Site Assessments And Other Environmental Due Diligence Considerations From Site Owners' and Purchasers' Perspectives


Environmental considerations are often crucial in the sale or acquisition of real estate, stock or assets of a company, and in obtaining or making loans. As a result, environmental site assessments and other environmental due diligence procedures have become standard in such transactions. Who should perform site assessments and what the scope of such assessments should be often depend on the nature of the transaction and the nature of the property or business involved in the transaction. While environmental due diligence more commonly would be expected to be the duty of a purchaser, it may be necessary for an owner or seller to conduct environmental due diligence in order to be able to make representations and warranties required by the transaction and in order to understand the value of the seller's property.

Considerations of site owners with regard to site assessments and environmental due diligence are quite different than for a purchaser. Owners must be concerned with the inconsistent concepts of confidentiality of information that is developed and reporting obligations that might result from newly acquired information. Purchasers are concerned with identifying and quantifying environmental costs and qualifying as innocent landowners with regard to potential liability under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). Additionally, purchasers of business assets or the stock of a company and lenders are concerned with the ability to carry on and expand business operations. Environmental due diligence is necessary to address these issues.

Site assessments are a key component of environmental due diligence in most transactions. There has been an attempt to standardize environmental site assessments; however, site assessments should be tailored to address the unique facts of each transaction. When a site assessment is conducted in connection with a sale of property or a loan transaction, considerations of who should be privy to the results and what should be done if unsuspected hazardous substances are discovered should be addressed by the parties prior to conducting the site assessment. Finally, consideration must be given to what environmental due diligence should be conducted in addition to an environmental site assessment, which, obviously, depends upon the nature of the transaction in question.

Site Assessments

Why Conduct a Site Assessment?

Why would a site owner do a site assessment? Lending institutions often require site owners to conduct environmental site assessments as part of the lending institution's environmental due diligence. Prospective purchasers sometimes require sellers to conduct environmental site assessments, although it is more common for purchasers to conduct their own site assessments. Also, lenders and purchasers often require sellers to make detailed representations about the environmental condition of property which is the subject of a transaction. If the seller is required to make representations beyond its current knowledge, it may be necessary for a seller to have a site assessment conducted in order to make such representations.

Purchasers and lenders conduct site assessments in order to identify and quantify the potential environmental risks involved in a transaction. Additionally, purchasers conduct site assessments in order to learn how environmental conditions and the costs of remediation will affect the value of the property in question. Purchasers are generally required to conduct site assessments in order to qualify for the "innocent landowner defense" to liability under CERCLA (which will be discussed below).

Reporting Requirements Regarding Newly Discovered Information

There are significant reporting requirements under various environmental laws that may be applicable to information that is gathered or conditions that are discovered in environmental site assessments. Typically, such obligations are borne by the owner of the site. Following is a discussion of reporting requirements that might be triggered.

CERCLA (42 U.S.C. §9601 et seq .) (as interpreted by the courts) imposes strict, joint and several liability for cleanup costs on site owners, past and present site operators, off-site generators who "arranged for disposal" of hazardous substances and transporters who selected the site in question. CERCLA includes broad reporting requirements for releases of hazardous substances into the environment, some of which may be applicable to site owners who learn of the presence of hazardous substances on their property as the result of an environmental assessment.

Pursuant to Section 103(a) of CERCLA, any person in charge of a facility (such as the owner of property) who learns of a release of a hazardous substance from the property in reportable quantities must immediately notify the National Response Center of the release. A list of reportable quantities of hazardous substances is contained in 40 C.F.R. §302 , at Table 302.4. If a reportable quantity is not listed for the hazardous substance in question, a release in excess of one pound must be reported. Thus, if a hazardous substance which is being released into the environment is discovered during a site assessment, the owner of the property would have an obligation to report it if the reportable quantity for the substance is exceeded.

A landowner arguably also has the duty to report the discovery of hazardous substances on his or her property under Section 103(c) of CERCLA. Section 103(c) requires persons who own or operate facilities where hazardous substances have been stored, treated or disposed to notify EPA of the existence of the facility within 180 days after the effective date of CERCLA (by June 9, 1981). Although Section 103(c) appears to be limited to sites that were known to exist when CERCLA was enacted, given the purposes of CERCLA to identify and clean up sites from which releases of hazardous substances occur or are likely to occur, an argument can be made that the reporting requirements of Section 103(c) apply to the newly discovered existence of releases of hazardous substances.

