Clarifying Cleanup: Make Sure You Are Getting The Correct Environmental Site Assessments
It is common knowledge and a best practice for commercial real estate lenders and buyers to obtain a Phase I Environmental Site Assessment (commonly known as a “Phase I”) during the due diligence period of a purchase transaction.
The reason is simple: environmental conditions may adversely impact the value of the property and may, in certain circumstances, cause owners and lenders to be held directly liable for the environmental cleanup of the property or adjacent property.
If you have obtained a Phase I, now ask yourself two questions: "Does the Phase I provide adequate protection for buyers and lenders when an environmental contamination is not readily ascertainable from visual observations, historical records, and regulatory and database record searches?" and "Does the Phase I identify issues related to asbestos, radon, mold, or lead-based paint at the property?"
If you answered “yes” to either of the questions above, you answered incorrectly. Read on for the correct answers and an explanation of the limitations of Phase I assessments.
Will a Phase I discover asbestos, radon, mold, or lead-based paint issues?
No, not necessarily, unless the contamination is obvious to the naked eye. Because a Phase I Environmental Site Assessment may not identify issues with asbestos, radon, mold, or lead-based paint, purchasers of multi-family properties, student housing properties, childcare facilities, or other similar uses should order additional testing to ascertain whether those environmental conditions are present on the property.
Will a Phase I provide protection when contamination is not readily ascertainable?
It depends. (A predictable response from a lawyer.)
Phase I inspections are non-invasive by nature (i.e., no surface nor subsurface soil analysis, nor groundwater analysis is undertaken). Instead, the scope of a Phase I includes:
- A visual inspection of the subject property;
- A review of the historical records of the subject property and properties in the immediate vicinity of the subject property; and
- Interviews with owners, occupants, neighbors, and local government officials.
Common findings as a result of the visual inspection and historical records search may include evidence of a leaking underground storage tank, evidence of a spill or staining from an environmental contaminant, or evidence of potential releases from an adjacent property (such as a neighboring gasoline station or dry cleaner). These types of discoveries are known as recognized environmental concerns (REC) and generally lead to further investigation, such as a Phase II Environmental Site Assessment, which includes invasive testing of soil, water, or buildings.
A Phase I that is compliant with the standards of ASTM E1527 – 13 (and typically costs about $2,000-$3,000) will protect a buyer or lender from the responsibility of paying the costs of remediating a hazardous environmental conditions on acquired property under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA).
Under CERCLA, a purchaser of contaminated property can be held responsible for remediation costs of an environmental hazard, even if the contamination was caused by a prior property owner or user. However, CERCLA contains the “innocent landowner” defense whereby a property owner and its lender can claim it did not know or have reason to know that there was an hazardous condition on its property, provided that the owner or lender can show that they performed adequate due diligence prior to the purchase.
Because a Phase I provides a comprehensive overview of the environmental conditions of the property, obtaining a clean Phase I qualifies as “adequate due diligence” pursuant to the innocent landowner defense against the costs of the environmental remediation if any hazardous condition is subsequently discovered on the property. It will not, however, prevent the owner’s lender from requiring the owner to remediate the hazardous condition.
Because a Phase I will not discover every environmental hazard but only assess the likelihood of whether an environmental contaminant is present on the subject property, in order to determine the actual presence of environmental contaminants on the property, a Phase II Environmental Site Assessment may be necessary.
A buyer and its lender should determine if the past or current use of the property or adjacent property requires any additional environmental testing beyond the Phase I. As always, choose a reputable environmental consulting company to undertake any environmental studies to ensure a thorough investigation.
Larry Lerman is a commercial transactions attorney at Lerch Early. For more information on navigating the due diligence period of a purchase transaction, contact him at firstname.lastname@example.org or 301-347-1776.