Doing environmental due diligence in order to come within the “all appropriate inquiry” safe harbor under federal and many state environmental statutes has become a necessary component of the underwriting process for commercial and industrial property transactions. For a lender needing to know what surprises might be lurking at a property, a Phase I environmental site assessment produced under this “all appropriate inquiry” rule is an imperfect vehicle. That’s because a Phase I is primarily a records search, coupled with a visual inspection and interviews with knowledgeable owners and users, and it only identifies potential red flags that often raises more questions than it answers. As of December 30, 2013, the U.S. Environmental Protection Agency (“EPA”) has endorsed a new set of standards for Phase I reports that, potentially, could make them more useful in evaluating the risks at a property, although it is likely to cost more and take more time to prepare.
The “all appropriate inquiry” rule comes into play if a party can show that it did everything commercially reasonable before closing a property transaction to inquire about previous ownership and uses of the property that would identify whether there were releases or threatened releases of hazardous substances at the site. A Phase I that meets standards adopted by the EPA qualifies a party for the innocent landowner defense under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), which states such as Washington use as the guidance for statutes such as the Model Toxics Control Act. All appropriate inquiry also applies to brownfields funding, as well as prospective purchasers of contaminated property.
Originally published in Community Banker on March 4, 2014.
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