Environmental Concerns for Real Estate Purchases and Sales - Part 3
I Environmental Site Assessment
first step in establish the BFPP defense or the innocent owner defense is the
purchaser conducting “All Appropriate Inquiries” (“AAI”) PRIOR TO CLOSING ON THE PROPERTY. Failure to conduct AAI prior to
taking title cannot be repaired. If you do not complete AAI prior to taking
title, you lose the defense.
recall that to establish the Innocent Owner Defense, you also need to establish
that you conducted AAI prior to closing, so it is a critical step, regardless
of whether the purchaser is trying to establish the Innocent Owner Defense of
the BFPP defense.
Congress adopted CERCLA in 1980, it required EPA to adopt regulations
establishing how a prospective purchaser can complete All Appropriate Inquiries
in compliance with the statute. EPA
finally got around to doing that on November 1, 2005, and those regulations
became effective on November 1, 2006.
They were updated on October 6, 2014.
first and most important step in completing All Appropriate Inquires is to get
a Phase I Environmental Site Assessment. Not just anyone can perform the Phase
I investigation for you. The Phase I investigation must be completed by an
Environmental Professional, as that term is defined in the federal regulations.
EPA adopted the All Appropriate Inquiries regulations, it specifically stated
that a Phase I completed pursuant to ASTM E 1527-05 is presumed to comply with
the federal regulations. ASTM stands for American Society for Testing and
Materials and is a group of professionals that works to define appropriate
standards for conducting various types of technical investigations. They have
publishing their recommendations for completing AAI long before EPA actually
adopted the regulations. When EPA updated the AAI regulations, they also
updated the appropriate ASTM standard as being ASTM E-1527-13.
if you complete your Phase I investigation pursuant to the ASTM standards, it’s
presumed that you have done your investigation properly. However, that is a
rebuttable presumption. You can’t ignore an obvious source of pollution just
because it doesn’t fall within the ASTM standard investigation.
so, it’s the correct place to begin your environmental investigation. You hire
an Environmental Professional and you contract for a Phase I that complies with
ASTM E 1527-13. You can purchase a copy through the ASTM website.
With Environmental Consultants For Phase I Investigations
There are a few issues to be aware of when negotiating a
contract for the completion of a Phase I Site Assessment.
Phoenix, Arizona, where I practice, a Phase I can run from $1,200 to $12,000,
and it’s not necessarily a matter of getting what you pay for. Some small firms
are just as competent as the big firms and charge a lot less.
if you are looking at a site you know is contaminated, you may want to pay for
the bigger firm because if you need to go to a Phase II investigation the
smaller firm may not be able to provide the services you need and it will cost
you money to change firms part way through the investigation process.
sure to review the limitations of liability language in your contract with the
environmental consultant. Most environmental consultants attempt to limit their
liability. The limitation can be as extreme as to limit the consultant’s
liability to the price you pay for the Phase I. Some use a fixed amount, such
as $25,000. Either way, that limitation makes the Phase I virtually useless,
because if the consultant makes mistakes, your liability is potentially a lot
more than $25,000. Also, be aware that the environmental consultants will try
to impose an artificial statute of limitations on you. While the statute of
limitations for a contract in Arizona is 6 years, most environmental
consultants’ contracts will require you to file suit within one year.
Considering that many environmental claims do not arise until years after the
environmental investigation is complete, a one-year period after receipt of the
Phase I report to file a complaint is not very useful.
make sure the environmental consultant has sufficient professional liability
insurance to cover your risk. Believe it or not, some environmental companies
have begun setting up shell companies in an effort to protect themselves from
should be able to delete those provisions from their standard form of contract
or negotiate better provisions. If not, find another environmental consultant.
