There is general awareness of the need to perform environmental due diligence on virtually any transaction that involves commercial/industrial property. However, even with such general awareness missteps or lack of attention to detail during the process can risk exposing a purchaser or new tenant to significant liability. Having been involved in counseling on environmental due diligence for hundreds of properties, here are four of the most common issues/questions that arise during the environmental due diligence process.
As Buyer, can I rely on Seller’s prior Phase I reports and simply avoid spending the money on a new Phase I assessment?
It depends on the age of Seller’s Phase I report and whether the prospective owner/tenant can rely on the conclusions of Seller’s environmental professional contained in the report. Under U.S. EPA’s “All Appropriate Inquiries” rule (AAI) and under the new Phase I ASTM 1527-21 standard, certain portions of a Phase I must be updated after six months. If the report is older than one year, then a new Phase I will be required under ASTM 1527-21 and AAI. Therefore, if a Seller’s prior Phase I report(s) are older than one year then is strongly recommended that a prospective buyer and/or tenant secure a new Phase I environmental assessment.
If Seller’s report is more than 180 days old but not yet one year old, then a prospective buyer/tenant should work with the Seller to allow for a Phase I update of those sections that must be updated which include:
- required interviews must be updated;
- searches for recorded environmental cleanup liens;
- review of government records;
- site reconnaissance of the subject property; and
- the Environmental Professional [EP] Declaration.
Further, the new ASTM E1527-21 standard requires that the Phase I ESA identify the dates on which each of these components were completed and further provides that the 180-day or one year time period commences on the date when the first of these components were completed.
Finally, if Seller’s report is less than 180 days old or has been updated and is less than one year old, then Buyer must be able to rely on the Phase I report. The Phase I report will identify the “user” or “client” that may rely upon the findings and conclusions of the report. A prospective purchaser and/or tenant must be issued a so-called “reliance letter” from the Seller’s environmental consultant that allows them to rely on the report.
Is a Phase I assessment recommended for a prospective tenant of a commercial and/or industrial building?
Yes. Often times prospective tenants are under the impression they do not need to perform a Phase I assessment if they are not taking ownership of the property. However, a tenant can still be considered an “operator” and be liable for pre-existing contamination on a property especially if the tenant will be using similar chemicals as the pre-existing contamination. EPA’s AAI rule allows tenants to qualify for an environmental liability defense under CERCLA (called the “bona fide purchaser defense”) if the prospective tenant performs a Phase I prior to signing the lease.
Beyond establishing a liability defense, performance of a Phase I assessment as a prospective tenant is also advisable because it establishes a baseline condition of the property prior to commencement of the lease. Establishing a baseline condition can help prevent major disputes with the landlord as to whether tenant was responsible for contamination that may be discovered during the term of the lease. Furthermore, the baseline condition can also identify potential human health exposure issues such as vapor intrusion (i.e., soil/groundwater contamination volatilizing and creating unsafe indoor air conditions).
Does the Phase I constitute a comprehensive environmental due diligence assessment?
No. A Phase I is an examination of records, performance of interviews, review of federal/state databases and a site walkover which are designed to identify whether there has been an actual or potential release of hazardous substances on a property. The list below is not an exhaustive list of all non-scope items, but the list contains those environmental issue that arise most frequently and are not within the scope of a Phase I environmental assessment:
- Environmental Compliance- If the buyer is purchasing an on-going business operation it is important to note that a Phase I is not a compliance audit. A Phase I will not evaluate whether the Seller’s business has all the required permits and has been filing mandatory reports with state and/or federal regulators. It will also not evaluate OSHA compliance. A separate environmental audit typically should be performed when the buyer is purchasing an ongoing industrial or manufacturing operation.
- Asbestos– A Phase I is not an asbestos survey of the building. If any demolition and/or renovations are planed post-acquisition, then buyer/tenant should consider an asbestos survey to identify all asbestos-containing material (ACM) in a building.
- Wetlands- A Phase I will not identify the presence of any wetlands on a property. If the property contains open areas and the buyer/tenant is considering expansion and/or new construction, then a wetlands survey would likely be appropriate.
If issues are identified in a Phase I report, what should the scope of the Phase II sampling be?
If a Phase I report identifies an actual or potential release of hazardous substances at the property or an adjacent property (i.e., so called “recognized environmental conditions” or RECs), then typically the next step in the due diligence process is to perform sampling of the property to evaluate the nature and extent of any potential contamination. The cost of a Phase II can range quite dramatically depending upon the number and type of sampling to be performed. If a prospective purchaser and/or tenant is considering a Phase II, it will be important to work with your environmental specialists and attorney closely to adequately design the scope of testing to be performed.
In discussing the scope of the Phase II with your consultant and/or attorney, you should first identify the goal of the Phase II sampling which may typically include:
- Testing to simply determine if there is a potential issue on the property;
- Testing to qualify for the bona fide purchase defense under AAI;
- Testing to perform a regulatory cleanup of the property; and
- Testing to evaluate any potential for off-property issues that could raise regulatory and/or liability issues.
Identifying the goal of the Phase II assessment upfront is key in order to ensure an adequate scope of work to achieve your goal as well as the cost-effectiveness of the proposed sampling.