Tuesday, November 11, 2008

Are Transaction Screens Still Useful In Evaluating Environmental Risks?

In August of 2004, the U.S Environmental Protection Agency (USEPA) promulgated a final rule that eliminated the use of Transaction Screens for the purposes of avoiding Superfund (CERCLA) liability. This action has left many prospective Buyers and Lenders wondering if Transaction Screens have any value anymore. As background, in 1996 the USEPA published interim guidance for meeting the “all appropriate inquiry” test under Superfund. In summary, if a prospective buyer or lender could demonstrate they had conducted “all appropriate inquiry” before buying a property and determined that there was no evidence of contamination, they have the opportunity to be considered an “innocent landowner”. If the property is subsequently found to have contamination, the new owner may not be directly responsible for the costs of the clean-up.

In their interim guidance, USEPA identified two ways to demonstrate that “all appropriate inquiry” had been made. The first is a Phase 1 Environmental Site Assessment (ESA) done in conformance with the ASTM standard practice. The second was a Transaction Screen, done in conformance with a separate ASTM practice. The advantage of conducting a Transaction Screen was that it could be done at a significantly lower cost. Because of the lower cost, the industry saw an increased use of Transaction Screens. USEPA eliminating Transaction Screens as a means of protecting the Buyer’s or Lender’s financial liabilities meant many organizations were faced with the question of whether to stop using Screens all together.

So why conduct a Transaction Screen? In practice, Lenders may be protected from direct financial responsibility for environmental problems. However, prospective purchasers of the property (their customer) do not have this protection. Therefore, the financial burden of a contaminated property is indirectly borne by the bank, as a reduction in the value and marketability of the property. Although Transaction Screens do not meet the standard of “all appropriate inquiry”, Screens may provide important information to both parties to evaluate the business risk associated with a transaction.

In some cases, the risks for contamination on the property are low – for example, on undeveloped or agricultural properties. Prospective Buyers may be more interested in evaluating risks associated with past contamination at neighboring sites which could impact their property. In this case, the prospective Buyer may be looking for a pass-fail evaluation; if there appear to be issues, they will decline the opportunity to buy and look somewhere else. In this case, the Transaction Screen method may provide just the information needed.

In the end, avoiding bad risks is the goal of all parties. Transaction Screens, if properly constructed, can still be an cost-effective tool in evaluating these risks.

For further information contact Caltha LLP at
Caltha LLP Website

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