Should Be Included In The Phase I
Phase I Environmental Site Assessment that complies with the AAI rules and ASTM
E 1527-13 is made up of several elements. Understand that a Phase I
investigation does not include any testing or invasive practices. No holes are
punched in the ground and no samples are collected. It is a process of walking
the property, talking to people and looking at records to determine if there is
any reason to do more than that.
are an important part of the investigation. The Environmental Professional must
interview each current owner of the property. If there is more than one parcel,
the owner of each parcel has to be interviewed. Occupants and tenants need to
be interviewed by the Environmental Professional. If there are multiple tenants, the major
tenants, and any likely to use, store, or handle hazardous materials must be
interviewed. If the environmental professional feels s/he didn’t get enough
information from those people to complete All Appropriate Inquiries, she can
interview current and past managers, and current and former employees.
Environmental Consultant needs to learn the history of the property. Therefore,
she must review historical sources back to 1940, or the first use of the
property for residential, agricultural, commercial, industrial, or government
purposes, whichever is earlier. The environmental professional has some
discretion on how far back s/he needs to go to meet the objectives of AAI, so
long as it is back to at least 1940.
regulations make some allowance for the availability of records, but the
Environmental Professional must review federal, state, tribal and local
records. Often, a research service such as Environmental Data Resources is used
by the Environmental Professional and the regulations allow for that. The
regulations specify the search radius from the property being investigated for
the different types of records being reviewed.
addition to interviews and record searches, the Environmental Professional has
to complete a site reconnaissance, where s/he actually goes onto the property
and looks for potential environmental problems.
• Walk the site
• Look for solid waste
• Look for staining
• Look for distressed vegetation
• Look for sources of contamination –
ASTs, USTs, PCBs (generators, hydraulic lifts)
• Views adjacent properties from the
right-of-way or other best vantage point
• Define current use of the property
and the adjacent properties in the report.
limitations on the consultant’s ability to view the property, such as snow
cover, fog, heavy weeds, etc., has to be documented in the Phase I report. A
site reconnaissance when the consultant can’t see the property isn’t terribly
big change in the 2013 standards is that the consultant must investigate the
potential for vapor intrusion. That was optional in 2005, but is now a
Environmental Professional also has to investigate environmental liens and use
restrictions. There are multiple ways to do this, but we prefer that the
Environmental Professional review a current title report, as that is the only
sure way to determine what restrictions are recorded against the property. That
takes more work, so some consultants will try to short cut the process by relying
on the local regulatory agency’s website, for example, or on a report prepared
by the firm that does the document investigation. That’s a dangerous way to
proceed, because the website is not always up to date and the information firms
to tend to rely on the websites.
Environmental Professional also needs to interview the prospective purchaser of
the property (as opposed to the owner of the property, which s/he should also
interview). The point of that interview is simply to make sure the environmental
consultant knows the things the prospective purchaser knows before completing
the investigation. The best way to do that is through a User Questionnaire so
the questions and answers are in writing.
strongly recommend to our clients that they have an environmental attorney
knowledgeable about the All Appropriate Inquiries requirements review the Phase
I report. That may sound self-serving, but we’ve found that more than 75% of
all Phase I reports we review do NOT meet the basic AAI requirements, and that’s
based on a pretty large sample size. I’ve reviewed approximately 1,000 Phase I
reports over the past 10 years and at least 75% of them have had fatal flaws.
Understand that EPA uses a “bright line” standard. Either you have completed
All Appropriate Inquiries or you haven’t. A mistake in one area defeats the
entire investigation, even if properly completing that portion of the
investigation would not have disclosed the problem.
Phase I Errors
the most common error has to do with the Viability Date of the Phase I report.
A Phase I report can be relied upon for up to one year prior to closing, if the interviews, governmental database
review, environmental lien
investigation, and site reconnaissance are less than 180 days old at closing.
days, by the way, means 180 days, not 6 months. We often see Phase I reports
using 6 months as the standard, which means you can miss properly completing
critical investigations by as much as 5 days.
problem we often run into is that a properly performed Phase I has not been
timely updated. Generally, a Phase I may only be updated once. After one year
from the date of the original Phase I investigation, an entirely new Phase I
ESA must be conducted to complete All Appropriate Inquiries. An Update can only
make a Phase I viable for one year. If you needed to extend your closing beyond
the one-year anniversary of the original Phase I, you would need an entirely
new Phase I to comply with the regulations, regardless of how recent your
Update was conducted.
