“Due diligence.” “All Appropriate Inquiries.” “Phase I Environmental Site Assessment.” These are phrases used to discuss a review of potential environmental liabilities before acquiring property (collectively, "environmental due diligence"). Environmental due diligence has been around since the 1980s, in response to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Love Canal disaster. Environmental due diligence has evolved over the years, with additional defenses and a more structured procedure. However, many attorneys and clients consider environmental due diligence to be “cookie cutter” and have become complacent with its execution. This article discusses the most recent version of the standard, ASTM E1527-13; outlines common due diligence pitfalls; and provides general guidance on how to properly oversee a professional conducting a Phase I Environmental Site Assessment (Phase 1 ESA).
History of Environmental Due Diligence
Environmental due diligence was a product of the Love Canal disaster. Homes were built on a former toxic waste dump without any investigation into the historical land use (despite mention of the historical industrial use and land use restrictions in the deed records). Because of Love Canal, Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in 1980, which imposed environmental liability on the entity that caused the contamination as well as everyone in the chain of title, regardless of fault. See 42 U.S.C. §§ 9601–9675.
Over the years, amendments to CERCLA caused it to become less stringent to promote the sale of contaminated property, and the environmental due diligence process was formalized. In 1986 CERCLA added the Innocent Purchaser defense against environmental liability if the purchaser conducted All Appropriate Inquiries (AAI) to identify environmental hazards before purchasing the property. 42 U.S.C. § 9601(35)(A). Environmental due diligence reports (typically called a Phase I Environmental Site Assessment, or ESA) were created to document the AAI efforts. This defense, however, created the need for an industry standard for conducting environmental due diligence. In the early years of environmental due diligence, each consultant had its own format, and the substance of a Phase I Environmental Site Assessment varied. In 1997, the American Society for Testing and Materials (ASTM) created standard E1527, which outlines the protocol for Phase I ESAs, and the Environmental Protection Agency (EPA) endorsed it as a way to satisfy AAI. See 40 CFR Part 312. Accordingly, the issuance of a published standard was a welcome sight to purchasers, lenders, and their legal counsel.
In 2002, Congress amended CERCLA to add additional defenses for bona fide purchasers and contiguous adjacent landowners, which made obtaining a Phase I ESA even more critical before closing on a deal. See 42 U.S.C. §§ 9601(40); 9607(q).
Below is a brief summary of each defense in CERCLA available to purchasers and landowners and the criteria needed to support that defense:
1. Innocent Landowner Defense: Purchaser Unknowingly Buys Contaminated Property
- AAI made before purchase and no knowledge of or reason to know of contamination
- No affiliation with liable party
2. Bona Fide Purchaser Defense: Prospective Purchaser (or Tenant) Knows About the Contamination
- AAI made before purchase
- Property purchased after January 11, 2002
- No affiliation with liable party
- All contamination occurs prior to purchase
3. Contiguous Landowner Defense: Contamination Migrated onto Property
- AAI made before purchase and no knowledge of or reason to know of migration of contamination onto purchased property
- No Affiliation with Liable Party
Accordingly, because AAI is a requirement for each defense, proper environmental due diligence is critical.
Continuing obligations. In addition to meeting the threshold criteria in each of the three enumerated defenses above, CERCLA imposes additional obligations either (i) after purchase; or (ii) after discovery of contamination to assert the defense:
- Comply with land use restrictions and institutional controls, even if not in place when purchased;
- Provide cooperation, access, and assistance to responders;
- Supply requested information to responders;
- Comply with legally required notices regarding releases of hazardous substances at the property; and
- Take “reasonable steps” to stop continuing releases, prevent threatened releases, and prevent or limit exposure to releases.
See 42 USC. § 9601(40(D)).
These additional requirements pose their own set of problems when a new owner does not take action to contain a release or conducts development that exacerbates a release. See PCS Nitrogen v. Ashley II of Charleston LLC, 714 F.3d 161 (4th Cir. 2013) (holding that a purchaser’s failure to follow recommendation in Phase I ESA to repair cracked sump violated continuing obligations and negated bona fide purchaser defense); Voggenthaler v. Maryland Square LLC, 724 F.3d 1050 (4th Cir. 2013) (developer did not meet continuing obligation when it demolished building and left contaminated soil exposed to the environment). So, merely commissioning a Phase I ESAand putting it in the file without considering the conclusions and recommendations does not guarantee protection from environmental liability.
What Is Adequate Environmental Due Diligence?
As mentioned above, proper environmental due diligence is the first step in asserting a successful CERCLA defense. Adequate environmental due diligence complies with the current ASTM E1527 standard and includes several research components, including
- Historical environmental record search (databases, aerial photos, Sanborn maps);
- Physical property inspection; and
- Interviews with current owner and neighbors.
