Real estate developers and lenders are undoubtedly familiar with the Phase 1 environmental reports prepared in connection with the purchase and sale of real property. Also known as Phase 1 “environmental site assessments,” these reports are paper studies only, requiring, essentially, reviews of specified and recommended “environmental” and historical databases, site “reconnaissance,” and interviews of owners, key site managers, occupants, and local government officials. They do not involve any actual testing or sampling of the soil; those activities are precursors to so-called “Phase 2 Reports,” the scope of which are generally based on the “Phase 1 Reports”. These reports serve a number of purposes, but principal among them is to support an “innocent landowner” defense under the Comprehensive Environmental Reponse, Compensation and Liability Act of 1980, commonly known as “CERCLA” or the “Superfund” law. CERCLA imposes potentially significant liabilities on owners and operators of environmentally contaminated properties, but also provides certain defenses for innocent landowners and their tenants who conduct “all appropriates inquiries” before owning or operating environmentally contaminated properties.
These reports serve a number of purposes, but principal among them is to support an “innocent landowner” defense
Initially, CERCLA did not define what kinds of “all appropriate inquiries” would support the “innocent landowner” defense. Accordingly, the standards that came to govern Phase 1 Reports evolved from a variety of sources, most notably those promulgated by the American Society for Testing and Materials (“ASTM”), initially embodied in ASTM’s “E 1527-93” standard and later updated by its “E 1527-97” and “E 1527-00” standards. In 2002, in connection with the Brownfields Revitalization Act, Congress designated the “E 1527-00” standard as an interim standard (“Interim Rule”) for conducting “all appropriate inquiries” under CERCLA and directed the U.S. Environmental Protection Agency to develop its own standards for conducting “all appropriate inquiries.” The EPA completed its work on November 1, 2005 with the publication of a “Final Rule” governing the issue. Note, though, that a properly prepared Phase 1 Report is still only one factor (although a very important one) in establishing the “innocent landowner” defense. The Final Rule still provides a series of other “innocent landowner” defense requirements, the satisfaction of which is open to some uncertainty because of the Rule’s broad language (e.g. “taking reasonable steps to stop continuing releases . . . ,”; “exercising due care with respect to the hazardous substances concerned . . .”).
The Final Rule will take effect on November 1, 2006. Also, ASTM recently published an updated standard (“E 1527-05”) incorporating the requirements of the the Final Rule; the EPA has stated that compliance with the new ASTM standard will satisfy the requirements of the Final Rule.
The Final Rule differs from the Interim Rule and the ASTM “E 1527-00” standard in several significant respects:
- The Final Rule requires that the Phase 1 environmental site assessment be performed under the supervision of a qualified environmental professional, a term that is specifically defined by the Final Rule to require that person to have met certain educational and experience requirements.
- The Final Rule expands the obligations of the prospective owner or operator or its consultant to interview past and present owners of the property, and, in certain instances, neighboring property owners to determine the property’s history.
- The Final Rule expands the scope of review of the historical records of the property, and specifies special efforts required to fill any gaps that may be found in the historical record.
- The Final Rule requires that the Phase 1 environmental site assessment take place within one year before the property’s acquisition. If the report was prepared more than 180 days before the acquisition, then certain portions of the report (e.g. interviews, historical record, review, sites inspections) will need to be updated.
- The Final Rule requires an assessment by the prospective owner or operator of the relationship between the purchase price of the property and the fair market value of the property if it were not contaminated, and demands further inquiry if an unexplained discrepancy is found.
- The Final Rule requires a visual inspection of the entire property, and requires specific documentation if such an inspection cannot be performed.
For many prospective purchasers of real property, conducting environmental site assessments under the new standard will result in additional cost and time to conduct the assessment. Awareness of the new standard is important, however, as real property lenders will almost universally require compliance with the Final Rule to safeguard their collateral against the potential liability imposed by CERCLA. In addition, buyers and sellers should be mindful of the additional time and access to the property that may be needed to comply with the new standards.
For more information on this subject and for assistance in addressing this issue, please contact any of the attorneys at Garrett DeFrenza Stiepel Ryder LLP.