ENVIRONMENTAL SITE ASSESSMENTS, A PRIMER
by Joseph M. Cochran*
Several years ago, I had a closing that caused me to ponder the question: what constitutes a valid Phase I environmental assessment? I cannot remember the specific fact scenario that caused me to consider the question, but until then I had assumed that the parameters of environmental assessments were buried in the maze of Environmental Protection Agency (EPA) regulations. I was somewhat surprised to learn that there are no EPA standards for such assessments. The purpose of this article is to provide background information about environmental site assessments for the general real estate practitioner.
Environmental site assessments of commercial properties have been conducted for decades. However, environmental site assessment uniform standards were not established until the early 1990s. In 1980, the federal government enacted the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The Superfund Amendments and Reauthorization Act (SARA) was enacted in 1986. These laws identify parties responsible for cleaning up contaminated property by imposing strict liability on any person or entity that has any past or present ties to a contaminated property for up to the entire cost of clean up. The EPA may require clean up, or may perform the clean up and require reimbursement from responsible parties. These laws also establish three basic defenses to liability. They are: (i) act of God, (ii) act of war, and (iii) act or omission of a third party against which the potentially responsible party took all appropriate precautions, also known as the "innocent landowner defense." It is the innocent landowner defense that gave rise to environmental site assessment standardization.
During the decade following CERCLA's enactment, environmental site assessments were conducted by parties acquiring commercial properties in an effort to satisfy the innocent party defense since the assessments were wide ranging in their scope and comprehensiveness, and there were no widely recognized standards. In 1990, the American Society for Testing and Materials (ASTM) formed a committee of representatives from the environmental industry, the legal profession, the real estate and banking industry, and other groups to standardize the environmental site assessment process. ASTM first published the standards for environmental site assessments in March 1993. Since then, the standards have been modified on several occasions with the most recent modification being made in 2000.
ASTM established standards for three levels of environmental site assessments:
Phase I Environmental Site Assessments, Phase II Environmental Site Assessments,
and Phase III Environmental Site Assessments. A Phase I Environmental Site Assessment
(ESA) is designed to identify environmental hazards on properties. (A more in
depth description of the assessment requirements follows.) A Phase II ESA is
designed to confirm the presence or absence of environmental problems involving
a specific site but is not intended to identify or assess the extent of contamination.
Review of a site is accomplished through testing of soils, water, and other
samples. Activities may include sub-surface investigations including soil samples,
groundwater samples and analysis, soil vapor surveys, monitoring well installation,
air and surface watering sampling and analysis, asbestos surveys, and mold surveys.
A Phase III ESA is designed to determine the extent of contamination in both
soil and groundwater. The results of a Phase III ESA are used to determine remediation
activities.
The purpose of ASTM's Phase I ESA practice "is to define good commercial
and customary practice in the United States of America for conducting an environmental
site assessment of a parcel of commercial real estate with respect to the range
of contaminants within the CERCLA and petroleum products." ASTM Standard
E1527-00 §1.1. The practice is "intended to permit a user to satisfy
one of the requirements to qualify for the innocent landowner defense to CERCLA
liability." Id. That is, the practices constitute "all appropriate
inquiry into the previous ownership and uses of the property consistent with
good commercial or customary practice as defined in 42 USC §9601(35)(B)."
Id. The goal of the Phase I processes is to identify recognized environmental
conditions. ASTM defines "recognized environmental conditions" as
"the presence or likely presence of any hazardous substances or petroleum
products into structures on the property or into the ground, groundwater, or
surface water of the property." Id. §1.1.1.
An appendix to the ASTM standard contains a discussion about the appropriate level of inquiries a buyer of commercial real estate must make in order to avail herself of the innocent landowner defense. ASTM states that the appropriate level of environmental inquiry cannot be the same for every property or every party to a real estate transaction. Little case law exists on this issue, and the statutory language does not specify what is "appropriate inquiry." This makes sense given that the sophistication of parties varies widely, as does the condition of properties. The statute does, however, contain language that serves to guide courts in determining if a party made "all appropriate inquiry" as to the condition of the property. A court must consider a party's specialized knowledge or experience, what is reasonably ascertainable about the property, a party's ability to detect such contamination that may exist on the property, and the obvious presence of contamination that may exist on the property.
