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Currently when an environmental assessment (commonly known as a Phase I) is conducted for a potential purchaser prior to acquisition, there is generally little interaction between that purchaser and the consultant performing the assessment. The consultant may ask its client to fill out a questionnaire requesting basic information regarding the property being acquired, but in most cases whether the client actually fills out the questionnaire has no influence on whether the consultant will complete and provide the assessment report or whether the consultant is considered to have performed its contractual obligations satisfactorily. As a result of a new rule promulgated by the Environmental Protection Agency that will become effective Nov. 1, 40 CFR Part 312, for the first time consultants preparing assessment reports will be required to certify that they prepared the assessment in accordance with that rule. They will also be required to identify any required information they were not able to obtain and the significance of that information. The client will be required to provide certain information to the consultant, some of which the client may be reluctant to provide. The consultant’s certification, in turn, will in part be dependent on the information the client is required to provide. These new requirements are bound to increase the number of disputes that arise between the client and consultant during assessments and the claims they assert against each other afterward. Brownfields Amendments The new EPA regulation was mandated by amendments to the federal Superfund Law passed in 2002. Those amendments were intended to promote development of contaminated properties, commonly referred to as brownfields, in three ways: adding expended defenses for purchasers of contaminated property; creating a bar on enforcement by EPA of cleanup requirements at sites that complete a state voluntary cleanup program; and providing significantly increased federal funding for investigation and cleanup of brownfields properties. One of the expanded defenses, referred to as the “bona fide purchaser defense,” provides a defense for purchasers of property, subject to certain post-acquisition obligations, who perform “all appropriate inquiry” with respect to the property’s environmental condition, even with respect to contamination identified by that inquiry. The regulation coming into effect on Nov. 1 defines what constitutes “all appropriate inquiry.” Existing Standard Practice For several years the generally accepted standard with respect to environmental due diligence was one developed by the American Society of Testing and Materials known as ASTM 1527. The vast majority of lenders currently insist on the performance of an assessment consistent with ASTM 1527 before extending financing on commercial property. After Nov. 1, the EPA’s “all-appropriate inquiry rule” will certainly become the standard practice in the field. The “all appropriate inquiry rule” does not differ dramatically from ASTM 1527. The same types of information will be gathered by the same means. Rather, some areas will receive added emphasis, some will be defined in more detail and some things that were optional previously will become obligations. Among the more significant revisions to the existing practice not addressed elsewhere in this article are: a new definition of an “environmental professional” who must supervise the inquiry, based on minimum levels of education and experience; a new limit on the time period the report is considered valid; an added emphasis on conducting interviews; and an expanded coverage period for record searches regarding prior use of the property. Professional Certification The remainder of the article will address the new features contained in EPA’s that are likely to increase disputes between consultants and clients. The first of these is the requirement that the environmental professional execute a certification. The rule specifically mandates the following language for the certification: “[I, We] have developed and performed the all-appropriate inquiries in conformance with the standards and practices set forth in 40 CFR Part 312.” The requirement to execute this certification and the potential for liability in the event there is any uncertainty about compliance with the rule will undoubtedly make consultants more cautious in their approach to conducting the inquiry. Consultants are likely to feel the need to document their efforts to locate relevant information and to be more diligent in their efforts with the result that assessments take more time to prepare and cost more. As many assessments are performed in anticipation of a specific closing date, clients are likely to continue to put pressure on consultants to issue assessment reports according to a certain schedule, even if the consultant feels the need to include certain information it may be having difficulty obtaining. Add to the equation the obligation now placed on the client to provide certain information, as described below, pressure will be applied in both directions; i.e., the client may demand the report to be issued by a certain date while the consultant counters that the report cannot be completed by that date (without data gaps being identified, as described below) because the client has not provided the required information. Identify Data Gaps The EPA rule places greater emphasis on identification of missing information and makes it subject to a certification. In addition, the consultant is required to assess the significance of the missing information. As a result, consultants are likely to be more inclined