In real estate transactions it is not uncommon for the seller to provide the buyer a copy of prior a Phase I environmental assessment. The seller either ordered a Phase I in anticipation of the transaction or one may exist from a prior transaction involving the same property. Should the buyer be satisfied with this prior Phase I?
Purpose of the Phase I from the Seller’s Perspective
In terms of records and site review, a Phase I environmental assessment essentially involves the following steps:
- A review of environmental databases– records of known or potentially contaminated sites in the vicinity of the property, landfills, and other disposal sites, and underground storage tank records (for both leaking and registered USTs)
- A review of local regulatory files– these could include the state EPA, local fire department or health department.
- Aerial photos and sanborn maps- to review the history of the use of the property
- Interviews– with a site contact or someone with knowledge of the property
- Site walkover by the consultant- the consultant is looking for signs of potential releases of contamination (ex: distressed vegetation or oil stains)
- No sampling– A phase I will not involve any actual soil or groundwater sampling even if issues are identified
If the seller has a Phase I, they may have ordered a Phase I to determine whether there are any environmental concerns that can be quickly ascertained. However, keep in mind the seller and buyer’s goals are not exactly in line with regard to environmental due diligence.
First, seller is not concerned with establishing any liability defenses because they aren’t entitled to them if they perform a Phase I after already owning the property. Second, if the Phase I identifies a potential issue, many sellers will stop their inquiry- they aren’t interested in taking on the costs of addressing any issues that may be identified.
Buyer’s Perspective- Establish the Bona Fide Purchaser Defense
CERCLA liability applies to "owners" and "operators." Therefore, as the buyer, once you take ownership of the property you can be liable for any historical contamination that may exist, even if you had nothing to do with that contamination.
In 2002, Congress passed the Small Business Liability Relief and Brownfields Revitalization Act (known as the "Brownfields Act"). The Act amended CERCLA to provide greater incentives for buyers to purchases and re-utilize brownfield properties. The amendments established the Bona Fide Purchaser Defense (BFPD).
Under the BFPD, a Buyer can establish a defense to liability under CERCLA if it performs due diligence prior to purchase in accordance with EPA standards. A property does not need to be abandoned or vacant to be eligible for the BFPD, facilities still operating can qualify.
This post is not meant to be an exhaustive discussion of the requirements for establishing the BFPD. However, three key points to keep in mind from the buyers perspective with regard to prior Phase I reports:
- The Phase I must be performed within 180 days of purchase. If a Phase I was performed within the last year, then a Phase I update can be performed. A Phase I more than one year old cannot be used to establish the BFPD;
- The buyer must be able to "rely" on the Phase I. This means if the buyer wants to utilize the Seller’s Phase I it must obtain either be identified in the Phase I update as a party that can rely on the Phase I or it must obtain a reliance letter from the consultant who performed the Phase I; and
- The buyer must make sure that the Phase I meets all the required elements set forth under EPA recognized standard for Phase Is- ASTM 1527-13 and EPA’s "All Appropriate Inquiries" Rule (AAI). (See discussion in prior post on the new ASTM standard).
Item 3 is of particular importance to the buyer. I have reviewed plenty of Phase I reports that did not contain the required elements of the ASTM or AAI rule. An inadequate Phase I will not allow the buyer to establish the BFPD.
Therefore, it is of critical importance the buyer review any prior Phase I reports to ensure they are up-to-date, can be relied on and meet the required elements.
Buyer May Want a Closer Look
If the seller’s Phase I is "clean"- does not identified any "Recognized Environmental Conditions" (i.e. no indications of a release of contamination), then seller will be reluctant to allow any greater scrutiny of the property. However, buyer should make sure the Phase I was adequate and no red flags are contained in the report.
If the Phase I report does identify RECs, did the seller perform any additional investigation? While AAI technically does not require sampling, it may be very difficult, if not impossible, to establish the BFPD without sampling to determine if a release did occur.
If contamination is identified, then the buyer still can establish the BFPD if it takes "reasonable steps" to stop releases and prevent exposure to that contamination. Under the BFPD, the buyer is not expected to perform the same level of cleanup as a liable party under CERCLA.
Beyond liability defenses, as the potential owner of the property, it is generally prudent to avoid taking on major headaches. Therefore, buyers want to make sure sufficient due diligence was performed. It is definitely in the buyer’s interest to ensure they have a thorough understanding of the condition of the property.
For example, the BFPD is only a liability defense to CERCLA. If other environmental regulatory obligations exist, such as underground storage tanks, the BFPD will not provide liability protection to those requirements.
Sellers may resist any questioning of the adequacy of a prior Phase I. If the prior Phase I identified issues, seller may also be reluctant to allow further investigation. However, as the buyer, you face liability exposure under CERCLA and potentially other environmental laws once you take ownership.
In conclusion, if a prior Phase I report exists, it it very important the buyer thoroughly review the report and take the necessary steps to protect themselves.