You plan to acquire commercial property and understand how important it is to commission an Environmental Site Assessment (ESA) before the closing to protect against potential liability for pre-existing contamination. Your ESA documents the environmental issues that exist at the time of the closing. You take all subsequent steps as required, and anticipate you will be entitled to certain liability protections set forth in the law. What could go wrong? According to a recent court decision, a lot.
Under some environmental laws, the current owner of property can be held strictly liable (liable without fault) for a predecessor’s contamination. We have used these columns in the past to alert the reader to the importance of performing an ESA before closing on a commercial transaction involving real estate. A properly performed ESA can provide a buyer with post-closing protections against environmental liability for pre-existing contamination.
Specifically, federal law offers liability limitations for a new landowner that qualifies as a “Bona Fide Prospective Purchaser” (BFPP). That status arises only after the performance of a qualifying ESA that complies with law; the All Appropriate Inquiry (“AAI”) requirements defined in the Code of Federal Regulations (40 CFR Part 312).
What happens if the ESA is technically deficient in some way, and misses even a ministerial AAI requirement? In September, the US Court of Appeals for the 7th Circuit (one court below the US Supreme Court and having jurisdiction over Illinois, Indiana and Wisconsin) issued several rulings bearing on that question. The court held that the entity in that case that commissioned an ESA and then acquired a property with pre-existing contamination, is not entitled to BFPP protections even though its ESA was timely, done by an environmental professional, and identified all pre-existing environmental conditions.
Specifically, the ESA failed to include a formal certification from the consultant that did the ESA that must state:
[I, We] declare that, to the best of [my, our] professional knowledge and belief, [I, we] meet the definition of Environmental Professional as defined in § 312.10 of this part. [I, We] have the specific qualifications based on education, training, and experience to assess a property of the nature, history, and setting of the subject property. [I, We] have developed and performed the all appropriate inquiries in conformance with the standards and practices set forth in 40 CFR Part 312.
It appears undisputed that an otherwise qualified consultant did the ESA work and wrote the ESA report at issue. For unexplained reasons, however, the certification was not included. In its text, the ESA stated affirmatively that it complied with AAI, but that was not enough. An after the fact representation by the consultant as to its qualifications was not sufficient to cure the defect. In the words of the 7th Circuit:
To be sure, [buyer] did complete a Phase 1 Environmental Assessment … and did at the time satisfy parts of the “all appropriate inquiries” requirements … [the regulations] required more, and that more is where [buyer] fell short. Those provisions include requiring certain attestations about the professional qualiﬁcations of the environmental professionals conducting the inquiry for the prospective purchase. These required attestations appear nowhere in [the] Environmental Assessment, however. Try as [buyer] does …, it cannot show full compliance with all requirements in the “all appropriate inquiries” regulation.
Consequently, the buyer was not a BFPP and was not entitled to liability protection. The court ruling does not treat any one provision of AAI more or less important than any other. All facets of the ESA are equally important, so failure to follow any AAI requirement brings significant risk. In this case, for the new owner that risk is joint and several liability for pollution it did not cause.
What are the lessons? First, always have an AAI-compliant ESA done prior to closing a commercial property acquisition. After closing is too late. Second, make sure a qualified environmental professional with requisite experience and expertise performs the ESA. Before finalization, carefully review the ESA to make certain every single requirement of the AAI regulations is satisfied. After closing, follow the requirements imposed on a BFPP to ensure the liability protections are not lost.
You must develop a thorough understanding of all of the pre and post-closing legal requirements and obligations, or be sure to consult with someone who does. As this 7th Circuit case shows, no oversight will be excused.