Does A Phase 1 Have To Be Issued To The Person Seeking To Comply With AAI?

Purchasers who want to be able to assert the CERCLA Bona Fide Prospective Purchaser (BFPP), Innocent Landowner (ILO) or Continuous Property Owner (CPO) landowner liability protections (LLPs) need to conduct a pre-acquisition investigation that complies with EPA’s All Appropriate Inquires (AAI) rule. A question that is surfacing with surprising frequency is if the phase 1 report needs to be issued or assigned to the person seeking to comply with AAI. The short answer is no.

This issue often arises when a local government or local redevelopment agencies conducts a phase 1 using federal or state brownfield funds on property that will be AAIs for a site will be developed by  a private developer. Another example may where a state government agency conducts a phase 1 either for another agency or local government where the local government that does not have access to appropriate staff or capital resources to do the work.

This scenario also occurs in private transactions where an entity that ordered the report is unable to proceed with the transaction. There are many ways this situation can unfold but the more common scenario usually involves the party that originally ordered the phase 1 assigns its rights under a purchase agreement to a related entity (i.e. common principal) who eventually purchases the transaction but failed to ask the consultant to re-issue the report to the purchaser prior to the closing. it failed to obtain a reliance letter from the consultant that prepared the report and is not named in the reliance section of the Phase I report purchaser wants to argue that it satisfied AAI since one of its principals obtained a Phase I pre-purchase, completed the User Questionnaire pre-purchase, and conducted all of the “user” or additional inquires” required by AAI before the purchaser acquired the site. Sometimes the seller ordered the phase 1 to pre-position the property, the deal falls through and the seller provides the phase to a new purchaser. Other times, this situation also occurs because truncated diligence periods or auction sales where purchasers have to rely on materials provided sellers.

Based on the preamble that appeared in the federal register when EPA published the AAI rule, a purchaser may indeed use a report that was not expressly issued to it and does not have a reliance letter from the consultant for purposes of complying with AAI PROVIDED the underlying report satisfies AAI AND the purchaser otherwise complies with the user “additional inquiries”.  We will pull apart these various elements.

In the preamble to the AAI rule, EPA said EPA that:

” all appropriate inquiries investigations may be conducted by or for one party and used by another party. In all cases, the all appropriate inquiries investigation must be updated to include commonly known and reasonably ascertainable information and any relevant specialized knowledge held by the prospective landowner and environmental professional. In addition, the evaluation of the relationship between the purchase price and the fair market value of the property must reflect the current sale of the property. In all other aspects of the investigation, the all appropriate inquiries must be in compliance with the provisions of the final regulation. ” [70 FR 66085 (November 1, 2005)]

The underlying report must also have been complete its environmental site assessment within 180 days prior to the date of acquisition of the property. If the report is older than six months, it must be updated to ensure that the report accurately reflects the current environmental conditions at a property:

  • Interviews with past and present owners, operators, and occupants; 
  • Searches for recorded environmental cleanup liens;
  • Reviews of federal, tribal, state, and local government records; 
  • Visual inspections of the facility and of adjoining properties;  and 
  • The declaration by the environmental professional within one year of taking title to the property.

Finally, EPA cautioned in the preamble that the prospective owner or grantee desiring to use the report prepared for another party cannot wholly adopt the previously conducted AAI but must comply with the following “additional inquiries” that are the responsibility of the user. (70 FR  66084)

  • commonly known and reasonably ascertainable information,
  • relevant specialized knowledge held by the prospective landowner and the environmental professional, and
  • the relationship of the purchase price to the value of the property

To maximize the chances of establish that it complied with AI, the purchaser should document that it complied with the “additional inquiries” in its property file. One way to do this is to complete a questionnaire answering these questions.

Note that the ability to use a report issued for another party for purposes of complying with AAI is a separate and distinct question of whether the party has contractual right to RELY on the report for purposes of breach of contract or malpractice claims.

In general, a contract may be enforced by the parties to the agreement and third parties who are an intended beneficiary of the contract. However, there are often critical non-contracting parties to a transaction such as lenders or landlords who may insist on reviewing the reports. Because most real transactions are financed and the loans are often syndicated or securitized, lenders will often require consultants to extend reliance to broad categories of investors or purchasers of the loans. Those so-called reliance parties would then have standing to bring a breach of contract action subject to the terms and conditions of the underlying agreement. The consultant should identify the parties who may rely on the reports and also place limits on how long those parties may use the information in the reports.

In a professional malpractice action, the question is framed in terms who the consultant owed a duty to and did it breach that duty. This question frequently arises when the consultant is retained by the lender and the borrower/purchaser later wants to file a lawsuit against the consultant for failing to identify contamination. Courts will typically look to contract reliance language in determining who was owed a duty or if it would have been foreseeable to the consultant that such a person who have relied on the phase 1 report.