By Andrew Brought, Spencer Fane Britt & Browne
As someone who frequently helps businesses buy and sell commercial and industrial properties, all too often I encounter misunderstandings about Phase I Environmental Site Assessments (ESAs) and their role in a property transaction. Although not an exhaustive list, you should understand these 10 facts about ESAs.
They don’t do what you think they do.
The purpose of a Phase I ESA is to avoid legal liability for pre-existing contamination. Contrary to popular belief, Phase I ESAs are not a comprehensive environmental due diligence review. Rather, Phase I ESAs are standardized assessments using a practice issued by ASTM intended to identify conditions indicating surface and subsurface contamination.
If done properly, a buyer can satisfy one of three legal defenses under the federal Superfund law (a.k.a. CERCLA); a law that otherwise makes landowners strictly liable for pre-existing contamination, even if they were not the cause. Consequently, a landowner can avoid this liability by undertaking “all appropriate inquiries” into the uses and conditions of the property, and hence the need for an ASTM-compliant Phase I ESA before property acquisition.
A Phase I ESA, alone, doesn’t satisfy the defense. How can that be? This is because the prospective buyer must also conduct a title search for any recorded environmental cleanup liens and also search for activity-use limitations on the property (think deed restrictions, such as prohibitions on residential usage or installation of groundwater wells). This responsibility rests with the prospective buyer and not the environmental consultant, as most Phase I ESA contracts will exclude such a review.
If contamination exists, you can still close the deal and avoid cleanup liability. Yes, that’s right. Even if a “recognized environmental condition” (REC) is identified by the Phase I ESA, there is a legal defense known as the “bona fide prospective purchaser” defense that allows a prospective buyer to knowingly buy a contaminated parcel of property and still avoid liability. But you still have to perform all appropriate inquiries and make sure any continuing care obligations are satisfied. Working with professionals who understand these nuances is advisable in these situations.
Many environmental risks are excluded. Asbestos, lead-based paint, mold, regulatory compliance, health and safety, wetlands and many other risks are not part of a standard Phase I ESA (and, in fact, are specifically excluded). Additional surveys are needed to assess these risks. Vapor intrusion risk, however, is now a consideration with the 2013 version of the ASTM standard.
They have a short shelf-life. A Phase I ESA report that pre-dates the closing by more than 180 days will have to be updated to qualify for protection. And if the analysis and report are more than one year old? Well, it’s back to the drawing board.
Magic language is required. Yes. Really. It is. The Phase I ESA standard and the federal law specifically identify language that “shall” or “must” be included. When contracting for a Phase I ESA, be sure to work with a firm or individual with vast experience in environmental law – one who knows the exact language required by CERCLA and the Phase I ESA standard.
Reliance is limited. If the report is prepared for another user, certain updates and actions need to be taken if you want to rely on the report and qualify for the defenses to CERCLA. In other words, the Phase I ESA should be prepared specifically for the title holder in order to be legally valid.
A draft goes a long way. Always request a draft report. Surprises are only fun on your birthday, and not every environmental condition is really a REC. Because timing of the transaction is often critical, it is also helpful to have a verbal report immediately after the on-site reconnaissance to identify if the consultant believes any RECs are present. This also allows you to begin parallel work on subsurface investigation activities – Phase II ESA – on a faster timeframe if necessary.
Your lender will probably require one. Even though financial lenders have their own separate legal defense under CERCLA, if you need a loan from a bank or the SBA, chances are good a Phase I ESA will be required to protect credit risk and the loan value.
Recommendations for a Phase II ESA are not required. Although an environmental professional should provide an opinion regarding whether additional appropriate investigation is necessary to confirm the presence of a REC if it is not obvious, “recommendations” are not required for an ASTM-compliant Phase I ESA. And if recommendations are desired, you may want to have them addressed in an accompanying side letter and not the report itself.
Beyond these issues, there are also a myriad of considerations for both buyers and sellers in the process, including the hiring and contracting with an environmental professional that prospective buyers should carefully consider, such as insurance, limitations on liability and the like.
While contracting for and conducting a Phase I ESA has a number of subtle nuances with substantial ramifications, working with seasoned advisors through the process will allow your business to achieve its goals for the property transaction.
Andrew Brought is a partner in the Environmental Practice Group at the law firm Spencer Fane Britt & Browne in Kansas City, Mo. Contact him at abrought@spencerfane.com or at 816-292-8886.
