The U.S. « All Appropriate Inquiries » Rule : Raising the Bar for Environmental Due Diligence in Canada?
May 7, 2007
In November 2005, the United States Environmental Protection Agency ("EPA") published its final rule with respect to "all appropriate inquiries" ("AAIs"), which came into force on November 1, 20061 ("AAI Final Rule"). The AAIs are due diligence standards and practices that must be followed by prospective purchasers of land in order to be able to benefit from certain future environmental liability exemptions under the Comprehensive Environmental Response, Compensation and Liability Act2 ("CERCLA").
CERCLA, also known as the Superfund statute, was enacted in 1980 for the purpose of locating, investigating and cleaning-up sites where hazardous substances3 were abandoned or accidentally released. CERCLA also established a trust fund to pay for remediation work when no responsible party can be identified, which was initially funded by a tax imposed on chemical and petroleum industries.
Under CERCLA, four classes of parties may be liable for hazardous substances present, released or threatened to be released on a property.4 Those potentially responsible parties ("PRPs") are: (i) current owners and operators of a facility on the property; (ii) past owners and operators of a facility at the time the hazardous substances were disposed of; (iii) generators and parties that arranged for the disposal or transport of the hazardous substances; and (iv) transporters of hazardous substances that selected the site where hazardous substances were brought. The liability amongst PRPs is joint and several. It follows that one may be held strictly liable for the entire clean-up of a site, for clean-up costs incurred by the authorities, for health assessments costs as well as for natural resources damages, merely because he owns the land or operates a facility on the land. Proving that the owner or the operator did not commit any statutory violation or was not negligent is not a defence under CERCLA.
A landowner may however avoid liability by invoking one of the three protections provided for under CERCLA: (i) the innocent landowner; (ii) the bona fide prospective purchaser; and (iii) the contiguous property owner. To be allowed to claim any one of these liability protections, a landowner must have conducted AAIs prior to purchasing the land.
A person may claim that he is an innocent landowner if, after having conducted AAIs prior to purchase, he bought the property without knowing or having reason to know that the property was contaminated.
A bona fide prospective purchaser is someone who purchased a property after January 11, 2002, knowing or suspecting the presence of contamination and, amongst other things, after all disposal of hazardous substances at the site has ceased and after having performed AAIs.
The contiguous property owners are neighbours of a contaminated site who did not cause or contribute or consent to the release or threatened release of hazardous substances. To benefit from this protection, they must have conducted AAIs prior to purchasing property. If the AAIs provide knowledge of contamination or reason to know that the property is contaminated, the contiguous property owner protection cannot be claimed. In this case, the bona fide prospective purchaser status may still be available.
Merely following AAI Final Rule is not sufficient to benefit from one of CERCLA’s landowner liability protections A landowner is also subject to various continuous obligations such as not consenting to a release, taking reasonable steps to prevent damages related to a release and complying with land use restrictions.
So what are the AAIs that must be carried out to be entitled to invoke liability protections under CERCLA?
In January 2002, an amendment to CERCLA, the Small Business Liability Relief and Brownfields Revitalization Act5 ("Brownfields Act"), required the EPA to adopt regulations establishing standards and practices for conducting AAIs that would allow landowners to benefit from CERCLA’s liability protections. The Brownfields Act established the regulatory criteria that had to be addressed, including interviews with past and present owners, operators and occupants, review of historical sources of information (chain of title, aerial photos, etc.), search of records of environmental liens, review of federal, state, tribal and local government records, visual inspection of the property, and review of commonly known or reasonably ascertainable information about the property. Until the adoption of the AAI Final Rule, prospective purchasers had to follow interim standards which were set out under the American Society for Testing and Materials ("ASTM") E1527-00 Phase I Environmental Site Assessment Process.
Only qualified environmental professionals who meet the more stringent qualification criteria set out in the AAI Final Rule can supervise the conduct of AAIs for the purposes of CERCLA. The results of the AAIs must be documented in a written report.
The AAI Final Rule also requires that data gaps be identified by the environmental professional conducting the inquiry, who must disclose them and comment on their significance for the accuracy of the assessment. As to the scope of historical research into past uses, good practices used to dictate going as far back as 1940. The AAI Final Rule requires that the searches of historical documents and records cover a period of time commencing when the site was first occupied by a structure or was first used for residential, agricultural, commercial, industrial or governmental purposes.
The AAI Final Rule is said not to differ significantly from the interim standards, but tightens certain due diligence obligations. For example, interviews with current owner or occupant are now mandatory. Interviews with past owners and occupants are also required in certain circumstances and if the property is abandoned, neighbouring property owners or occupants must be interviewed. Under the AAI Final Rule, tribal and local government agencies records must be reviewed.
In addition to the AAIs that must be conducted by the environmental professional, the comparison between the property purchase price and its fair market value, commonly known and ascertainable information (newspapers, websites, etc.), as well as the prospective purchaser’s specialized knowledge or experience are elements that must be taken into consideration by the prospective purchaser himself as part of his AAIs to assess the potential presence of contamination on the property.
