Environmental Concerns for Real Estate Purchases and Sales - Part 4

D.                Phase II Investigations

A Phase II is used when the Phase I identifies one or more “Recognized Environmental Conditions,” (“REC’s”) which is a defined term in the regulations and in ASTM E 1527-13. If a Phase II is determined to be necessary, testing of soil, air and/or groundwater, as recommended by the environmental professional, is undertaken.

Under the Brownfields Amendments            the Bona Fide Prospective Purchaser defense may make purchase of a contaminated property feasible, but Phase II testing may be required to complete All Appropriate Inquiries,         because it’s not possible to fulfill all of those obligations described in Section III.B in order to protect your BFPP status, if you don’t know what the contamination is or how extensive it is. For example, how can you know that you’ve taken all appropriate steps to contain an ongoing release, if you don’t know if there is an ongoing release?

Whenever a Phase I identifies RECs, we almost always recommend a Phase II. But unlike a Phase I, there are no regulations that define how a Phase II must be conducted. Therefore, that becomes a negotiation with your environmental consultant designed to get sufficient information without testing every square inch of the property and running up a huge bill.

There are other reasons to do a Phase II. Prospective Purchaser Agreements usually require that the contamination be documented before the agency will enter into such an agreement. A similar situation exists regarding No Further Action letters, and Enforceable Written Assurances. Those types of agreements and letters can be very valuable in protecting a purchaser, and later purchasers, against environmental liability in some instances. But to get one, you have to submit a Phase II to the regulatory agency. There also may be contractual obligations to do a Phase II if you’re selling the property.

E.                 Non-Scope Considerations (aka Business Environmental Risks)

Standard Phase I Environmental Site Assessments do not include investigation of those items classified in ASTM E 1527-13 as Non-Scope Considerations (aka Business Environmental Risks or “BERs”). Among the BERs that the prospective purchaser should consider including in the scope of work for the Phase I are the following:

•           Asbestos-containing materials

•           Radon

•           Lead-based paint

•           Lead in drinking water

•           Wetlands

•           Regulatory compliance

•           Cultural and historic resources

•           Industrial hygiene

•           Health and safety

•           Ecological resources

•           Endangered species

•           Indoor air quality

•           High-voltage power lines (recently deleted from the ASTM Standards)

•           Biological agents

•           Mold

Adding an investigation into BERs to the standard Phase I ESA is not an expensive proposition and may help the prospective purchaser avoid many costly problems that would not otherwise be identified. Some of the BER issues will be discussed below.

 IV.  REUSE of ENVIRONMENTALLY IMPAIRED PROPERTY: LIABILITY ISSUES and IMPACT REDUCTION

 Brownfield development can be beneficial to investors and the community. Brownfields grants continue to serve as the foundation of EPA's Brownfields Program. These grants support revitalization efforts by funding environmental assessment, cleanup, and job training activities. Brownfields Assessment Grants provide funding for Brownfield inventories, planning, environmental assessments, and community outreach. Brownfields Revolving Loan Fund Grants provide funding to capitalize loans that are used to clean up Brownfields. Brownfields Job Training Grants provide environmental training for residents of Brownfields communities. Brownfields Cleanup Grants provide direct funding for cleanup activities at certain properties with planned greenspace, recreational, or other nonprofit uses.

Much of the cleanup of Brownfield sites is accomplished primarily at the state level.  EPA says:

State response programs play a significant role in assessing and clean­ing up brownfield sites. As Congress recognized in the legislative history of the Brownfield Amendments,

“[t]he vast majority of contaminated sites across the Nation will not be cleaned up by the Superfund pro­gram. Instead, most sites will be cleaned up under State authority.”

Voluntary cleanup programs (VCPs) are typically the state authority used to address brownfield and other lower-risk sites.[1]

 There are two primary reasons owners of Brownfield sites or prospective purchasers of Brownfield sites will agree to enter the property into a VCP.  One is because the state regulatory agency has the ability to approve remediation of the property to standards less than would otherwise be required by environmental laws and regulations, thereby substantially reducing the cost of remediation.  The VCP statute usually contains provisions to the effect that remediation alternatives shall be based on the actual risk to human health and the environment currently posed by contaminants on the real property, as opposed to meeting predetermined cleanup criteria.  Determining remediation requirements based on actual risk is a more flexible process than meeting fixed maximum levels of contaminants in soil or groundwater mandated by typical environmental statutes and regulations and can result in significant cost savings to the property owner. It is also often possible for the owner of a Brownfield site to obtain a determination from the state regulatory agency that it has no responsibility for cleanup or to limit the amount of cleanup for which the owner is responsible.