A common misconception is that a Phase I ESA report includes sampling. Sampling (of, for example, soil, groundwater, and asbestos) is not required in a Phase I ESA report. If the Phase I ESA concludes that there may be environmental concerns, then the buyer typically conducts a Phase II ESA, which includes sampling of the potential problem areas to determine whether a problem actually exists.
The Phase I ESA must be completed by a qualified environmental professional who has experience in conducting Phase I ESA reports. Additionally, to comply with the CERCLA environmental due diligence requirements, the report must contain the following language, signed by the environmental professional who prepared the report:
[I, We] declare that, to the best of [my, our] professional knowledge and belief, [I, we] meet the definition of Environmental Professional as defined in §312.10 of this part. [I, We] have the specific qualifications based on education, training, and experience to assess a property of the nature, history, and setting of the subject property. [I, We] have developed and performed the all appropriate inquiries in conformance with the standards and practices set forth in 40 CFR Part 312.
40 CFR § 312.21(d)
What Is Not Adequate Environmental Due Diligence?
Problems occur in a Phase I ESA in several areas:
- Failure to include the required language and signature referenced above.
- Relying on an old report. According to the ASTM standard, a report that is more than six months old is outdated. Old reports should be updated or redone.
The Evolution of the ASTM Standard
ASTM has modified standard E1527 over the years with consultants most recently using ASTM E1527-13, which was published on November 1, 2013, and became the exclusive standard on October 6, 2015. See 79 Fed. Reg. 34480 (Jun. 17, 2014). The latest version created three key changes: (1) added a third category of recognized environmental condition (REC); (2) clarified the use of the phrase “de minimis condition”; and (3) specifically mentions vapor migration. These major changes are discussed below.
A third category of REC. The term REC was introduced with the initial release of E1527 to help distinguish minor issues from issues that may require additional investigation. A REC is defined as the presence or likely presence of any hazardous substance or petroleum product on the subject property that satisfies at least one of the following three conditions: (1) due to 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. See § 3.2.78. Note that the release does not have to originate from the subject property. For example, an adjacent, upgradient dry cleaner with an open cleanup file likely would be a REC. Whether something is a REC is subject to the judgment of the environmental professional.
When ASTM revised the standard in 2000, it added the term “historical REC” to identify a past release of a hazardous substance or petroleum product that has been addressed to the satisfaction of regulatory agency without land restrictions or other institutional controls. See E1527-13 § 3.2.42. For example, an adjacent upgradient dry cleaner with a release that was cleaned up to residential levels and granted closure by the regulatory agency may be a historical REC.
ASTM added a new REC category in the 2013 revision. A controlled REC is a REC resulting from a past release addressed to the satisfaction of the regulatory agency with land restrictions or other institutional controls. See E1527-13 § 3.2.18. For example, an adjacent dry cleaner with a release that was cleaned up to commercial levels or with a deed restriction prohibiting groundwater use likely would be a controlled REC.
Clarification of de minimis condition. ASTM clarified that a de minimis condition is a condition that, if brought to the attention of the regulatory agency, would not be the subject of an enforcement action, and is not to be listed as a REC. See § 3.2.22. However, de minimisconditions need to be included in the report’s findings section. See § 12.5. For example, an environmental professional may consider minor soil staining to be a de minimis condition. Like the REC categories, ASTM defers to the environmental professional’s judgment on whether something should be considered de minimis.
Specific mention of vapor intrusion. Much has been written about the updated ASTM standard and whether it imposes additional obligations to assess vapor intrusion (vapors migrating into a structure from beneath the foundation). This concern arose out of the new definition provided in the ASTM E1527-13:
§ 3.2.56 migrate/migration – for the purposes of this practice, “migrate” and migration” refer to the movement of hazardous substances or petroleum products in any form, including, for example, solid and liquid at the surface or subsurface, and vapor in the subsurface. (emphasis added).
Many industry professionals have pointed out that the mention of vapors was merely a clarification, and vapors should always have been part of a Phase I ESA as part of any pathway analysis. The EPA agreed. In its response to comments when it proposed to accept E1527-13 as a method of achieving AAI, the EPA noted that “[i]n the case of vapor releases, or the potential presence or migration of vapors associated with hazardous substances or petroleum products, EPA notes that both the All Appropriate Inquiries Rule and the ASTM E1527-05 standard already call for the identification of potential vapor releases or vapor migration at a property, to the extent they are indicative of a release or threatened release of hazardous substances.” 78 Fed. Reg. 79319 at 79321-22 (Dec. 30, 2013). But professionals wonder whether consultants who conducted Phase I ESAs under the ASTM E1527-05 standard truly considered the vapor pathway when concluding what is a REC.
