August 3, 2006
New rules for ‘innocent landowners’
By JOHN F. HILDENBRAND
Robinson, Noble & Saltbush
Among the changes were revisions to the liability provisions of CERCLA that clarify how to establish an innocent landowner defense.
For those unfamiliar with this subject or needing a little refresher; the “innocent landowner defense” is a legal defense that can be asserted to limit a property owner’s liability for cleaning up contamination. It is intended to protect those who own property after an impact has occurred.
CERCLA had been vague about what exactly was required to meet this defense, stating that an innocent landowner had to conduct an “all appropriate inquiry,” or AAI. The law essentially left it up to the real estate/environmental consulting industries and the courts to define what that meant.
Now “all appropriate inquiry” is defined. The amendments also provide for additional liability protections for contiguous property owners and bona fide prospective purchasers.
The AAI requirements apply to any public or private party who may potentially claim protection as an innocent landowner, a bona fide prospective purchaser or a contiguous property owner. Additionally, grantees conducting characterizations or assessments of brownfield properties under EPA’s Brownfields Grant program must comply with AAI requirements in property characterizations and assessments.
To avoid being held liable for a cleanup, a prospective property owner or contiguous property owner must comply with statutory requirements defining current landowner liability defenses. Among these is the requirement to undertake “all appropriate inquiries” into prior ownership and uses of a property before it is acquired.
This requirement generally leads to a Phase I Environmental Site Assessment. Most of these use standards published by ASTM as a guideline. However, many lenders and prospective buyers modify these guidelines to suit their needs.
Some of the key elements of the AAI rule include:
• Specific qualifications for individuals supervising AAIs.
• Broader definition of environmental lien searches.
• Allows for CERCLA-only assessment instead of including petroleum products, as is the case in the ASTM standards.
• Requires identification of data gaps and comments on the significance of the ability to identify conditions of concern.
• Specific requirements for interviews, including neighboring properties.
One of the most significant elements is the obligation of a buyer to follow through with any impositions/restrictions on land use, and/or business operation. These institutional controls are becoming increasingly common in managing environmental contamination, so the need for maintaining them is critical.
An example of a buyer’s obligation would be a case in which he buys a property that has residual contamination left in place and capped by an asphalt parking lot. As time goes by, the asphalt falls into disrepair and several potholes and cracks appear. Over the years, rainwater migrates down through the cracks and causes the contamination to impact a neighboring well. In this case, even though the buyer complied with all the pre-ownership AAI requirements, he failed to meet the continuing obligation of maintaining the asphalt cap. He was held responsible for cleanup of the well and damages to the neighboring property.
A property owner’s failure to maintain the controls can remove his or her ability to mount an innocent landowner defense. Potential buyers need to be fully informed about the nature and cost of any attached institutional controls during the purchase process.
Another significant element is the stipulation of experience/education requirements for individuals supervising Phase I ESAs. While the final language of the rule is less stringent that those originally proposed, they do provide certain minimum standards for the professional competency of individuals performing Phase I ESAs.
What does it mean?
The ultimate effect of the AAI rule will be learned over time. Obviously, it should be followed to the letter if there is any concern about the potential for CERCLA liability associated with a particular property.
Additionally, many lending institutions will likely modify their environmental risk evaluation policies to include AAI elements. Although, given the wide variation in lender policies, this may not be industry-wide, thus further widening the current span of variation.
Just as there is a range in lender requirements, there is also a wide-range in the content and format of Phase I ESAs. Ideally, the advent of AAI will help to improve their quality, and thus provide buyers and sellers better information.
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