Practical Tips for Managing Environmental Issues During the Coronavirus Pandemic

Written by Sheila McCafferty Harvey and Reza Zarghamee, Pillsbury Law

Due diligence and compliance challenges require flexible approaches and creative solutions.

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:

  • Develop an internal team responsible for the COVID-19 response: The establishment of clearly defined roles and a chain of command can be tremendously useful to ensuring that the tasks needed to maintain compliance are expeditiously performed.
  • Consult existing plans and internal policies: Some businesses already may have in place plans and policies that have been triggered by the current crisis or are otherwise useful. For example, environmental management systems, hazardous waste contingency plans and risk management plans may contain specific protocols for exigent circumstances that may prevent compliance with legal obligations (e.g., the inability to remove hazardous waste within the 90-day threshold specified for large quantity generators) or trigger certain preventative measures (e.g., the securing of extremely hazardous substances regulated under Section 112(r) of the Clean Air Act as part of a risk management plan).
  • Identify what tasks and deadlines are required or coming up in the near-term and whether they are at risk of being impacted: Businesses should develop lists of upcoming environmental tasks and deadlines, including scheduled remedial activities, sampling, submittals to agencies, commitments to private-parties under environmental indemnities, etc. For items due in the next few months, an assessment should be made about the degree to which the requisite task may be affected by COVID-19-related disruptions. A broad view of how current conditions may affect the ability to discharge obligations should be taken in this regard. For example, it may be useful to ascertain which tasks require outside vendors or subcontractors and the likelihood that they would be available to assist.
  • Review relevant statutes, regulations, guidance, and other documents for authority that might excuse or delay performance: Applicable laws, regulations, and legal instruments such as permits and orders should be consulted to determine if they contain provisions that afford relief from the obligations discussed in the previous bullet. The EPA has policies and guidelines regarding governmental expectations during emergency situations, and an increasing number of states have issued guidance on how businesses may invoke enforcement discretion during the current crisis. Pillsbury is closely monitoring these developments and tracking them on its website. Where such agency guidance is vague or off-point, businesses are recommended to consult the specific documents establishing their legal obligations, as many consent orders, cleanup agreements, private-party indemnities, and permits contain provisions that bound parties may invoke to obtain relief from requirements that may be difficult or impossible to perform because of COVID-19-related restrictions. “Force majeure” clauses are a good place to start, as these provisions serve to excuse or delay performance under exigent circumstances. Some such clauses explicitly designate pandemics and governmentally declared emergencies and shutdowns as force majeure events. However, they often also have time limits, so they should be reviewed as soon as possible.
  • If legal authority affording relief is identified, follow the specified procedures for invoking the authority and providing notice. This should be done as early as possible, especially if the applicability of specific guidance or provision is questionable, to ensure enough time to react if a third party (e.g., governmental agency) disagrees about the existence of an adequate basis to excuse or delay performance.
  • Document efforts to comply and reasons impeding performance. The legal landscape is extremely fluid right now, giving rise to a heightened potential for legal disputes over failure to perform. For this reason, as well as the fact that many force majeure clauses require it, businesses should document all efforts to comply, as well as information supporting the contention that COVID-19-related disruptions have prevented compliance, as such information may be useful in supporting petitions for enforcement discretion.

Key Takeaways

  • The COVID-19 pandemic is impeding the ability of businesses to perform transactional environmental due diligence and usual compliance activities.
  • How courts and businesses (e.g., lenders, insurers) will value attempts to perform All Appropriate Inquiries that, because of COVID-19-related orders, may not include such activities as physical inspections of the subject property is uncertain. Though we may see various guidance emerge in the coming days, much like the numerous hastily promulgated stay-home orders, we can expect a patchwork with ample ambiguity and unanswered questions.
  • In such a dynamic and unprecedented legal and business climate, proactive and creative compliance strategies, and effective strategies to document parties’ efforts to comply with existing obligations, can help hedge against transactional and compliance risks.

About the Authors

Sheila Harvey, Pillsbury’s Energy Industry Group leader, is an accomplished adviser on environmental and energy policy and regulatory issues and their impact on transactional and litigation matters.

Reza Zarghamee advises U.S. and international clients on a vast array of environmental matters, including the strategies for performing compliance audits, transactional due diligence, remediation, and SEC disclosures.