Because parties and properties differ, the level of inquiry that is appropriate will differ. For instance, for a buyer purchasing a mom and pop dry cleaning business, a Phase I ESA may not be an appropriate place to begin. A Phase II ESA is possibly more valuable to the buyer and may be more reasonably calculated to satisfy the innocent landowner defense for that buyer.
Neither the ASTM standards
nor any other standards are made part of the statute but merely serve as an
accepted standard for purchasers of commercial properties to use in their effort
to avail themselves of the innocent landowner defense. It is possible, given
the underlying facts concerning a buyer and the property being purchased, that
following the ASTM standards will not be sufficient to provide an innocent landowner
defense to a buyer. This should be a consideration for the practitioner representing
a buyer of commercial property who expects to avail herself of the innocent
landowner defense by merely ordering a Phase I ESA.
A CLOSER LOOK AT A PHASE I ENVIRONMENTAL SITE ASSESSMENT
A Phase I ESA is comprised of four components:
A. Records review
B. Site reconnaissance
C. Interview
D. Report
Records Review
A review of public records will be conducted to help identify the potential existence of recognized environmental conditions on and near the subject property. Some examples of federal records ASTM identifies are:
A. National Priorities List.
B. Comprehensive environmental response compensation and liability information system (maintained by EPA).
C. Comprehensive environmental response compensation and liability information system sites where no further remedial action is planned.
D. Resource Conservation and Recovery Act facilities subject to corrective action.
E. Resource Conservation and Recovery Act generators list.
F. Emergency Response Notification System list.
Examples of state records ASTM identifies are:
A. State lists of hazardous waste sites identified for investigation or remediation.
B. State landfill and/or solid waste disposal site lists.
C. State leaking underground storage tank lists.
D. State registered underground storage tank lists.
Examples of local records ASTM identifies are:
A. Brownfield sites.
B. Lists of landfill/solid waste disposal sites.
C. Lists of hazardous wastes/contaminated sites.
D. Lists of registered underground storage tanks.
E. Local land records.
F. Records of contaminated public wells.
In addition to federal, state, and local records, maps and aerial photographs are reviewed. Historical records are also used. ASTM requires identification of all obvious uses of the property from the present back to the property's obvious first developed use, or back to 1940, whichever is earlier. Standard historical sources include aerial photographs, fire insurance maps, property tax files, land title records, local street directories, building department records, and zoning records.
Site Reconnaissance
Site reconnaissance involves site visits to visually and/or physically observe and identify any evidence of recognized environmental conditions. Site reconnaissance includes not only the subject property but also adjacent properties. Site reconnaissance includes interior and exterior evaluations.
Interviews
Interviews are conducted to seek information to indicate the existence of recognized environmental conditions on the subject property. Persons to be interviewed include site managers, occupants, owners, prior owners and/or occupants, and local governmental officials.
Report
The ASTM standard sets forth report format and requires a listing of documentation relied upon, methodology, scope of services, findings, opinions, and conclusions. The standard also requires a statement that the site assessment was conducted in accordance with the ASTM standard as most recently modified.
In my experience, environmental assessments are typically required by lenders, but not necessarily wanted by the client. I sense that many clients assume that they are riding the coattails of their lender by relying on a lender's ESA. In my review of dozens of loan commitment letters, I have never seen one identify the standard by which the ESA must be conducted. I assume that the ASTM standard is so widely accepted and used in the industry that there is no question as to what is required by the lender. I assume also that if an ESA was delivered to a lender underwriter that it would be kicked back if it did not expressly say that it was done in accordance with ASTM standards. However, it is interesting that most loan commitment letters will identify exactly the type of survey that is required for closing, which is usually identified as an ALTA survey, but generally do not specify the standard by which an ESA must be conducted.
As mentioned earlier, the most recent modification to the ASTM standard for Phase I ESA was adopted in 2000. Current literature indicates that other modifications are being considered by ASTM to be published shortly. ASTM standards can be accessed, for a price, by visiting its website at http://www:astm.org.
*Joseph M. Cochran is a partner with Richmond and Fishburne, in Charlottesville, Virginia. His area of practice is commercial and residential real estate transactions and land use law. He also serves as an Area Representative and is a member of the Membership Subcommittee, the Commercial Real Estate Subcommittee, and the Residential Real Estate Subcommittee of the Real Property Section of the Virginia State Bar.