Ohio Environmental Law Blog : Ohio Environmental Lawyer & Attorney : Joseph Koncelik : Frantz Ward Law Firm : Environmental Regulation, Land Use, Compliance : Cleveland, Ohio

Phase I environmental assessments have become the norm in virtually any commercial or industrial property transaction.  Almost any financial institution 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, beyond securing your financing you may not truly know the condition of your property.  Or even worse, you may not secure the legal protections from environmental liability you intended by procuring your Phase I.

A recent U.S. EPA study evaluated the quality of 35 Phase I reports that were performed on brownfields in connection with federal grant funding.  The Phase I reports were evaluated against basic requirements necessary to secure protections under the "All Appropriate Inquiries Rules (AAI)" (a shield from CERCLA liability for innocent purchasers).

"All Appropriate Inquiries"

Under federal law, in order to establish a shield from liability under CERCLA, a purchaser must, prior to the date of acquisition, perform "all appropriate inquiries" into ownership and uses of the property.  In 2005, U.S. EPA finalized its rule establishing mandatory standards for conducting AAI to secure liability protection.

IG Evaluates 35 Phase I's

In the study, the Inspector General evaluated the 35 Phase I reports to see if they met the required elements of the AAI rule.  Not one of the reports met the U.S. EPA required elements (or alternative ASTM standard).  Worse yet, the missing components were simply formalistic elements necessary for a Phase I to meet U.S. EPA standards.  They did not evaluate the professional judgments in the reports which would be more prone to varying opinion.  Aspects evaluated included:

1. Environmental Professional Qualification Statement- U.S. EPA AAI rule requires a boiler plate statement to be included in the report that the consultant meets the standards to be considered an environmental professional. 
2. Signature-  The environmental professional who responsible for the assessment must sign the report. 
3. Data Gaps-  The professional must identify any data gaps that may have impacted their ability to identify whether conditions at the property indicate a release or potential release occurred at the site.
4. Opinion Statement-  The report must include a conclusion section that summarizes all "recognized environmental conditions" at the property.  Any areas where there were conditions identified on the property which indicate a release or potential release occurred.

In the opinion of the Inspector General, not a single one of the 35 reports evaluated adhered to all of the requirements set forth above. 

The report is another example of the risks associated with hiring an environmental consultant to perform a Phase I.  From my discussions banks don't often evaluate the quality of the consultant or even whether the report meets the ASTM or EPA rule requirements. 

What are the risks to the future property owners in the transaction?  The Inspector General summarized the risks as follows:

Improper AAI investigations introduce risk that the environmental conditions of a property have not been properly or adequately assessed. Consequently, decisions about appropriate uses of redeveloped or reused brownfields properties may be based on improper assessments. Ultimately, threats to human health and the environment could go unrecognized.

Beyond the risks of the unknown conditions, you also could be jeopardizing the legal protections available under the AAI rule.  The rule is very specific in mandating an ASTM or EPA regulatory compliant Phase I assessment before the legal liability protections kick in.  Years later, when an issue arises, you may find you have no shield from liability due to an inadequate Phase I.

Recommendations:

• If you want a true evaluation of the conditions of the property hire a quality environmental consultant.  Avoid consultants who are simply churning Phase I's to move deals forward.  Low ball pricing can often be a red flag regarding the quality of the report.
• Review the Phase I for compliance with standards to secure liability protections.

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Liability for pre-existing contamination acts as a strong deterrent to re-use of brownfield properties.  Prospective purchasers simply do not want to expose themselves to potential liability especially when they had nothing to do with the contamination.

At the federal level, there has been an attempt to address liability exposure in order to provide prospective purchasers some level of liability protection.  However, even though tools exist at the federal level, potential exposure to state environmental liabilities can act as its own deterrent. 

While Clean Ohio may be one of the best brownfield grant programs, not every redevelopment or re-use of a brownfield is right for Clean Ohio.  Given the number of vacant and idled brownfield properties in Ohio, perhaps its time Ohio looked to strengthen protections for innocent purchasers to encourage re-use and prevent urban sprawl.

Federal "Innocent Landowner" Defense

CERCLA (otherwise known as the Superfund law) establishes joint and several liability to a variety of parties, including property owners, for releases of hazardous substances.  Liability can attach regardless of whether you generated or brought the contamination to the property.

The 2002 Small Business Liability Relief and Brownfield Revitalization Act (“the Brownfield Amendments”) amended CERCLA to provide for protections for purchasers of property.  Under the Brownfield Amendments a person can receive liability protections when purchasing contaminated property, it the person meets certain requirements. This is commonly referred to as the “innocent landowner defense.”

Under federal law, in order to establish the innocent landowner defense the purchaser must, prior to the date of acquisition of the property, perform “all appropriate inquiries” into prior ownership and uses of a property. In 2005, U.S. EPA finalized a rule which establishes mandatory standards for conducting all appropriate inquiries ("AAI Rule").

If the investigation (a Phase I assessment) spots no issues, then the legal protection attaches if procedures are followed set forth in the AAI rule. If the investigation of the property reveals the likelihood that a release has occurred, the AAI rule requires reasonable steps be taken to address the release or contain it before you receive liability protection.

But what about State environmental liability?

State environmental statutes provides separate authority to bring actions for historical contamination on brownfield properties.  While there are certain limitations on that authority, I have had clients express concern regarding this liability exposure.

The State of Ohio does not have a regulation or even a policy that recognizes the "innocent landowner" defense.  Meeting the AAI rule will not establish a legal defense against state statutory environmental liabilities.  While the State may exercise enforcement discretion, some clients don't have the risk tolerance to live with that potential exposure.

Should Ohio adopt some kind of "innocent landowner" protection to attract re-use of brownfields?

At a minimum, some formal recognition of the AAI rule by the State would at least provide some level of comfort.  However, given the number of brownfield sites in the State, something stronger is warranted. 

One potential model is the Clean Michigan Initiative.  Under this law, the State provides liability protection to innocent purchasers similar to the federal AAI rule.  Here is a quick synopsis of the program:

• Baseline Environmental Assessment (BEA)- A BEA is performed which is a simpler, streamlined alternative to full blown clean up of the site.
• Establish the Baseline- BEA is used to gather information about a contaminated property when the owner or operator changes so existing contamination can be distinguished from any that might occur once a new owner or operator acquires the property.
• Timing- the BEA must be performed prior to or no more than 45 days after the date of purchase, foreclosure, or becoming the operator, whichever occurs first; 
• Disclose -  the results of the BEA must be provided to the Michigan Department of Environmental Quality (MDEQ) and subsequent purchasers and lessee operators.
• Due Care Responsibilities- Purchasers need only take actions sufficient to ensure that their use of the property: 1) does not allow an unacceptable exposure to contamination, 2) does not worsen the contamination, and 3) protects against the reasonably foreseeable actions of third parties such as contractors or trespassers.

Very similar to the Federal AAI rule, Michigan's BEA serves as a good model to address State liabilities at contaminated properties.  Such protection could further encourage re-use of industrial sites that remain idled or vacant.

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