EPA’s “Standards and Practices for All Appropriate Inquiries” Rule (more commonly referred to as the “AAI Rule”) became effective November 1, 2006, and established a new, highly touted standard for environmental due diligence conducted by prospective purchasers in commercial real estate transactions. Now, a little more than six months after the date that many in the industry predicted would mark a sea change in the way environmental due diligence is conducted, the transition has proved relatively uneventful. Despite this apparently smooth transition, however, issues still bubble beneath the surface. In the context of the current real estate market, uncertainties regarding the protections provided by AAI, and various ambiguities in the rule, it is important to rely upon technical and legal expertise, and such tools as insurance, to protect oneself from the full range of potential environmental liabilities.

Background
In January 2002, President Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act. Among other things, the law amended the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) by providing new defenses to environmental liability, namely the Bona Fide Prospective Purchaser (BFPP) defense and the Contiguous Landowner (CLO) defense. These new “landowner liability protections” were intended to incentivize the purchase and redevelopment of brownfield properties by relieving a purchaser from fear of the “joint and several” liability scheme. Previously, this made an owner of contaminated property strictly liable for environmental contamination on its property—no matter when, where or from whom such contamination originated.

The most anticipated of these new statutory defenses was the BFPP defense which, for the first time, provides landowners with a defense to liability under CERCLA for contamination known to exist on a property at the time the property was purchased. The BFPP defense was seen as particularly valuable since most prospective purchasers of brownfield properties are aware that such properties are, or may be, contaminated.

The AAI Rule
To be eligible for the BFPP defense and the other landowner liability protections, a landowner must demonstrate that it conducted “all appropriate inquiries” into the previous ownership, uses and environmental condition of the property prior to acquiring title. EPA developed standards and practices to satisfy this requirement, resulting in the AAI Rule, codified at 40 C.F.R. § 312 (2005).

In general, the differences between the new AAI Rule and the old due diligence standard are relatively minor. As before, prior to acquiring title to a property, a prospective purchaser is required to conduct a Phase I Environmental Site Assessment. Shortly after EPA published the final AAI Rule, the American Society of Testing and Materials (ASTM) updated its familiar standard for conducting Phase I Environmental Site Assessments to comply with the Rule. EPA has agreed that compliance with the resulting ASTM E1527-05 (ASTM-05) standard is an accepted method of demonstrating compliance with the AAI Rule, and most environmental consultants now follow the ASTM-05 standard in lieu of the actual AAI Rule.

Changes to the Due Diligence Process
Although not as significant as originally forecast, the AAI Rule has resulted in changes to the Phase I assessment process. For example, the user of the Phase I assessment is now required to complete a User Questionnaire, which contains questions that a prospective purchaser must consider before acquiring title to a property. It is intended to elicit information that may be indicative of environmental contamination.

The new AAI Rule also requires the environmental consultant to conduct interviews of current and, in some cases, former and even neighboring owners and occupants. This can extend the time required to conduct the assessment. In our experience, however, the environmental consultant often is unable to conduct such interviews and simply identifies the omission as a data gap that does not significantly impact the ability to identify environmental conditions affecting the property.

Another change to the Phase I assessment process is the requirement that the user review (or arrange for the consultant to review) recorded land title records to determine whether any environmental liens or engineering and institutional controls are recorded against the property. One way of satisfying this requirement is by having the environmental consultant or attorney review listed exceptions to the title in a title commitment report issued for the property. The other way to satisfy the requirement is to purchase a lien search report from an environmental database company such as Environmen-tal Data Resources (EDR).

Both approaches can add extra time to the process and neither are foolproof methods in determining whether there is an environmental lien or engineering or institutional controls recorded against the property. But conducting such searches arguably is evidence that the prospective purchaser has reviewed reasonably available records to make such a determination.

Liability Protection
While the AAI Rule is now generally recognized as the prevailing due diligence standard, many practitioners question the value of the liability protections afforded by compliance with the standard. For one, compliance only provides eligibility for defenses to federal CERCLA liability (which, among other things, does not apply to petroleum releases). It does not provide a defense to liability under state statutes or against third-party common-law claims.

Moreover, the specter of third-party cost recovery and contribution claims under CERCLA have, for the most part, been rendered moot by the U.S. Supreme Court’s 2004 holding in the Cooper Industries, Inc. v. Aviall Services case. Thus, strict compliance with the AAI Rule really only protects a landowner from CERCLA enforcement actions.

While the foregoing criticism is technically accurate, demonstrating compliance with the AAI Rule is still important because it is indicative of compliance with industry standards.

Thus, a landowner that conducted a Phase I Environmental Site Assessment pursuant to the ASTM-05 standard prior to acquiring property can argue, even when facing state environmental enforcement or a common-law claim, that it complied with the applicable industry standard for environmental due diligence. Further, to the extent that states may begin adopting comparable liability schemes, compliance with the standard can be valuable.

Continuing Obligations
Perhaps the most perplexing aspect of the landowner liability protections, particularly with respect to the BFPP defense, is the Continuing Obligations that a purchaser must comply with, post-closing, in order to preserve its defense to CERCLA liability. After acquiring title to a contaminated property, for example, a BFPP must, among other things, take reasonable steps to stop a continuing release and prevent future threatened releases, comply with activity and use restrictions imposed on the property, and cooperate with and provide access to parties responsible for addressing any contamination.

The scope of the Continuing Obligations (i.e., to what extent, if any, do they require the new purchaser to remediate contamination identified on the property?) raises a number of questions regarding the practical viability of the BFPP defense. Current landowners must guess as to the scope of their Continuing Obligations, including what constitutes “reasonable steps.” How the Continuing Obligations will be interpreted by the courts remains to be seen.

Conclusions
Conducting environmental due diligence in the context of a typical commercial real estate transaction raises many practical challenges. In the end, it is important for prospective purchasers to document, as best they can, that they have complied with industry standards for environmental due diligence to the extent practicable, given both the constraints of the transaction and the ambiguities in the AAI Rule.

And because even the most stringent efforts to comply with the rule will not protect a purchaser from all potential environmental liabilities, it is increasingly important to remain vigilant with respect to potential environmental issues, and to use a variety of technical and legal mechanisms, such as Operations and Maintenance Plans and environmental insurance, to address potential environmental concerns.

It may be several years before we know the full effect of the AAI Rule on the environmental due diligence process, and the results of current compliance efforts. Changes in the marketplace and recognition of the limited protection afforded by compliance with the rule have, however, given rise to additional considerations of which every prospective purchaser should be aware.

Shareholder Stephen C. Jones and Associate Paul R. McIntyre are attorneys at Greenberg Traurig LLP. They practice with the firm’s National Environmental Group in Philadelphia.