Performing appropriate environmental due diligence prior to acquisition of any industrial or commercial property is a necessity. Due to expansive liability under environmental statutes, most notably CERCLA (i.e. Superfund), a purchaser of contaminated property can be held liable for all cleanup costs regardless of whether the purchaser caused the contamination or knew it was present. Therefore, taking the appropriate steps to understand what you are buying is critical. All purchasers should follow the simple “no surprises rule.”
Here are five tips for purchasers regarding environmental due diligence.
1. Avoid Low Cost Phase Is
Typically, the first step in the environmental due diligence process is a Phase I environmental assessment. A Phase I involves the review of records, government databases, interviews with those familiar with the property and a site walk over by the retained environmental consultant. The purpose of the review is to determine whether there is any information or visible signs to suggest a release of contamination may exist on the property. If the consultant determines such evidence exists, it will be identified in the Phase I report as a “recognized environmental condition” (REC).
Phase I environmental assessments have become the norm in virtually any commercial or industrial property transaction. Most financial institutions will require a Phase I report prior to agreeing to finance a transaction.
In this regard, Phase I's have become a commodity- A box that needs to checked off before a deal can go through. But buyer beware, while Phase I may be enough to secure financing, does the report provide a high quality review of the condition of the property?
There are a plethora of environmental consultants who perform Phase I’s. However, all consultants and Phase I reports are not equal. Performing a good Phase I involves ensuring a comprehensive review takes place, attention to detail as well as the exercise of professional judgment. At a minimum, the Phase I should meet the ASTM 1527-05 standard which is required in order to potentially qualify for the federal EPA liability defenses discussed below.
Be wary of consultants who are willing to perform a Phase I for less than the typical fee for your area. A low price can be a red flag that you will not receive a quality Phase I.
2. Be Mindful of Lurking Vapor Intrusion Issues
Vapor intrusion can occur when volatile chemicals from contaminated groundwater or soil enter an overlying building. Volatile chemicals can generate vapors that migrate from groundwater or soil through basements or foundations into indoor air similar to radon gas in homes.
Regulations and guidance associated with vapor intrusion are changing rapidly both at the state and federal level. It is likely that forthcoming revisions to ASTM guidance for performing Phase I assessments, which is expected this year, will include new guidance on evaluating the potential for vapor intrusion.
Given the potential legal liability and/or costs associated with addressing vapor intrusion, a purchaser should make sure that the environmental consultant properly evaluated the potential for vapor intrusion during the due diligence process.
3. Take Advantage of Potential Liability Defenses
Under federal law, purchasers can protect themselves from liability under CERCLA by performing proper due diligence, as established by EPA regulation and guidance. Proper due diligence is referred to by EPA as “all appropriate inquiries” (AAI).
If a purchase performs due diligence in accordance with AAI, it can qualify for liability protection known as the “bona fide prospective purchaser defense” (BFPD). AAI requires the performance of a Phase I that meets ASTM 1527-05. It also requires that the purchaser take reasonable steps to address any contamination that may be identified during due diligence.
In December 2012, EPA issued an update to its BFPD guidance which expanded the ability of tenants to qualify for the defense so long as the tenant performs AAI prior to leasing the property.
While it is well worth taking the steps to qualify for available liability defenses such as the BFPD, you should also understand the limitations of these defenses. For example, the BFPD does not cover petroleum related contamination. Also, federal liability protections such as the BFPD do not provide state based environmental liability protection.
4. Access and Confidentiality
Key issues that need to be addressed upfront with the seller include securing proper access to the site as well as obtaining copies of all key documents, such as permits and prior environmental reports. Typically, the parties will enter into a confidentiality agreement that sets forth the terms upon which information will be shared.
It is also critical to make sure you have secured the requisite access before you initiate your due diligence. You should make sure you have the legal right to access the property to perform any tests deemed appropriate. As the purchaser, you want to avoid battles over access once the due diligence process commences.
5. Beware of Issues Not Covered in the Typical Phase I
Typical Phase I’s do not cover whether the property contains wetlands, asbestos or endangered species. However, you can add them to the scope of the Phase I if you determine the conditions of the property justify such a review. For example, if you are purchasing an undeveloped tract of land it is critical to review for wetlands and endangered species. If you are purchasing a building that was built before 1980 then you should strongly consider having an asbestos survey performed.