Changing Your Due Diligence Ways: The EPA's New Rule On Phase I ESAs

Prior to the EPA's new AAI rule, prospective purchasers hired an Environmental Professional (EP) to perform an ESA, which conforms to the American Society for Testing and Materials' (ASTM) Phase I Environmental Site Assessment process. Since the new rule's promulgation, which was announced last year, ASTM issued a new standard, ASTM 1527-05, to conform with the new AAI rule. The changes reflected in the AAI and the ASTM 1527-05 standards impact the following vital components of the ESA process:

While these six categories are not an exhaustive list of all of the changes in the new AAI rule, they encompass the major changes.

First, the EP's interviewing process is now mandatory. The EP must interview current owners or occupants of the property. Under the prior rule, the EP only had to make a "reasonable attempt." Similarly, the EP must interview one or more of the following: current and past managers of the facility; past owners, occupants, operators of the property; or employees of current and past occupants of the property if they are likely to have material information about environmental releases. Under the prior rule, interviewing these individuals was not mandatory. Finally, with respect to abandoned properties, the EP must interview neighboring (or nearby) property owners or occupants. Under the prior rule, interviewing these individuals was left to the EP's discretion.

Under the old rule, the EP was required to evaluate and analyze uses of the property from the present back to the property's first obvious use, or 1940, whichever is earlier. Under the new rule, there is no formal date requirement; rather, the EP must search as far back as "it can be shown that the property contains structures or from the time the property was first used for residential, agricultural, commercial, industrial, or governmental purpose." Also, now the EP must identify in the ESA report all data gaps and opine on whether those data gaps affected the EP's ability to identify recognized environmental conditions and further identify the sources of information that were consulted to address the data gaps.

Additionally, the "shelf life" of the Phase I ESA prepared by the EP is changed by the new rule. Under the old rule, a Phase I ESA less than 180 days old was presumed valid. The new rule changes this limit to one year; however, certain information like regulatory records review, site visits, interviews and environmental liens, must be updated if the information is more than six months old.

As for the EP under the old rule, there was no minimum educational requirement. Under the new rule, the EP must: (a) hold a PE (professional engineer license or certification) or PG (professional geologist license or certification) or other state or federal government certification or an environmental professional license and have three years of relevant full-time experience as an environmental professional; (b) have a degree in science or engineering and five years of relevant full time experience; or (c) have ten years of relevant full-time experience. You should ask the EP if he or she can satisfy the requirements under the new rule and ask for a curriculum vitae so that you can confirm that the EP satisfies one of the three new requirements.

Finally, the new rule places requirements upon the purchaser. Mainly, the new rule requires that the EP and/or purchaser (and user of any ESA) evaluate the purchaser's specialized knowledge of the subject property or other reasonably ascertainable information about the property. Significantly, the new rule requires the prospective purchaser to compare the fair market value of the property as an uncontaminated parcel to the contemplated purchase price to evaluate whether the proposed purchase price reflects potential environmental conditions that require further evaluation.

This article outlines some of the major changes to the rules pertaining to due diligence and utilizing the innocent purchaser/landowner or bona fide prospective purchaser defense. However, as a prospective purchaser, you should understand that there are other minor changes and that those changes also place requirements on you. For a complete inquiry, you should consult with your EP and legal counsel.

Arthur Siegal and Satyam Talati are attorneys with Michigan-based Jaffe Raitt Heuer & Weiss. They can be reached at asiegal@jaffelaw.com or stalati@jaffelaw.com or by calling 248.351.3000