In 1986, Congress passed an amendment to Superfund known as the Superfund Amendment and Reauthorization Act (SARA). This amendment incorporated a very commonly used phrase: “all appropriate inquiry consistent with good commercial practice”—a phrase sometimes referenced simply by the acronym “AAI.”
The concept of AAI is based on the ancient principle of caveat emptor (“buyer beware!”), and the burden for due diligence investigations was placed on both the purchaser and the lender for commercial real estate.
It was Congress’ intent for SARA to be a self-regulatory initiative, motivating the industry to “police itself” with an element of liability, and an expectation of environmental due diligence.
Several court cases, such as U.S. v. Maryland Bank and Trust (1986), and the often-cited Fleet Factors Case (1990), made liability for remediation costs a significant concern for lenders. Lenders had deep pockets, but in most cases did not contribute to or exacerbate contamination that existed on their collateral properties.
So Congress passed the Asset Conservation Act of 1996, an amendment to Superfund, to define permissible activities that lenders could perform without violating their secured creditor exemption. (The act is also known as the Secured Creditor Exemption Act of 1996.) This Act essentially states that as long as the lender behaves as a lender, and does not get involved in management of the operation, they will not be found liable for contamination that exists on properties used to secure loans.
The Asset Conservation Act provides some relief in that lenders are not as concerned about liability as they once were. However, the security of loans is still a risk for lenders if the collateral property is impacted. Diligent Phase I Environmental Site Assessments (ESAs) and plans to either maintain, restore, or insure property value are typically required by lenders and buyers to go forward with impacted property transactions.
Moreover, a thorough, expert Phase I ESA is a critical step to helping both buyers and lenders beware of any potential property concerns.