bona fide prospective purchaser

By Andrew H. Perellis, Jeryl L. Olson, and Ilana R. Morady

On October 6, 2014, EPA finalized an amendment to the “All Appropriate Inquiries” (AAI) rule to remove the reference to ASTM E-1527-05. 79 Fed. Reg. 60087. This means that ASTM E-1527-05 is no longer adequate to establish landowner and lender liability protections under CERLA. Buyers, sellers, and lenders take note: you will now need to ensure that your AAI is conducted under the newer 2013 ASTM standard.

“All Appropriate Inquiries,” or AAI, is the process of evaluating a property’s environmental conditions and assessing the likelihood of any contamination. Buyers, Sellers and Lenders involved in the transfer of real estate, including real estate transferred as part of a corporate merger, acquisition or asset sale, know that ASTM E-1527 is the typical starting point for conducing AAI and thus obtaining landowner and lender liability protections under the environmental statute CERCLA. In 2013, the 2005 ASTM standard was revised (see our article, SOMETHING NEW IS IN THE AIR:  Important Changes to ASTM E 1527 “Phase I” Environmental Due Diligence, to read more about the 2013 revisions). EPA’s policy at the time was that both ASTM E1527-05 and E1527-13 were consistent with the AAI rule at 40 CFR Part 312.  Now, however, EPA has amended the AAI rule  to remove the reference to ASTM E-1527-05, thus rendering the 2005 standard inadequate for establishing CERCLA landowner and lender liability protections.

The amendment comes after EPA received many adverse comments in response to its decision to allow both ASTM E1527-05 and E1527-13. Commenters stated that using two standards could create confusion, especially since even ASTM no longer recognizes 2005 as meeting its standards for good customary business practice. EPA ultimately agreed, and is now requiring the 2013 standard to establish AAI. Thus, if you are commissioning a Phase 1 audit report to establish AAI, you will need to make sure  the environmental consultant performing the Phase 1 relies upon ASTM E1527-13.

By Jeryl L. Olson

In follow-up to our August 16, 2013, blog regarding the EPA’s Direct Final Rule installing the new ASTM E1527-13 as an alternative, updated process for conducting Phase I environmental due diligence, it should be noted the Agency has indicated (in an email to BNA reporter Pat Ware) that it will WITHDRAW that rule.  78 Fed. Reg. 64403 (Oct. 29, 2013).

The ASTM E1527 standard is identified in 40 CFR Part 312 as the standard to be followed to ensure a user of the standard can assert Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) affirmative defenses (innocent purchaser and bona-fide prospective purchaser defenses) to CERCLA liability for contaminated real property,  The ASTM E1527 standard is universally used in real estate transactions to assess environmental conditions on properties subject to transactions.

The withdrawal is based on comments received by EPA which criticize not just the terms and conditions of the 2013 version of the ASTM standard, but EPA’s interpretation of how and when the new standard can be used. BNA reports that comments were received which criticized the Agency’s position that users may rely on either the 2005 or the 2013 versions of the standard when performing Phase I assessments. The BNA reported criticisms suggest that because the 2013 standard will be more expensive, institutional users of the standard (e.g. lenders) who tend to be high-volume purchasers of consulting services for Phase I assessments will continue the use of the 2005 standard, which is less expensive, thus rendering the 2013 standard at best moot, but most likely, confusing and potentially controversial to the myriad users of Phase I reports.

It is expected that consultants who have been gearing up for the new 2013 standard which was anticipated to become effective late this fall, will fall back for now and will be proposing services based solely on the 2005 standard.

By Andrew H. Perellis, Jeryl L. Olson, and Eric E. Boyd

To promote brownfield development, in 2002, the Congress provided the Bona Fide Prospective Purchaser defense under the Comprehensive Environmental Response, Compensation, and Liability Act (Superfund), Section 101(40)(A)-(H). In a nutshell, that provision provides that a person (or a tenant of a person) that acquires contaminated property qualifies for a defense from Superfund liability provided the contamination occurred prior to the acquisition, and the person conducted “all appropriate inquiry” prior to the purchase, and maintains the defense by accepting certain post-purchase obligations such as cooperating with the U.S. Environmental Protection Agency (EPA), abiding by land use restrictions, and taking “reasonable steps” with respect to the known contamination.

Recent EPA Guidance, Revised Enforcement Guidance Regarding the Treatment of Tenants Under the CERCLA Bona Fide Prospective Purchaser Provision, dated December 5, 2012, describes the EPAs enforcement policy towards tenants occupying contaminated property. According to EPA, a tenant who itself undertakes all appropriate inquiry prior to leasing the property and meets the required obligations for maintaining the defense is entitled to Bona Fide Prospective Purchaser protection. In addition, if its landlord conducted all appropriate inquiry prior to the lease, but fails to meet the required obligations for maintaining the defense, EPA will decline enforcement against the tenant (who itself did not conduct all appropriate inquiry) where the tenant steps in to perform the appropriate obligations for maintaining the defense. In short, the tenant can rely on its landlord’s all appropriate inquiry and receive derivative Bona Fide Prospective Purchaser protection so long as the landlord meets the obligations for maintaining the defense, or the tenant does so itself.

In summary, the Guidance applies in two circumstances: (1) where the tenant has derivative bona fide prospective purchaser status through the owner and the owner loses its status through no fault of the tenant; and (2) where the tenant leased property after January 11, 2002 and itself meets all of the bona fide prospective purchaser provisions, including the requirement to conduct all appropriate inquiry prior to execution of the lease.

The Guidance is further indication that leases involving contaminated property should expressly address the respective obligations of each party as to pre- and post-occupancy obligations respecting contamination on the property. The important take away is that regardless of whether a tenant itself conducts all appropriate inquiry before executing the lease, for a Bona Fide Prospective Purchaser defense, either the tenant or the landlord must undertake the required activity to maintain the defense.