as "all appropriate inquiry" (AAI) under the Amendment, are many new obligations such as a requirement that the inquiry be performed by an environmental professional, as defined in the Amendments; stricter obligations for interviews with past and present owners, operators, and occupants of the facility; more stringent reviews of historical sources; reviews of Federal, State, and local government records, waste disposal records, underground storage tank records, and hazardous waste handling, generation, treatment, disposal, and spill records, concerning contamination at or near the facility; additional requirements for the visual inspections of the facility and of adjoining properties; the business acumen of the purchaser; consideration of the relationship of the purchase price to the value of the property, if the property was not contaminated; and, consideration of commonly known or reasonably ascertainable information about the property.

If a buyer seeks to rely upon the Innocent Landowner or Contiguous Property Owner defense to avoid liability under CERCLA or Superfund, it must perform an assessment in compliance with the requirements highlighted here that demonstrates it did not know and had no reason to know, after undertaking all appropriate inquiry or AAI that contamination existed at a site.¹ If a buyer seeks to rely upon the Bona Fide Prospective Purchaser defense to avoid liability under CERCLA or Superfund, it must perform an assessment in compliance with the AAI requirements highlighted here regardless of whether there is contamination on the site. Regardless of which defense a purchaser is attempting, invasive investigations which attempt to define whether contamination exists are not generally required.²

Further, in some transactions, the parties will know or suspect there is contamination affecting a property and will want to agree upon an invasive assessment at the outset of the transaction. This information may help in allocating responsibility for investigative and remedial activities later mandated by a governmental agency. All parties to a real estate transaction must consider the cost of performing various aspects of a site assessment against the risk that may follow if contamination is not detected and addressed at the outset.

Under the Amendments, the American Society for Testing Materials (ASTM) processes are sufficient to demonstrate "all appropriate inquiry" for land purchases subsequent to 1997, until the final rule was effective. The USEPA has promulgated new rules to address the requirements of the AAI as required by the Amendments. In response, the ASTM has developed a new standard which is designed to comply with the new AAI Rule. See ASTM E1527-13. The ASTM standard requires the investigation of a number of items related to the property.³

First, it is important to remember that the standard requires that the investigation seek information that may raise confidentiality questions that may make any attempts to keep a deal secret more difficult. This is because the AAI standard requires interviews with current and past owners of the property in question and occupants, managers, and, often, employees of the property or the businesses operating on the property. Thus, more people will become aware of the pending deal. Regarding interviews, the new AAI standard makes these interviews mandatory.

In addition, the AAI standard requires interviews with past owners or tenants and it makes mandatory that the investigator interview one or more of the following individuals: the current and past facility managers; the past owners, occupants, or operators of the property; or, employees of current and past occupants of the property if they are likely to have material information about releases. Further, if a property is abandoned, neighbors of nearby properties must be interviewed.

Second, data gaps must be identified in the report, and the investigator must provide an opinion whether those data gaps affect her ability to identify any conditions that would indicate that a release...