CERCLA contains an exemption for petroleum products. However, releases of regulated substances (including petroleum products) from underground storage tanks are regulated under Subtitle I of the Resource Conservation and Recovery Act ("RCRA") and federal regulations at 40 C.F.R. Part 280 . Pursuant to 40 C.F.R. §280.50, the owner or operator of an underground storage tank is required to report a release or suspected release of a regulated substance from the underground storage tank to the designated implementing agency for the state in question within 24 hours of discovery of the condition. Although it is not clear whether the definition of "owner" in the federal regulations covers landowners who discover old abandoned underground storage tanks, because of the remedial nature of the regulations, reporting the discovery of such tanks is advisable.

In addition to these federal reporting requirements, state laws and regulations may impose reporting requirements on landowners that are applicable to information regarding environmental conditions discovered during site assessments. State reporting requirements may exist as the result of state laws and regulations that were adopted to obtain delegation of the federal programs discussed above. Additionally, there may be reporting requirements that are unique to the state in question. An example of the latter type of state reporting requirement is Section 101.2 of Pennsylvania's Special Pollution Regulations . Section 101.2 requires the person in charge of a polluting substance or owning or in possession of the property where it is spilled or placed to notify the Department of Environmental Protection immediately by telephone if the polluting substance is spilled or placed in such a manner that it would endanger downstream users or would otherwise result in pollution or the danger of pollution of waters of the Commonwealth. Another example of state notice requirements is the requirement to include notice of the presence of hazardous wastes or substances and underground storage tanks on property in deeds when such property is transferred.

Confidentiality of Information

When entering into agreements with consultants and potential purchasers, site owners should consider including provisions providing for the confidentiality of information obtained in site assessments. Consultants and potential purchasers may want to exclude from their confidentiality obligation information that they are required by law to report to a regulatory authority. If there is an exception for information that by law must be reported, the site owner should retain the right to do the reporting.

A confidentiality agreement with a consultant should protect documents and information relating to the site assessment after the assessment is completed and the engagement of the consultant has ended. Also, it should allow the party who engages the consultant to request the return of confidential documents at any time, so the documents can be recovered from the consultant if the consultant is discharged.

A confidentiality agreement with a prospective purchaser should identify and limit the parties who will have access to the consultant's report. It should also provide for the return of confidential information to the site owner in the event the prospective purchaser elects not to purchase the property.

Indemnification

Agreements with consultants and prospective purchasers regarding site assessments should contain indemnity provisions which protect the site owner from liability that might result from the activities of the consultant or the prospective purchaser in conducting a site assessment. Site assessment consultants often seek to limit their liability by using standardized preprinted agreements. The terms of consultants' "standard" agreements are often negotiable. Furthermore, if a consultant refuses to agree to a reasonable indemnity provision, consideration should be given to engaging a different consultant who will.

Innocent Landowner Status

An important reason for a prospective purchaser to have a site assessment performed on property that is being considered for acquisition is to support a post-purchase argument that the purchaser has satisfied the requirements of Section 107(b)(3) of CERCLA for establishing the innocent landowner defense of the purchaser to cleanup liability under CERCLA. According to Section 107(b)(3) of CERCLA and the definition of "contractual relationship" in Section 101(35) of CERCLA, in order to qualify for the innocent landowner defense, a purchaser must have made "all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial and customary practice." Therefore, to have a chance of qualifying for the innocent landowner defense, it would be prudent for a prospective purchaser to have a site assessment performed by a reputable consulting firm.

An owner of contaminated property that might otherwise qualify as an innocent landowner can lose the ability to assert an innocent landowner defense if the landowner learns of a release or threatened release of a hazardous substance on its property when the landowner owned the property and the landowner sells the property without disclosing such knowledge to the purchaser. This is another reason for a seller to disclose all knowledge of site contamination to a prospective purchaser.

Scope of Site Assessments

Generally, there are two types of site assessments, which are commonly referred to as "Phase I" and "Phase II" assessments. A Phase I assessment relies primarily on visual inspection of the property in question and research of records relative to the history of the property and surrounding area. A Phase II assessment is an intrusive investigation of the property in question which often involves the collection and analysis of soil and water samples, and possibly samples of building materials and other potentially hazardous substances. Generally, if a Phase I site assessment does not disclose any grounds to suspect that hazardous substances exist on or under the property in question or in buildings or equipment on the property, a Phase II site assessment is not conducted.

In 1993, the American Society for Testing Materials ("ASTM") published guidelines for Phase I environmental site assessments entitled "Standard Practice for Environmental Site Assessments: Phase I Environmental Assessment Process" ("ASTM Standard").

