AS ENVIIRONMENTAL RULES EVOLVE,, SO MUST DUE DIILIIGENCE

When Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) in 1980, it held that property owners and operators, along with those who participate in the property’s management, are liable for cleanup, even if they didn’t cause or even know about the contamination. Hence, environmental due diligence became a necessary reality for risk managers. In 1986, the “innocent landowner defense” was added to CERCLA, providing property owners with liability protection for pre-existing contamination as long as the owners performed pre-purchase environmental due diligence—and thus, the environmental site assessment industry was born.

Fortunately, CERCLA’s secured creditor exemptions provide lenders with liability protection. Borrowers, however, have no such guarantees. Under CERCLA, liability protection is afforded only if the owner performs “all appropriate inquiries” (AAI) on the property prior to taking title. As it was written, however, CERCLA failed to define exactly what AAI must entail, leading to great confusion in the marketplace. ASTM International, a standards-setting organization, came to the rescue. In 1993, the organization developed an environmental site assessment guideline, ASTM Standard Practice E 1527 for Phase I Environmental Site Assessments, which became the standard (it underwent subsequent revisions) accepted by the industry and the courts as sufficient protocol to satisfy CERCLA’s innocent landowner requirements. With environmental
liability potentially reaching hundreds of thousands of dollars—and sometimes even more— ASTM E 1527-compliant Phase I environmental site assessments and other environmental screening tools became a part of most banks’ environmental practices. By requiring a ‘clean’ Phase I, lenders receive some assurance that an unforeseen environmental problem—and any resulting remediation costs—will not compromise a borrower’s ability to pay back principal and interest, hamper his ability to comply with the repayment schedule, or cause him to default on the loan.

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