By Charlotte M. Ebbert, P.G.
McCallum Testing Laboratories | A small, woman-owned company and proud sponsor of CREW
A Phase I Environmental Site Assessment (ESA) is the gold standard for evaluating the environmental condition of property prior to a commercial real estate transaction. The most recent version published by the American Standards for Testing and Materials is designation: E1527-13, published in November of 2013. Most in the real estate industry know that a Phase I ESA is an environmental “audit” and may be aware that information is collected from multiple sources, including but not limited to an inspection of the property, a search of federal, state and local government environmental records, interviews with property owners and other key people associated with the property, historical research, and preparation of a report. The reports can be several inches thick, with pages and pages of supporting documentation, and few people besides lawyers ever read them cover to cover. It takes a lot of time and money to produce these reports. Is all this inquiry necessary? Maybe for a site that “seems” clean, would just a government database review or a visual inspection be enough?
The answer is that it depends upon the purpose of the Phase I ESA. Back in the day, some sporadic environmental inquiry may have been performed by a few tree huggers or precocious risk managers but what really changed the game was the 1980 Comprehensive Emergency Response Compensation and Liability Act (CERCLA), and the Superfund Amendments and Reauthorization Act (SARA) in 1986, which together establish the basis for the EPA Superfund program. Among other things, its purpose was to finance clean-up of heavily contaminated sites like the infamous “Love Canal” disaster, which is why they call it “super fund.” The law makers wanted to cast a wide net to collect money for remediation, so the law was written to establishing joint and several liability for priority contaminated sites. Landowners could be held responsible even if they did not participate in contaminating a property. However, if a real estate purchaser can prove she has performed “All Appropriate Inquiry” (40 CFR Part 312) that may be sufficient to qualify for the “innocent landowner defense” and protect against liability. The scope of the Phase I ESA was designed to be the affirmative answer for the question, did you perform “All Appropriate Inquiry”?
There are three types of landowner liability protections described in the Phase I standard. There is the previously mentioned Innocent Landowner defense, where the defendant says, “I performed all appropriate inquiry and was not aware of this problem.” Another is the Contiguous Property Owner defense where the person owns property that was contaminated by substances from a property not owned by that person. This still requires that all appropriate inquiry be performed and the inquiry must not result in knowledge or having reason to know of the contamination. The third defense is the Bona Fide Prospective Purchaser liability protection, established by the 2002 Brownfields law. In this defense, all appropriate inquiry was performed and contamination was found. However, if the purchasing party did not cause the contamination, complies with required use restrictions and engineering controls, and takes reasonable steps, etc., she may qualify for liability protection.
Most other reasons for performing a Phase I ESA, other than those above, usually fall into the category of trying to mitigate business environmental risk. However, business environmental risk may include considerations which are outside of the scope of “All Appropriate Inquiry” such as radon, mold, asbestos-containing building materials or lead based paint, so instead of limiting the inquiry, performing a Phase I to mitigate business environmental risk may actually expand the inquiry as well as the expense. However, having recently gone through a commercial real estate purchase myself when I bought the company which employed me for more than 20 years, I would encourage you to inquire into any business environmental concerns that you may have. The potential cost of not doing the inquiry is generally far greater.