With the explicit mention of vapor migration in the ASTM E1527-13, consultants surely will include a vapor discussion. This, in turn, will likely increase the cost of a Phase I ESA. The consultants interviewed for this article stated that they plan to use the vapor encroachment screening set out in ASTM E2600-10 if any contaminated properties are identified within the area of concern. If contaminated properties are identified within the area of concern, ASTM E2600-10 mandates that the environmental professional review reasonably ascertainable sources to determine whether vapor encroachment exists, such as looking at agency documents regarding the contaminated property to determine the geology, groundwater contaminant concentrations, and plume length. ASTM E2600-10 §§ 5.3 and 8.2.3.
Other Problems with the Application of the Updated ASTM E1527-13 Standard
In addition to the likely increased cost of Phase I ESA under this revised standard due to the explicit mention of vapor migration, there may be confusion among environmental professional about the appropriate categorization of environmental conditions. For example, say there is a former gasoline station adjacent to the Phase I ESA property. The station had leaking storage tanks, and the Texas Commission on Environmental Quality (TCEQ) issued a no-further-action letter in 2002. The following questions may arise:
- Would this be a historic REC, because it is a past release addressed to the satisfaction of the TCEQ?
- Should this be a controlled REC, because closure letters issued under the leaking petroleum storage tank program typically used cleanup standards for commercial property?
- Should this be a REC, because closure letters issued by TCEQ under the leaking petroleum storage tank program often let petroleum hydrocarbons remain in the groundwater—sometimes even free product? So, is the former station’s existence a vapor encroachment condition? If so, will indoor air or soil vapor testing be recommended as part of a Phase II ESA? What if TCEQ decides to follow other states like New York, New Jersey, and California and reopen the case and require a vapor assessment?
- If there is a vapor encroachment condition, does the buyer have a “continuing obligation” to prevent further releases by installing a vapor mitigation system in an existing or future building?
In addition, “clarification” of the de minimis definition is anything but clear. Professionals are left wondering exactly what would or would not trigger agency action, posing a potential dilemma for the environmental professional conducting the assessment. For example, does minor soil staining constitute a de minimis condition? TCEQ has taken the position that any release, no matter how small, requires sampling to determine whether concentrations are below background concentrations or method quantitation limits. See TCEQ, Determining Which Releases are Subject to TRRP, Nov. 19, 2010. So, how can the environmental professional determine whether the stained soil would trigger further agency action without sampling, which is beyond the scope of a Phase I ESA?
The new standard is not as simple as ASTM or EPA may infer. Environmental legal counsel should be used to review draft Phase I ESA and identify any gray areas like the hypotheticals mentioned above.
Tips to Protect Your Client and Ensure Proper Due Diligence
The tips set out below help ensure that your client receives the most protection from its environmental due diligence efforts.
- Require the consultant to follow the current ASTM E1527 standard. Do not let the consultant’s scope of work in its proposal or contract include words like “general compliance with” or “substantially in compliance with.” The consultant needs to represent that the Phase I ESA will comply with ASTM E1527 without exception.
- Read the consultant contract carefully. Many consultant contracts will try to limit liability to the amount of the project. For example, liability may be limited to a few thousand dollars. In addition, ensure that the consultant has sufficient liability insurance and will maintain that insurance throughout the project term (which may include a Phase II).
- Do not rely on someone else’s Phase I ESA report. The best way for the client to protect itself is to hire its own consultant and complete its own Phase I ESA. This direct relationship allows the client to control the project and negotiate the contract terms. Then, if something is missed or goes wrong, the client may have a claim for breach of contract (which can include recovering legal fees) as well as a claim for negligence or malpractice. If the client wants to accept the seller’s Phase I ESA report, obtain a reliance letter from the consultant that will allow the client to rely on that report. Otherwise, there is no privity between the consultant and client, and the client may not have an action against the consultant if there is an error or omission.
- Do not read just the executive summary. Phase I ESA reports are often churned out by consultants for little or no profit, with the hope that the work will lead to a Phase II ESA. Mistakes happen, and issues are overlooked. Therefore, it is important to thoroughly review the Phase I ESA report, including the appendices. Although the consultant likely has liability insurance, the consultant may not be available when the client discovers it has bought the next Love Canal despite receiving a clean bill of health from the Phase I ESA report. Minimize headaches (and litigation expenses) by reviewing the Phase I ESA report thoroughly before closing and retaining environmental counsel to review it.
- Do not overlook other environmental due diligence concerns. Do not overlook other potential environmental concerns that are outside the scope of a Phase I ESA, such as the presence of lead paint, wetlands, mold, or asbestos and whether environmental permits or compliance plans may be needed. Representations from a seller that it is operating in material compliance with environmental laws are not worth much if the buyer finds out it needs a new permit, and it will take six months to get one. Sure, you can sue the seller for breach of contract (if the seller is still viable), but that will not get your operations up and running to satisfy investors.
Do not ignore proper environmental due diligence. It deserves respect and more than just selecting the low bidder and putting the report in the file. Otherwise, your deal may become the next Love Canal.
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