In order for a landowner to be eligible to liability protection under CERCLA, the AAIs must have been conducted or updated no earlier than one year prior to the date of acquisition of the property, with the exception of certain components (including interviews with past and present owners and visual inspection of the property) which must be updated unless they were conducted no earlier than 180 days prior to the purchase date.
Although the AAI Final Rule only applies to prospective property purchasers who may want to seek protection from liability under CERCLA, in practice, it could change the way environmental due diligence is carried out generally. Since the publication of the AAI Final Rule, the ASTM has updated its standard practices for conducting Phase I Environmental Site Assessment (ASTM E1527-05) in order to make its standards consistent with the requirements of the AAI Final Rule.
Will the AAI Final Rule have any impact north of the U.S. border?
It is foreseeable that the AAI Final Rule will influence the standards for good practices as they apply to verifications conducted prior to the purchase of land. This influence will likely be felt first where U.S. parties are purchasing or financing the purchase of property in Canada.
Other implications could occur in the Canadian provinces.
In Québec, for instance, the Land Protection and Rehabilitation regime under the Environment Quality Act6 ("EQA") enumerates categories of persons who could be subject to a ministerial order to characterize and decontaminate land. They include any person who has or has had custody of the land, as owner or lessee or in any other capacity, after March 2003, regardless of whether this person authored the contamination.7
The custodian of a land could oppose such order by demonstrating his diligent conduct in three sets of circumstances: (i) he was unaware of and had no reason to suspect the presence of contaminants, having regard to the circumstances, practices and his duty of care; (ii) he was aware of the presence of contaminants and acted in conformity with the law, in particular as regards his duty of care and diligence; or (iii) it is established that the presence of contaminants in the land resulted from an outside migration from a source attributable to a third person. There is obvious similarity with the three liability protections under CERCLA. In particular, the first ground for opposition implies the obligation to have conducted environmental due diligence inquiries prior to the purchase of land which meet industry practices.
British Columbia's Environmental Management Act8 (the "EMA"), is another example of the provincial influence the AAI Final Rule may have. The EMA borrowed many of its concepts from CERCLA. Under the EMA, current and previous owners and operators of a contaminated site are jointly and separately responsible for remediation of the site, regardless of whether they caused the contamination, subject to a number of relatively narrow exceptions. One of the exceptions, the "innocent purchaser exception", protects an otherwise responsible owner and operator from liability if the person can establish that: (i) at the time the person became an owner or operator of the site (a) the site was a contaminated site, (b) the person had no knowledge or reason to know or suspect that the site was a contaminated site, and (c) the person undertook all appropriate inquiries into the previous ownership and uses of the site and undertook other investigations, consistent with good commercial or customary practice at that time, in an effort to minimize potential liability; (ii) if the person was an owner, the person did not transfer any interest in the site without first disclosing any known contamination to the transferee; and (iii) the person did not, by any act or omission, cause or contribute to the contamination of the site.
In order to benefit from this exception from liability, it will be necessary for a person to conduct a competent environmental investigation before becoming an owner or operator and for that investigation not to have disclosed any information that would give the person a reason to suspect that the site is contaminated. If the person has followed the AAI Final Rule, it may help in establishing that the "all appropriate inquiries" and other required investigations under the EMA were indeed conducted.
Since it is not rare that U.S. initiatives regarding environmental protection are piggybacked in Canada, the new AAI Final Rule may eventually find its way into Canadian industry practices for the conduct of environmental due diligence inquiries in the context of the acquisition, leasing or financing of property. Thus, even if standards similar to the AAI Final Rule may not become part of Canadian environmental legislation, companies should still monitor closely whether it becomes an industry standard to follow the U.S. rule as it may prove helpful in benefiting from certain liability exemptions under provincial environmental legislation or in establishing a due diligence defence in the future.
NOTE: Although the authors of this article provide an overview of statutory provisions regarding U.S. environmental liability, they are not qualified under U.S. law.
1 40 C.F.R. Part 312.
2 U.S.C. title 42, chapter 103.
3 The definition of "hazardous substances" under Section 9601 (14) of CERCLA refers to various substances regulated under other U.S. statutes, including "hazardous waste", "toxic pollutant", "hazardous air pollutant", "imminently hazardous chemical substance or mixture", but exclude petroleum products not otherwise included in the other categories and exclude natural gas in various forms.
4 The liability protections apply to the landowner of a brownfield, a site abandoned or underused because its redevelopment and/or expansion is complicated by environmental contamination that is either real or perceived, or of a Superfund site, which is a site seen as posing a real threat to human health and/or the environment.
5 Pub. L. No. 107-118, 115 Stat. 2356 (2002).
6 R.S.Q. c. Q-2.
7 Sections 31.43 and 31.49 of the EQA.
8 SBC 2003 c. 53.