Due Diligence and the Innocent Landowner Defense
The experienced and well informed know that due diligence is an important and common practice when purchasing real estate. The advantage of due diligence and conversely not performing due diligence can best be compared to the saying "you break it, you buy it". In real estate terms if you buy a property that has an environmental issue (broken) that you were not aware of prior to purchase, you own it and the issue is yours to pay for no matter the cost or value of the real estate.
For example a couple received an inheritance from a relative, the money's were substantial enough for the couple to realize a dream of buying and operating an automotive garage. This dream was achieved by buying a garage cash from a fellow who was retiring. They were able to buy the land and tools for approximately $100,000.00. (As a side note the lower the value of the property, the more risk there is that an environmental issue can be a large percentage of the property price. I say this as time and again prospective buyers defer a Phase I as the purchase price is low). They used an attorney for the paperwork, but no bank was involved. While the attorney advised of performing a Phase I, the buyers were not concerned and did not want to derail the deal for something they saw as a waste of time and money. Couple buys property, run the garage for three years and then husband develops health concerns limiting physical activity such as working on cars. Couple list property for sale, potential buyer finds property and decides to buy it. Buyer goes to bank, as he is not able to pay cash as the current owner did. Bank does phase I, finds issues leading to a phase II. Phase II finds oils in ground from garage operations. Buyer requires owner to remediate, owners say not their problem and are selling as is.
Deal falls through, owner now paying money from retirement to cleanup the problem. Buyer is gone, garage is closed and owners are spending 50% of what they paid to cleanup the site.
Can the owners claim an innocent landowner defense?
No, the innocent landowner defense is based upon a party purchasing a property and having no knowledge of contamination at time of purchase. A buyer must perform an all appropriate inquiries (AAI) prior to purchase to begin to have this defense.
What does an All Appropriate Inquiries (AAI) inquiry entail?
Completion of a Phase I ESA as per
- All Appropriate Inquiries
“All appropriate inquiries” refers to the process of evaluating a property’s environmental conditions and assessing potential liability for contamination either past or present. This applies to any party seeking to assert protection from CERCLA liability as an innocent landowner, or a bona fide prospective purchaser, or a contiguous property owner.
In 2002 Brownfields Amendments were set forth requiring the EPA to establish regulations establishing standards and practices for conducting all appropriate inquiries. These practices were meant to include research into the previous ownership and uses of a property necessary to qualify for certain landowner liability protections.
November 1, 2005, the EPA published in the Federal Register its final rule entitled “Standards and Practices for All Appropriate Inquiries,” in which it declared that the American Society for Testing and Materials (“ASTM”) E1527-05 standard, entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process,” can be used to comply with the provisions of the rule. The standards and practices constituting “all appropriate inquiries” are set forth in 40 C.F.R. Part 312.
What is included in the All Appropriate Inquiries?
- Must be conducted or updated within one year of acquiring ownership of a property.
- Interviews with past and present owners, operators, and occupants, the review of government records, visual site inspections, and searches for environmental cleanup liens, must be conducted or updated within 180 days prior to acquiring ownership of the property.
- An environmental professional must conduct or oversee the conduct of activities required by the all-appropriate inquiry rule.
- The environmental professional must conduct the following inquiry activities:
- Interviews with past and present owners, operators, and occupants of the facility for the purpose of gathering information regarding the potential for contamination at the facility;
- Reviews of historical sources, such as chain of title documents, aerial photographs, building department records, and land use records, to determine previous uses and occupancies of the real property since the property was first developed;
- Reviews of Federal, State, and local government records, waste disposal records, underground storage tank records, and hazardous waste handling, generation, treatment, disposal, and spill records, concerning contamination at or near the facility;
- Walking inspections of the site and of adjoining properties;
- Assessments of commonly known or reasonably ascertainable information about the property; and
- Assessments of the degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect the contamination by appropriate inspection.
- 5 Searches for recorded environmental cleanup liens against the site that are filed under Federal, State, or local law.
- Assessments of specialized knowledge or experience on the part of the prospective landowner.
- The relationship of the purchase price to the value of the property, if the property was not contaminated.
An innocent landowner defense also extends to the operation and maintenance of the site after purchase. Once the property is owned the new owner must take reasonable steps to stop any continuing release, prevent any future release, and prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substances. The owner must also cooperate, provide assistance, and allow access to persons to conduct response actions or natural resource restoration at the site. Owners must maintain any and all land use restrictions and not degrade the effectiveness of institutional controls.
Additional responsibilities cover cooperating with requests and administrative subpoenas concerning the facility and follow through with all legally required notices (public notification and government) regarding the discovery or release of any hazardous substances at the facility.
Lastly to comply with AAI, the purchaser cannot be associated/affiliated with any other potentially responsible party through any direct or indirect familial relationship, or any contractual, corporate, or financial relationship (excluding relationships created by instruments conveying or financing title or by contracts for the sale of goods or services).
Bottom line the new owner has to be able to prove that the environmental contamination damages were caused by a third party with whom the new owner does not have an employment, agency, or contractual relationship, as defined in 42 U.S.C. § 9601(35).
Buyers beware and perform your due diligence so you know before you buy?