Alert 03.23.20
COVID-19 Pandemic Will Soon Be Impacting Compliance with and Enforcement of Environmental Laws
EPA existing guidance provides some conceptual anchoring for informing evolving risk management considerations.
Alert
Alert
03.25.20
Practical Tips Regarding Due Diligence
The COVID-19 pandemic already has created significant disruptions to daily business and governmental activities, as employees across industries have been encouraged to practice social distancing and work from home. Moreover, an increasing number of states have issued shelter-in-place orders and nonessential business shutdowns, which may last for several months.
Among the challenges facing companies in these circumstances is the practical matter of how they may satisfactorily conduct environmental due diligence under such conditions for corporate and real estate transactions. To explain, in transactions involving the transfer of title to real property or the creation of a leasehold interest (since the 2018 BUILD Act), prospective purchasers and lessees must satisfy the requirements of the All Appropriate Inquiries (AAI) Rule (40 CFR Part 312) to obtain innocent status and, thus, qualify for one or more affirmative defenses to liability under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. 9601, et seq. (CERCLA). The baseline level of environmental due diligence under the AAI Rule is the performance of a Phase I Environmental Site Assessment in accordance with the ASTM E 1527-13 standard. An ASTM-compliant Phase I also has become the industry standard for environmental due diligence required by financial institutions and insurers for purposes of project financing and obtaining insurance coverage, respectively, although such companies tend to allow somewhat greater flexibility in terms of strict adherence to the standard.
A Phase I contains many components, some of which may be performed on a “desk-top” basis. Environmental Data Resources LLC, the provider of the EDR Radius Map Report that accompanies the majority of Phase I reports, is committed to providing its services during the pandemic. As a result, between the services of EDR and the Phase I author, assuming responsive information is available online, the expectation is that environmental consultants should be able to continue to perform these tasks, despite the new paradigm of working at home. However, an essential component of the ASTM standard is a site visit of the subject property. Non-essential business shutdowns and shelter-in-home orders may prevent consultants from performing such visual inspections in certain states. Although the ASTM standard allows for the specification of “data gaps” and “limiting conditions/deviations,” the site visit is such a core requirement of the standard that, in the ordinary course, failure to perform one within 180 days of the closing date of a transaction renders a Phase I inadequate for purposes of qualifying for CERCLA defenses.
EPA has yet to give any indication about how it will treat the failure to perform a site visit due to COVID-19-related disruptions in terms of Phase I user’s eligibility for the CERCLA defenses. A distinct possibility thus exists that a Phase I consisting of a desk-top only review will be deemed inadequate, regardless of the exigent circumstances preventing a site visit. Therefore, to the extent possible, companies should schedule Phase I ESAs to occur after the expiration of non-essential business shutdowns or shelter-in-home orders. If a Phase I cannot be delayed, then companies may wish to consider creative means of performing the site inspection, e.g., perhaps using drones to examine interior and exterior site features or using FaceTime to direct any facility personnel onsite to perform the site surveillance.
For a Phase I intended to satisfy a business purpose (e.g., securing a loan, obtaining insurance coverage), failure to satisfy the ASTM standard could have undesirable consequences. However, because agreements between private parties are negotiable, the party commissioning the report has, in theory, greater flexibility in terms of working around the COVID-19-related obstacles. Specifically, the inability to obtain firsthand information regarding a site may be excused or addressed in business agreements. To this end, the party commissioning the report is encouraged to proactively engage the other parties seeking to rely on the report to discuss whether a report without a site visit would suffice and, if not, what possible alternatives would be acceptable for purposes of obtaining the business objective.
Practical Tips Regarding Environmental Compliance Obligations
Proactiveness is also necessary to ensure continued compliance with environmental cleanup obligations, permit conditions, and environmental due diligence standards during the COVID-19 pandemic. In evaluating options and implementing measures to ensure continued compliance with environmental legal requirements, businesses are encouraged to take a systematic approach, which may entail all or some the following steps:
Pillsbury can provide advice and counsel on strategies for managing environmental due diligence, environmental and emergency response plans, and compliance solutions. Please contact Sheila Harvey (at 202.883.8224 or sheila.harvey@pillsburylaw.com) or Reza Zarghamee (at 202.663.8580 or reza.zarghamee@pillsburylaw.com) for assistance.
Pillsbury’s experienced crisis management professionals are closely monitoring the global threat of COVID-19, drawing on the firm's capabilities in supply chain management, insurance law, cybersecurity, employment law, corporate law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.