United States: Phase I Environmental Site Assessments: What Are They And Why Do We Do Them?

Last Updated: November 3 2014
Article by James A. Thornhill

OVERVIEW

Whenever commercial or industrial property is sold, leased or financed, the checklist of due diligence items includes a Phase I environmental site assessment (Phase I).  Phase Is are performed both for possible defenses to liability as well as for broader due diligence purposes.  A Phase I includes four basic components:  (1) historical review of the property usage back to the first developed use, (2) agency record review for indications of use or release of possible contaminants, (3) site visit to assess the site for evidence of releases of contaminants, and (4) interviews with individuals with knowledge of the current and past use of the property.  The area of the property is also included in the review although surrounding properties are only assessed from the property line.  If "recognized environmental conditions," or RECs, are identified in the Phase I, then sampling of soil, groundwater, surface water, soil gas or indoor air may be necessary to confirm whether there has been a release of hazardous substances or petroleum products.  Such sampling reports are known as a Phase II environmental site assessment (Phase II).  This article explores what Phase Is are and why we do them.

CERCLA

The fundamental reason for performing a Phase I began in 1980 with the passage of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which imposed liability for hazardous substance release cleanup on owners and operators of real property, among other parties.  As CERCLA is not fault-based, purchasers for the first time faced incurring remediation costs that could be many times the value of the property purchased.  CERCLA included a defense to liability where the contamination was caused by an act or omission of a third party, but such defense was not available to purchasers.  

In 1986, Congress passed the Superfund Amendment and Reauthorization Act (SARA)  amending CERCLA to create the "innocent purchaser" defense for those purchasers who conducted "all appropriate inquiries" into the past use of property prior to acquisition.  If a purchaser performed all appropriate inquiry and did not find a concern for a release of hazardous substances, then such purchaser had a defense to liability if the historic release was found after the purchase was completed.  "All appropriate inquiries," was not defined, however, so the environmental consulting industry responded by developing the Phase I environmental site assessment.  The first Phase I assessments appeared on the scene around 1987 and covered just a few pages.

While the Phase I is rooted in CERCLA and was meant to cover hazardous substances, it evolved very quickly to also consider petroleum products, as the U.S. Environmental Protection Agency passed its underground storage tank regulations in 1988 and many states followed suit over the next decade.  The environmental consultants quickly began noting concerns for potential releases of petroleum in Phase Is.

In 1993, the American Society for Testing and Materials (ASTM) developed its first standard for use in performing Phase Is, titled Standard Practice for Performance of Phase I Environmental Site Assessments, with the number E1527-93.  The scope of Phase Is had evolved over the eight years since the passage of SARA, so the ASTM standard was able to gain some, but not widespread, traction in the real estate industry.  ASTM amended the standard in 1997 and 2000, creating E1527-97 and E1527-00, which experienced broader usage.

BROWNFIELDS ACT

EPA was required to create its own "all appropriate inquiries," or AAI, standard with the enactment of the Small Business Liability Relief and Brownfields Revitalization Act (Brownfields Act) further amending CERCLA in 2002.  In the interim before EPA developed its own standard, AAI could be met by following the 1997 or 2000 ASTM Standard.  On Nov. 1, 2005, EPA published its AAI rule. The most important aspect of the AAI rule was that it specifically provided that a then-new version of the ASTM "Phase I Site Assessment Process Standard" E 1527-05 (2005 ASTM Standard) could be used to meet AAI.  Since the AAI rule went into effect, most Phase Is have followed the 2005 ASTM Standard.

Recently, EPA completed a rulemaking to add an updated version of the standard E 1527-13 (2013 ASTM Standard) as approved for meeting AAI and a subsequent proposed rule to eliminate the use of the 2005 Standard in the future.  The 2013 ASTM Standard requires more extensive agency records review and additional focus on potential sources of vapor intrusion, among other changes.  The agency records review requirement generally means that a proper Phase I will take three to four weeks to complete.  As with the 2005 ASTM Standard, the new standard includes requirements regarding the professionals who may complete the work, required certifications, and limitations on how long Phase I components are viable before closing.

BONA FIDE PROSPECTIVE PURCHASERS (BFPPS)

While the innocent purchaser defense helped protect purchasers from the harshness of CERCLA, if contamination or potential contamination from hazardous substances was found on the property, the purchaser would not have a defense to liability.  The Brownfields Act was a big game change as it created the bona fide prospective purchaser (BFPP) defense. The creation of the BFPP defense allowed contamination or potential contamination from hazardous substances to be identified in a Phase I and the purchaser to still purchase the property and avoid liability as an owner or operator.  It is not as simple, though, as just performing a Phase I.  The purchaser also must meet certain obligations even post-closing to maintain BFPP status.  