ASTM also developed a "Transaction Screening Questionnaire." The transaction screening process is a preliminary, optional alternative to a Phase I environmental site assessment. According to ASTM, the transactional screening process need not be conducted by an environmental consultant. The transactional screening process consists of the Transaction Screening Questionnaire, observation of site conditions and review of available government records. This process might be appropriate for underdeveloped land where there is no reason to expect that the property is contaminated. However, for property that has been used for industrial or commercial purposes, a Phase I assessment should be conducted.

According to ASTM, a Phase I assessment must be performed by an environmental consultant. The Phase I assessment begins with the current owner of the property completing a questionnaire which asks the current owner to identify any environmental liens on the property, the presence of contamination, the history of waste disposal, any recognized environmental conditions on the property and the history of environmental notices, fines and enforcement actions, and to disclose other knowledge the current owner has about the environmental history of the property.

An ASTM Phase I site assessment consists of the following five steps:

  1. a records review;
  2. a site reconnaissance;
  3. interviews with owners and occupants;
  4. interviews with government officials; and
  5. a report.

Each of these steps of a Phase I site assessment are discussed below.

Records Review

This review should address the title and environmental history of the site and adjoining properties. According to the ASTM Standard, the consultant need only review information that is publicly available and reasonable in cost and practicality. The ASTM Standard defines "publicly available" as available to anyone who requests the information. "Reasonable time and costs" is defined to mean that the information is available within twenty days of the request at a nominal cost.

Under the ASTM Standard, the environmental consultant has some discretion as to the area of land to inspect and may investigate the property to be purchased and surrounding areas as well if there is a likelihood of contamination of the site through migration of contaminants from a neighboring site. The area of investigation may be determined, at the consultant's discretion, based on the following factors:

  1. the density of facilities and/or population (e.g., urban, rural or suburban) of the area in which the property is located;
  2. the distance that various hazardous substances or petroleum products might migrate, based on geological or hydrogeologic conditions; or
  3. other reasonable factors.

The ASTM Standard provides that the actual area of investigation and any justification the consultant uses to reduce the originally determined area must be documented in the Phase I report.

The only item required to be reviewed in this step is the U.S. Geological Survey (U.S.G.S.) 7.5 Minute Topographical Map for the area in question. However, the ASTM Standard identifies some additional records and governmental sources which may be used, at the discretion of the consultant, if they are accessible, useful, and are normally used in a site assessment. Examples of such other records include:

  1. lists of landfills or solid waste disposal sites;
  2. lists of hazardous waste or contaminated sites;
  3. records of contaminated public wells;
  4. records of the state environmental regulatory authority with jurisdiction over the property in question; and
  5. fire department records.

The scope of the records review stage is solely up to the professional judgment of the consultant. However, federal, state and local requirements may have some impact on the scope of the records review of a Phase I site assessment. If the site is a listed site, either by the federal government, by a state or by local officials (e.g., is contained on the CERCLA National Priority List ), that fact must be included in the assessment report. Accordingly, consultants usually review appropriate government records or hire subcontractors to do so as part of site assessments.

Site Reconnaissance

This second step requires the environmental consultant to visually and physically inspect the property in order to ascertain whether there are any apparent environmental conditions on the property. This step includes inspection of the perimeters of the land as well as the interior of any structures on the property. The Standard provides that it is "not necessary to look under floors, above ceilings, or behind walls." Past uses of the site or of any adjacent property which the consultant knows about must be included in the Phase I report.

In ASTM Phase I site assessments, the environmental consultant is not required to do testing for hazardous substances on the property. Instead, the consultant must merely visually inspect the property and identify environmental conditions that might require testing. The type of conditions that consultants should look for are:

  1. stained soil or pavement evidencing spills or leaks of petroleum products or a hazardous substance;
  2. stressed vegetation;
  3. existing pits, ponds or lagoons, or depressions in the land which may be the former locations of pits, ponds or lagoons;
  4. the presence of storage drums or containers on the property; and
  5. any unusual odors.

Owner/Occupant Interview

The purpose of these interviews is to obtain information regarding potential contamination which may not have been visible on inspection and to follow up on information about something noted during the inspection which may indicate possible contamination. The consultant should make an attempt to interview a sufficient number of people in person or by telephone so that readily available information on former uses of the property is obtained.

Interviews of Government Officials

Members of the following agencies should be interviewed regarding environmental conditions and environmental compliance at the property in question:

  1. the local fire department;
  2. the state environmental agency with jurisdiction over the property; and
  3. the local or state agency with regulatory power over waste disposal and wastewater treatment.

