When purchasing commercial property, a Phase I Environmental Site Assessment (Phase I or ESA) is conducted as a matter of course. The assessment is an important part of environmental diligence for any purchase of commercial property, as it is necessary to establish innocent landowner defenses under the Comprehensive Environmental Response, Compensation & Liability Act (CERCLA) 42 U.S.C. §§ 9601 et seq. Unfortunately, the ESA is often treated as an item to be completed on a checklist, with only minimal or cursory review by the prospective purchaser or attorney.
The Phase I or ESA is a real property investigation, usually conducted by an engineer, which culminates in a report identifying potential or existing environmental contamination issues and liabilities. The ESA addresses the underlying land, as well as physical structures of the property. A “clean” ESA will state that there are no Recognized Environmental Conditions (RECs), Controlled RECs (CRECs), or Historical RECs. RECs are defined as the presence or likely presence of any hazardous substances or petroleum products in, on or at a property, due to a prior release to the environment or to a material threat of a future release to the environment.
However, merely having a report that identifies the absence of RECs is not enough for the ESA to satisfy the “all appropriate inquiries” element of the CERCLA innocent landowner defenses.
CERCLA imposes joint, several and strict liability on owners of contaminated property, unless the owner satisfies the elements of innocent landowner defenses, including making “all appropriate inquiries” into the previous ownership and uses of the property. Absent the innocent landowner defenses, an owner can be liable under CERCLA for contamination they did not cause, such as pre-existing contamination or migration of contaminated groundwater to their property. This includes liability for remedial action or removal costs, as well as any damages to natural resources such as wildlife, air, water, groundwater and other resources owned or held in trust by the United States or any local government. Because environmental contamination, particularly groundwater contamination, can be extremely expensive and difficult to remove or remediate, the potential liability is enormous.
To meet requirements, the ESA must be conducted or supervised by a qualified environmental professional, defined as someone with:
The elements of the ESA include:
The investigation must include “user” inquiries. The purchaser of the property must take into account its own knowledge and conduct its own investigation into site conditions. The user inquiries required are:
The environmental professional performing the ESA will make the user inquiries on what is called the “user questionnaire.”
The most common mistake I see purchasers make in performing “all appropriate inquiries” is that the purchaser will not fill out the user questionnaire provided by the consultant performing the ESA. The user questionnaire is essential to the innocent landowner defense and takes just a few minutes to fill out, yet so many purchasers simply ignore it. This destroys the innocent landowner defenses; an ESA concluding there are no RECs does not relieve the purchaser of the burden of documenting that the purchaser did not independently know of any contamination prior to purchasing the property.
The second most common mistake I see purchasers make in performing “all appropriate inquiries” is allowing the ESA to become “stale.” The ESA must be conducted or updated within one year of acquiring the property, and the following aspects of the report must be updated if more than 180 days old:
There are additional requirements for the innocent landowner defenses that are beyond the scope of this article. As part of its due diligence for the purchase of commercial real estate, the attorney should ensure that its purchaser client satisfies all elements of the CERCLA innocent landowner defenses, including a careful analysis of the Phase I ESA.
Elidia C. Dostal is a partner and environmental, land use and business attorney at Vanst Law.