Second, the owner of the Brownfield site can usually obtain a No Further Action Letter (“NFA”) or similar determination from the state regulatory agency if it meets the requirements of the VCP.  Each state’s requirements are different, so it is important to consult with an expert in dealing with the state Brownfield regulations.

It is important to note that the Brownfields Amendments do not cover petroleum contamination. Therefore, the CERCLA safe harbor defenses are not applicable to properties contaminated with petroleum products.

 V.  HOW HAZARDOUS SUBSTANCES IMPACT LAND DEVELOPMENT

 As can be seen from the discussion above, the existence or potential existence of hazardous substances at a site can have serious consequences to the land development process.  Even if a property owner has completed “all appropriate inquiries” prior to acquiring an interest in real property, thereby establishing a BFPP defense under CERCLA, s/he still must guard against defeating the CERCLA safe-harbor by conducting activities after acquisition that will cause liability in spite of the environmental due diligence completed prior to acquisition.

While the "bona fide prospective purchaser," "innocent landowner," and "contiguous property owner" provisions limit liability, there are still measures the property owner has to take, should hazardous substances ever be identified at the property.  These measures would have to be determined based on the characteristics of the release, but can be described generally, as follows:  A "bona fide prospective purchaser" and "contiguous property owner" must (i) provide all required notices with regard to discovery or release of hazardous substances, (ii) take reasonable steps to stop any continuing release, prevent future releases and to prevent or limit exposure to hazardous substances on or from its property, (iii) cooperate with any cleanup or restoration activities and certain requests for information, and (iv) use the land in accordance with any land use restrictions or other institutional controls used in connection with the response to the contamination.  The United States retains a lien against some properties for its un-recovered response costs in cases where the property's fair market value has increased above that which existed before a cleanup response action was taken. 

"Innocent landowners" must (i) provide full cooperation with clean up efforts, (ii) comply with and not interfere with land use or other controls used in connection with the contamination, (iii) exercise due care with regard to the contamination, and (iv) take precautions against foreseeable acts of third parties and the foreseeable consequences of the acts of third parties. 

If contamination is known to exist or is suspected at a site, the contracting process must be structured so as to clearly delineate who is responsible for the contamination and any necessary cleanup. This involves potentially complicated access agreements, indemnification provisions, and sometimes requires negotiations on caps to liability for the seller and/or buyer. Environmental insurance must be considered and negotiated.

The existence of any contamination must be addressed in a manner that will shield the developer and property owner from liability under the vast array of environmental laws that now confront them. Does the developer need to dispose of contaminated soil? The RCRA regulations must be followed. Will the developer be dewatering a site that has contaminated groundwater? How will s/he deal with that contaminated water? S/he can’t run it onto a neighboring property. Is contaminated groundwater causing a vapor intrusion problem? The structures must be built to deal with that eventuality. Is there asbestos-containing materials in structures that must be demolished? NESHAP regulations must be complied with.

 VI.             HOW ENDANGERED SPECIES FIT INTO LAND USE

  The Endangered Species Act (“ESA”)[2] provides a program for the conservation of threatened and endangered plants and animals and the habitats in which they are found. The lead federal agencies for implementing ESA are the U.S. Fish and Wildlife Service (“FWS”) and the U.S. National Oceanic and Atmospheric Administration (“NOAA”) Fisheries Service.  The FWS maintains a worldwide list of endangered species. Species include birds, insects, fish, reptiles, mammals, crustaceans, flowers, grasses, and trees. In the United States, 735 species of plants and 496 species of animals are listed as threatened or endangered.  Arizona has 56 threatened and endangered plant and animal species.