The Final Report

The final written Phase I report the consultant prepares is a significant requirement of the ASTM Standard. The ASTM Standard requires the consultant to make a definitive conclusion whether there is any evidence of environmental conditions that warrant further investigation. The ASTM Standard also requires the consultant to provide documentation to support the analysis, opinions and conclusions found in the report.

Other Considerations

Prospective purchasers should consider the ASTM Phase I environmental site assessment process as a starting point for defining the scope of work of a Phase I assessment consultant. It is important to be aware that the ASTM Phase I process does not address issues relating to off-site liability from past disposal or operating compliance by an ongoing business, both of which are significant matters where the purchaser is acquiring the stock of the seller or is acquiring the assets of an ongoing business. Additionally, the ASTM Phase I process does not address specific issues such as the potential for the property to be subject to mine subsidence, the presence of asbestos-containing materials in buildings on the property, the presence of radon in buildings, the presence of lead in drinking water, the presence of lead-based paint and the presence of wetlands on the property. Some or all of these issues could significantly affect the value, use or development of the property. Additionally, the presence of such conditions on the property or in buildings on the property could substantially affect the amount a prospective purchaser is willing to pay for the property.

If evidence of contamination is found during a Phase I site assessment and the prospective purchaser is still interested in the property, a Phase II assessment should be conducted. The purpose of the Phase II assessment is to define the exact environmental condition of the site through appropriate sampling and testing and to estimate with reasonable accuracy the cost of remediation. With such information, the current owner and prospective purchaser can negotiate a sale price and indemnity provisions which reflect the actual environmental condition of the property and the potential liability of the owner of the property.

Other Environmental Due Diligence Issues

How Much Information Should Be Reviewed?

The quantity of information that should be reviewed depends upon the nature of the property or business involved and the nature of the transaction. If the deal is a simple purchase of property, a Phase I site assessment and a review of title documents for the property may be adequate. If the deal involves purchase of the stock of a company, far more information should be reviewed, especially if the company is currently engaged, or in the past was engaged, in activities that have the potential to lead to environmental liabilities relating to both owned property and third-party sites. Additionally, if the transaction involves the purchase of an ongoing business that requires environmental permits and local zoning permits, the due diligence inquiry should include a review of all documents, including local environmental and zoning laws and facility environmental and zoning permits, to ascertain whether all permits and approvals necessary for continuing the business exist and, if need be, are transferable to the prospective purchaser.

In transactions involving the acquisition of the stock of a company or acquisition of the assets of a company and a continuation of its business, the purchaser may be held responsible for off-site environmental problems created by the seller or for response costs to remediate environmental problems at sites where the company's wastes were disposed. Therefore, documents relating to past waste disposal practices (on-site and off-site) should be reviewed.

If future development of acquired property is contemplated, inquiry should be made into matters that may affect the ability to do so. Such matters include:

  1. inquiry as to whether the contemplated use is allowed under local zoning laws;
  2. inquiry as to whether site conditions such as wetlands, steep slopes or location in a flood plain restrict or limit development of the property;
  3. inquiry into the presence of historical or archaeological sites on or near the property;
  4. inquiry into the presence of threatened or endangered animal or plant species or their critical habitat on or in the vicinity of the property; and
  5. availability of utility services.

Who Should Be Involved in Conducting Environmental Due Diligence?

The due diligence team should consist of persons with adequate expertise to evaluate the environmental risks involved in the transaction in question. Each transaction will have its own peculiarities. Where operating permits are involved, the due diligence team should include an engineer or operations person familiar with the type of operations and type of permits involved. Generally, attorneys are involved in some aspect of environmental due diligence in most transactions. However, attorneys should generally rely on other experts concerning technical matters. As discussed above, if outside consultants are used to conduct site assessments, their scope of work should be defined with due consideration given to the nature of the property involved, the historical uses of the property and the contemplated future uses of the property.

Conclusion

Site assessments are an important part of many transactions. They should be tailored to the type of transaction and the type of property involved. One should not rely solely on the standard ASTM Phase I environmental site assessment, because there may be matters unique to the site in question which are not addressed under the standard ASTM assessment. Because of potential reporting requirements and potential sensitivity of information generated in site assessments, such matters should be considered and addressed by the interested parties before a site assessment is conducted.

If a site assessment reveals evidence of contamination, an evaluation must be made as to whether any reporting requirements are applicable. With adequate planning and agreements among the interested parties, a site assessment can be a valuable asset to a lender or purchaser of property.