Environmental Due Diligence: A Practical Guide to Environmental Site Assessments Part 1

The Basics of a Phase I ESA

A Phase I ESA is normally the first environmental report requested as part of a potential purchaser's due diligence of a subject property.  The purpose of a Phase I ESA is to determine whether there are any Recognized Environmental Conditions (“REC”) related to the property that merit further investigation.

Recognized Environmental Conditions Defined:

The applicable ASTM Standards E1527-13 "Standard Practice for Environmental Site Assessment:  Phase I Environmental Site Assessment Process", defines a REC as "the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property: (1) due to the release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment.  A deminimis condition (small or inconsequential) is not a REC.  If the assessment reveals a REC related to the property, the report will advise the potential purchaser whether an additional investigation is warranted.

A Qualified Environmental Professional:

The assessment must be performed by an Environmental Professional ("EP").  The ASTM standard mandates that only consultants who meet the definition of an EP will be considered qualified to prepare the assessment.  To qualify as an EP, a person must:

• Hold a current Professional Engineer or Professional Geologist license or registration from a state, tribe, or U.S. territory and have the equivalent of three years of full-time relevant experience;

• Be licensed or certified by the federal government, a state, tribe or U.S. territory to perform environmental inquiries and have the equivalent of three years of full-time relevant experience;

• Have a Baccalaureate or higher degree from an accredited institution of higher education in a discipline of engineering or science and the equivalent of five years of full-time relevant experience; or

• Have the equivalent of ten years of full-time relevant experience.

The report must (1)  state that the EP is qualified under the above criteria, (2) include a statement concerning the EP's qualifications, and (3) be signed by the EP.

Liability Protections:

To serve as an effective bar to potential environmental liability under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Phase I ESA must meet the All Appropriate Inquiry (“AAI”) standard set forth in 101(35)(B)(ii) and (iii) of CERCLA and be completed before the transaction occurs.[2]  The potential liability protections under CERCLA extend to three circumstances: (1) the Innocent Landowner defense for purchasers who did not know and had no reason to know of contamination, (2) the Contiguous Property Exemption for releases from real property not owned by or contributed to by the purchaser, and (3) the Bona Fide Purchaser defense for purchasers who acquired the property with knowledge of the contamination caused by a release prior to purchase.  Purchasers who rely on the Contiguous Property Exemption or the Bona Fide Purchaser defense must also comply with certain obligations, which are discussed later in this Alert.

Meeting the AAI Standard:  ASTM E1527-13

The U.S. Environmental Protection Agency (“EPA”) has concluded that the AAI standard is satisfied where a report meets the criteria set forth in ASTM E1527-13.  The required criteria in ASTM E1527-13 generally include:

• Timing – A Phase I ESA is effective for one year; however, certain sections must occur within 180 days of the transaction.  These sections include (1) searches for environmental lien and activity and land use limitations, (2) owner/operator interviews, (3) environmental records review, and (4) site inspection.

• Performance of an on-site visit to view present conditions (chemical spill residue, die-back of vegetation, etc.); hazardous substances or petroleum products usage (presence of above ground or underground storage tanks, storage of solvents, etc.); and evaluate any likely environmentally hazardous site history.

• Evaluation of risks from neighboring properties upon the subject property.

• Review of Federal, State, Local and Tribal Records to specified distances (ranging from 1/8 to 1 mile depending on the database).

• Interview of persons knowledgeable regarding the property history (past owners, present owner, key site manager, present tenants, neighbors).

• Interview or review responses to the suggested questionnaire from the prospective user of the report with regard to the person’s knowledge of the property.

• Examine municipal or county planning files to check prior land usage and permits.

• Conduct file searches with public agencies (State water board, fire department, county health department, etc.) having oversight relative to water quality and soil contamination issues.

• Examine historic aerial photography of the vicinity.

• Examine current USGS maps to scrutinize drainage patterns and topography.

• Examine chain-of-title for Environmental Liens and/or Activity and Land Use Limitations.

User Reliance and Information:

The Phase I must also be prepared for the intended use of the person seeking the potential liability protections.  This person is identified as the “User” of the report.   A common problem with Phase I ESAs is that there is an absence of required information from the User or that the report was not prepared for use by the specific User.  When a person wants to utilize a Phase I ESA prepared for another party for potential liability protections, that person must either have the report revised to specifically identify him as the User of the report or he must receive a reliance letter allowing him to use the report from the EP.  The new User must also provide the User questionnaire information required by the ASTM standard.  This must be done despite the fact that commonly a potential purchaser does not have a significant history with the property and thus will have only limited information to provide.

A Purchaser's Continuing Obligations:

Conducting AAI prior to acquiring an interest in commercial real estate is the first step toward meeting AAI obligations; however, it is not necessarily the only step necessary.  If a REC be found and contamination confirmed on the property, the prospective property owner may be required to meet certain "continuing obligations," including:

• Complying with land use restrictions and institutional controls,

• Taking "reasonable" steps with respect to hazardous substances releases, and

• Complying with other obligations (e.g., release reporting obligations, information requests, etc.).

These continuing obligations come into effect when recognized environmental conditions or activity and use limitations are discovered. For example, if a purchaser buys a property with a gasoline underground storage tank, any release must be reported and "reasonable steps" must be undertaken to respond to the release. Failing to meet a "continuing obligation" identified during the course of a Phase I ESA, has the potential effect of negating any liability protections acquired by conducting AAI.

The Second Part of this Environmental Alert:

The second part of this two-part Alert will focus on the use of a Phase II ESA to further investigate REC's identified by the EP in the Phase I ESA, discuss Phase I and II ESA's limitations, and provide a short concluding paragraph.

[1]   A Phase III ESA is beyond the scope of this Alert and refers to a more thorough investigation of the nature and extent of adverse environmental conditions to determine potential risks to human health and the environment and if required, to develop a remedial action plan.

[2] While the "all appropriate inquiry" required for liability protections under the Federal Oil Pollution Act ("OPA") is similar to, though not as broad as the AAI under CERCLA, the applicable regulatory agencies agreed that the ASTM E1527-05 standard (the predecessor to E1527-13) is consistent with the statutory  requirements  of the OPA pertaining to its innocent land owner defense.