to identify potentially relevant information as a data gap, rather than risk a claim based on improper certification. Some of that missing information may be information the client is required to provide to the consultant. Clients, for their part, will prefer that data gaps not be identified in the report, both for their own sake and because, if financing is being used for the transaction, the lender will review the report and will be inclined to require that anything identified as a data gap be addressed and the identification of the gap removed from the report. Even when there is agreement among the parties that a data gap exists, there may be disagreement regarding how the report should describe its significance. Disagreements regarding the identification of data gap will likely lead to lengthy negotiations between consultants and clients regarding their characterization and ultimately to more disputes. Client’s Obligations As a result of the new EPA rule, for the first time clients commissioning an environmental assessment will be required to provide certain information to the consultant performing the assessment. There are three major categories of information the client is required to provide to the consultant: a title search, the relationship of the price to be paid to the value of the property if clear, and any special knowledge of the environmental condition of the property. The ownership history of the property was regarded by ASTM 1527 as relevant information, but in fact a title search was rarely included in an assessment report. The reason title searches were not included was largely a function of the timing of the overall due diligence process. Title searches can be helpful to an environmental assessment in two ways. First they are a means of determining whether a lien, such as is authorized to recover outstanding response costs by the federal Superfund statutes and many state counterparts, has been filed against the property. Such liens are extremely rare, but for obvious reasons their impact can be quite significant. Second, a chain of title may provide insight regarding past operations having the potential to have caused contamination. Although it is currently standard practice to obtain title searches (albeit not necessarily a chain of title) as part of due diligence, they typically are not obtained until the end of due diligence when the buyer is confident the acquisition will proceed. To satisfy the new EPA all appropriate inquiry rule, title searches will instead now need to be conducted at the beginning of due diligence. The relationship of price to value if clean may be the issue that provokes the most disputes between clients and consultants. Even when the parties to a transaction acknowledge to each other that the price of the property being assessed was reduced because of environmental conditions, they may be reluctant for others to know. Moreover, when prices are negotiated, unless the seller declares that the price was reduced because of environmental conditions, it is difficult for the buyer to know that the seller agreed to a certain price for that reason. The buyer only knows what offers it made and the price ultimately agreed to. Would the buyer be obligated to identify a reduced price to the consultant if the buyer was already aware at the time price was negotiated that environmental issues may exist with respect to the property being acquired and took this into account when making the offer, but never directly discussed those issues with the seller? Particularly in the absence of an appraisal, which the new EPA rule does not require, how does the buyer know that the property would be worth more if environmental issues were not present? Under the new EPA rule the consultant must not only ask the client whether the price has been reduced based on environmental issues, but have enough confidence in the answer to execute the required certification without identifying the lack of information regarding the relationship of price to value as a data gap. In some circumstances the consultant may independently have, or during the assessment may acquire, relevant knowledge that may cause the consultant to question whether the client has been entirely forthcoming. The consultant wishing to please clients and increase the odds of getting fully paid may accept the client’s unhelpful response at face value, not identify a data gap and execute the required certificate, while the consultant motivated to reduce the risk of later claims based on improper certification may confront the client and/or insist on identifying a data gap in the report. Unintended Consequence Congress, in mandating the adoption of, and the EPA, in drafting the new all appropriate inquiry rule, intended to create a uniform practice that would facilitate consistent, high-quality and reliable environmental assessments. The new requirements addressed in this article were viewed by the drafters as reasonable means to achieve that end. When assessing the likely impact of the new all-appropriate inquiry rule, many, including the drafters, have noted that the rule is likely to increase (hopefully marginally) the price and time required to perform environmental assessments. By contrast, few have recognized that the rule is likely to have the unintended consequence of increasing disputes between clients and consultants. KERMIT RADER is a partner in Wolf Block Schorr & Solis-Cohen’s environmental and land use practice group. His practice focuses on the environmental aspects of real estate and corporate transactions, regulatory compliance counseling, and remediation issues.

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