A BFPP is defined as "a person (or a tenant of a person)" who acquires ownership of a facility after the release of the hazardous substances and after Jan. 11, 2002, and who meets a number of criteria both before and after the purchase.  Although a purchaser must meet all of the requirements, two stand out:

  • Conduct "all appropriate inquiries" into the previous ownership and uses of the property.
  • Exercise appropriate care with respect to the hazardous substances found – stop continuing release, prevent threatened future release, and prevent exposure (Continuing Obligations).

Many purchasers complete a Phase I, purchase the property, and then forget about the Phase I.  However, if any "recognized environmental conditions," or RECs (the term of art coined by ASTM as issues), are identified, then the purchaser may need to complete a Phase II to further assess the concerns.  Purchasers also have to consider the Continuing Obligations to maintain the defense or run the risk of incurring liability to EPA, the state or third parties for a hazardous substance cleanup.

There are a few cases where the Continuing Obligations have been considered by courts in determining if a purchaser has maintained the BFPP defense post-closing.  In 3000 E. Imperial, LLC v. Robertshaw Controls Co. (C.D. CA 2010),  the court determined that since the purchaser removed the contents of the tanks shortly after learning that they were leaking hazardous substances after closing, that it had exercised appropriate care and was a BFPP.  

In PCS Nitrogen, Inc. v. Ashley II of Charleston, LLC v. (4th Cir. 2013), the Fourth Circuit Court of Appeals affirmed the district court's decision that a purchaser did not qualify as a BFPP.  In Ashley II the court held that a number of the purchaser's post-closing actions did not meet the Continuing Obligations requirement, including removing roofs exposing cracked sumps with hazardous substances, which allowed them to be exposed to rainwater and leakage, and failing to keep gates locked, which allowed dumping to occur. 

Finally, in Votggenhenthaler v. Maryland Square (9th Cir. 2013),  the court found that a purchaser who demolished a building after closing and thereby exposed contaminated soil to the elements, but who took no action to remove the soil or prevent the spread of the contamination thereafter, failed to meet the Continuing Obligations requirement.  The court further found that the purchaser did not show that it met the AAI requirements as it simply provided an affidavit about its due diligence and not a Phase I.

TENANTS AS BFPPS

While the CERCLA defenses to liability are available primarily to purchasers, a tenant can obtain some protection by completing a Phase I and following the BFPP requirements.  The definition of BFPP under CERCLA includes a tenant of the BFPP, so if the landlord satisfied the AAI requirement and has maintained the Continuing Obligations and other compoents, the tenant would have a derived defense.  Also, in the case of Commander Oil v. Barlo Equip. Corp. (2nd Cir. 2010), the court found that the tenant had acquired enough of the proverbial bundle of sticks to constitute a fee simple purchase, such that it should be considered a purchaser.  EPA also issued guidance in 2012 that it would exercise enforcement discretion under CERCLA with respect to a tenant who completes AAI and maintains the Continuing Obligations as a BFPP, as though the tenant had purchased the property.  Such guidance also noted the Commander Oil case as criteria where a tenant may be considered a purchaser.

PHASE I AS A COMPONENT OF DUE DILIGENCE

In addition to the liability protection provided under CERCLA, the Phase I has become a basic due diligence tool in the financing, purchasing and leasing of commercial and industrial property.  As noted earlier, Phase Is also focus on the storage or release of petroleum.  The historical review may pick up concerns for solid waste disposal, and the regulatory search may identify possible enforcement actions as well.    

Phase Is, however, do not necessarily provide everything a lender, purchaser or tenant needs to know regarding the environmental condition of the property.  Sampling for asbestos, lead-based paint and PCBs in building materials is not a standard component of Phase Is but rather an added service that may be necessary for the parties to understand the costs that may be incurred when renovating a building.  Phase Is also do not assess the possibility of wetlands, endangered species or historic resources that may be encountered in land development.  These are specialized services that may be needed, depending on the property and its intended use.  Additionally, a Phase I does not assess compliance with environmental, health and safety laws or the required permitting that may apply to industrial facilities, so a separate environmental, health and safety audit will need to be considered.

CONCLUSIONS

Phase I environmental site assessments are used not only for liability defense purposes but also as a broader due diligence tool.  Purchasers, proposed tenants and lenders of commercial and industrial property should consider completing a Phase I meeting the ASTM E 1527-13 standard and allow three to four weeks to properly complete the components prior to the purchase.  The ASTM standard includes requirements regarding the professionals who may complete the work, required certifications, and limitations on how long Phase I components are viable before closing.  Purchasers and tenants also must consider their Continuing Obligations post-closing to maintain the BFPP defense.

Originally published in ACC.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.