Phase I errors we regularly see include:
• Improper certification for use, i.e.
the Purchaser is not authorized to use the Phase I – this often happens if
seller is providing the report. It’s absolutely vital that the Phase I report
authorize the actual purchaser to use and rely on the report. A lot of clients
miss this because the entity that contracts with the environmental firm often
is not the entity that is going to take title to the property. Sometimes, the
contract is entered into by one entity as the purchaser, but the right to
purchase is assigned to another entity prior to closing. A Phase I that
authorizes an entity to use and rely on it does not protect another related
entity unless the report clearly states that the related entity can also use
and rely on the report. Make sure the Phase I report and any other
environmental reports are certified to the name of the entity that is actually
taking title to the property. Note that if you discover that the Phase I is not
certified to the actual purchaser after the Phase I is issued, but you discover
it before closing, you can still have the environmental consultant send a
letter authorizing reliance by the correct party, so long as it is done before
• Failure to interview the owner or a
critical tenant. This often happens when a broker tells the environmental
consultant to not talk to the tenants for one reason or another.
• Failure to review prior reports. If
there are previous environmental reports available, you need to make them
available to your consultant and s/he needs to review and comment on them in
her report. If you are the lender, you should have gotten at least a Phase I
report before you made the loan. Make sure the Environmental Professional sees
that report before s/he finishes the Phase I for the foreclosure.
• Failure to investigate Orphan sites.
When an environmental consultant hires one of the research firms to do the
governmental database investigation for them, there will always be included in
the research firm’s report a list of what they call orphan or unmapped sites. Those
are sites listed in government records, but which do not have sufficient
address information for the search firm to know where they are located. The
research firm’s report won’t talk about those sites, so your environmental
consultant needs to make sure none of those sites are located within the
required search radius of the property and note that in the Phase I report. Of
course, if any of the sites are within the required search radius, that
property needs to be investigated like any other site.
• Failure to identify wells on the
property. Dry, irrigation, and production wells all need to be identified by
type and location, and the environmental consultant needs to comment on the
potential for groundwater contamination as a result of the presence of the
• Failure to investigate landfilling,
especially on former farms and ranches, is a problem. It is a fact that farmers
do not spend money taking their garbage to a dump. They invariably dig a borrow
pit in the “back 40” and put all of their used tractor oil, expired
insecticides, dead animals and household garbage in that pit. The environmental
consultant needs to figure out where that pit is and whether it constitutes an
environmental risk for the property.
• Failure to inspect the interior of
buildings is a problem. The environmental consultant is required to look at the
interior of a building as part of the Phase I investigation. Phase I reports
often that say that the consultant didn’t go inside a building because it was
locked during the site reconnaissance.
• Failure to identify the source of
soil piles located on the property is a common mistake. I had one undeveloped
property a few years ago that had hundreds of soil piles on it because it was
being used by swimming pool contractors to dispose of the soil dug out during
the construction of swimming pools. If there are soil piles, and the
environmental consultant can’t determine with any degree of precision where the
soil came from, that needs to be identified as a Recognized Environmental
Condition in the Phase I report.
• Failure to interview a local agency
likely to have knowledge of environmental issues at the property, or to
properly conduct the interview is another problem we see regularly. This is
becoming a big issue because many agencies are beginning to charge for the kind
of information the consultants are looking for. The consultant needs to
understand that there are several different agencies that can be contacted,
including state agencies. Also, they have to actually talk to someone. They
can’t use e-mail or a fax or the agencies website for the interview.
• Failure to investigate or improper
investigation of environmental liens and use restrictions. I mentioned before
that we prefer that a title report be the source of this investigation. Agency
websites and third-party research firms are notoriously unreliable for
obtaining this information, and often times the consultant won’t look for it because
the AAI rules actually make it the responsibility of the user to get this
information to the consultant. It’s not unusual to get a Phase I report that
says, “We didn’t investigate environmental liens and use restrictions because
the user didn’t provide us with any information.” That is not acceptable. I
actually prefer to have a lawyer review the title report and give a summary to
the environmental consultant. Lawyers tend to be much better at reviewing title
reports than environmental consultants.
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