The ESA requires federal agencies, in consultation with the FWS and/or the NOAA Fisheries Service, to ensure that actions they authorize, fund, or carry out are not likely to jeopardize the continued existence of any listed species or result in the destruction or adverse modification of designated critical habitat of such species.  More importantly to private land owners, the law also prohibits any action that causes a "taking" of any listed species, by anyone. Likewise, import, export, interstate, and foreign commerce of listed species are all generally prohibited.  

The “taking” issue is addressed in Section 10 of the ESA. It is designed to regulate a wide range of activities affecting plants and animals designated as endangered or threatened, and the habitats upon which they depend. With some exceptions, the ESA prohibits activities affecting these protected species and their habitats unless authorized by a permit from the FWS or the National Marine Fisheries Service (“NMFS”). Permitted activities are designed to be consistent with the conservation of the species.

The ESA makes it unlawful to “take” (a term which includes harm, harass, pursue, hunt, shoot, wound, kill, trap, capture, or collect any wildlife within the United States), remove and reduce to possession any plant from areas under Federal jurisdiction; maliciously damage or destroy an endangered plant on areas under Federal jurisdiction; and remove, cut, dig up, or damage or destroy any endangered plant in knowing violation of any State law or regulation or in the course of a violation of a State criminal trespass law. These prohibitions apply to live or dead animals or plants, their progeny (seeds in the case of plants), and parts or products derived from them.

Some activities that “take” an endangered or threatened species may be authorized by a permit. The activities authorized by permits differ depending on whether the species is listed as endangered or threatened. An endangered species is in danger of extinction throughout all or a significant portion of its range. A threatened species is likely to become endangered in the foreseeable future. For endangered species, permits may be issued for scientific research, enhancement of propagation or survival, and taking that is incidental to an otherwise lawful activity. For threatened species, permits also may be issued for zoological, horticultural, or botanical exhibition; educational use; and special purposes consistent with the ESA.

Permits issued by the Endangered Species program are of three basic types: incidental take permits, enhancement of survival permits, and recovery and interstate commerce permits. Incidental take permits are required when non-Federal activities will result in the take of threatened or endangered species. A habitat conservation plan or “HCP” must accompany an application for an incidental take permit. The HCP associated with the permit is designed to ensure that the effects of the authorized incidental take are adequately minimized and mitigated.

Enhancement of survival permits are issued to non-Federal landowners participating in Safe Harbor Agreements or Candidate Conservation Agreements with Assurances. These agreements encourage landowners to take actions to benefit species while also providing assurances that they will not be subject to additional regulatory restrictions as a result of their conservation actions.

Recovery and interstate commerce permits are issued to allow for take as part of activities intended to foster the recovery of listed species. A typical use of a recovery permit is to allow for scientific research on a listed species in order to better understand the species’ long-term survival needs. Interstate commerce permits also allow transport and sale of listed species across State lines (e.g., for purposes such as a breeding program).

Obtaining any of the permits is an expensive and time-consuming process. However, penalties for violation of the ESA can be as much as $25,000 per violation. Therefore, it is essential that appropriate environmental due diligence be completed prior to any activities that could result in a “take” of a threatened or endangered species to determine if a threatened or endangered species, or habitat for such a species, is present on the property.[3]

Unfortunately, the ESA is not the only legislation with which property owners need be concerned in regards to flora and fauna located on their property. Other federal legislation that may be relevant to a specific plant or animal includes the Bald and Golden Eagle Protection Act (16 U.S.C. 668-668C)[4], the Migratory Bird Treaty Act (16 U.S.C. 703-712)[5], and the Marine Mammal Protection Act (16 U.S.C. 1361-1407),[6] among others.

In Arizona, A.R.S. § 3-901, et seq., is the Arizona Native Plants Act. That law requires notification to a state agency before certain desert plants may be damaged or destroyed. Violation of the act can result in a $5,000 fine for each violation.

It is important to understand that investigation of endangered species on a property is not part of a standard Phase I Environmental Site Assessment. Endangered species investigation is considered a “non-scope consideration,” sometimes referred to as a “Business Environmental Risk.” An endangered species investigation will only be conducted by an environmental consultant preparing a Phase I ESA if requested by the user of the Phase I ESA and at additional cost. Even so, it is usually a good idea to purchase the non-scope considerations investigation.