Where are we and how did we get here?
Thirty years ago, Phase I environmental site assessments were considered by most clients and lawyers to be optional in business acquisitions and real estate purchases. The notion that one could walk into substantial investigative and remedial cost liability for historic conditions at property was just beginning to be conceptualized in the wake of the recently enacted Federal Superfund law (CERCLA). State laws also emerged, imposing strict liability and stringent remedial standards for site cleanups and underground tank (UST) closures. Phase I investigations became increasingly common, with most consultants and environmental lawyers having their own customized “checklist”.
In the 1990s, states began to pivot from the paradigm of always requiring cleanup to very strict soil and groundwater standards. New voluntary cleanup programs, such as Pennsylvania Act 2, offered a liability release for demonstrating attainment of numerical standards OR achieving an acceptable risk-based solution conditioned upon maintenance of institutional and engineering controls. [essentially land use restrictions and limitations, and surface capping] It suddenly became feasible to buy and sell “Brownfield“ properties having likely historic environmental impact. Real estate portfolios including or even primarily comprised of Brownfield sites also entered the market.
By the turn of the century there was increasing demand for standardized due diligence tools, although the existing ASTM 1527-98 Phase I protocol did not have significant traction at that time. There was also demand for liability limitations in order to incentivize developers to take on Brownfield sites.
The fusion of standardized scope of investigation and development incentives occurred in the 2002 amendments to CERCLA.
The CERCLA amendments created varying degrees of liability limitation for Brownfield site developers— such as the “Innocent landowner” [no liability for unforeseen contamination] and the Bonafide Prospective Purchaser (BFPP). [ Limited liability for documented pre-closing conditions] In order to qualify for any limitation, it would be necessary to demonstrate that one carried out “All Appropriate Inquiry” (AAI) prior to purchase, as well as demonstrating implementation of due care measures for conditions already known or discovered in the future. Congress tasked EPA to define AAI by regulation. After considerable input from every corner of the environmental community, EPA issued a detailed definition at 40 CFR 312 in 2007. The definition concludes by saying that the required steps are deemed satisfied if one carries out an environmental site assessment in accordance with ASTM 1527-05. [Recently changed to ASTM 1527-13] Thus the detailed text of 40 CFR 312 was rendered largely moot, and the “safe harbor” for Phase I investigations came to be defined in a 23 page (small print and double columns) standardized protocol describing the required investigative tasks, and defining terms to use in reaching conclusions in a final report.
With CERCLA liability limitations at stake [as well as variations of those limitations in state laws] Phase I investigation following the ASTM 1527 model became an automatic element of due diligence. What happened next, is that people began to think of Phase I investigations primarily as a part of the loan application process, and/or a “get out out of jail free” card, rather than a risk management tool. The goal for many, became documentation of ASTM compliance and the achievement of a “passing grade” rather than assurance that reports provided clarity and insight. As the process became increasingly perceived as “routine," the average price dropped below $2,000.
So are we better off today than we were before the CERCLA AAI rule of 2007 ?
Some say we have achieved standardization and minimum quality control, while reducing consumer costs. Others say we have commoditized environmental due diligence to the detriment of all. I am very strongly in the latter camp, for a number of reasons which I will explain here.
The protocol requires that conclusions be stated as a summary of all conditions determined to be a ‘Recognized Environmental Condition” (REC). This creates an implicit “pass-fail” test on potentially complex issues.
The definition of REC [as I interpret it] is the presence or likely presence of a hazardous substance which is (or would be) indicative of a release. If the report conclusions identify a REC, that is considered by many to be a “failing grade”.
If an environmental condition is deemed not to be a hazard to human health or the environment and is not something for which a government agency would demand action if reported to them, then by default it is considered a “De minimis condition” and not a REC. It is discussed in the “Findings” section but disappears in the Conclusion Section. Thus the pass-fail test becomes: REC vs. De minimis Condition. Sounds clear cut—but it can actually be arbitrary and misleading because:
Baked into the test is an assumption that evidence of historic industrial use, without visual or other evidence of an actual release, is not enough to support a REC finding. This excludes many properties at which environmental impacts are actually quite likely.
Consequently, a property currently used for warehousing, but shown on Sanborn maps to have had several generations of manufacturing use, gas stations, dry cleaners, junk yards or all of the above, may get a “passing grade” in the Phase I conclusions. I find that astounding! It makes no sense because we essentially reduce the standardized formula for Phase I investigations to a site inspection report with site history information relegated to commentary in the “Findings” section. I get why subjective suspicion, alone, should not automatically lead to REC designation. Nevertheless, I think it is a red flag if there is strong evidence of certain kinds of past operations predating the era of modern regulatory programs and agency files. Everyone knows why site cleanup, hazardous waste and UST programs were implemented in the 1980s and the typical level of attention that was given to housekeeping and final site closure in previous decades. If the ASTM 1527 definitions lead to a misleading message of “all clear” when that is not really what is meant, then one has to consider how best to communicate reality to the client. And one need not “go rogue” in order to accomplish this. The protocol provides such opportunities.
ASTM 1527 actually requires that the Findings section include an opinion regarding the “impact on the property” of all conditions identified, including any De Minimis Conditions.
It also requires explanation of the rationale for selected classification of conditions. There is no obligation to soft-pedal regarding historic site use; and the discussion of classification rationale should easily accommodate an explanation of how a particular issue may be material –even if not qualifying as a REC. The ASTM 1527 definition of “business environmental risk” at section 3.2.11 seems to contemplate exactly such a concept.
What about recommendations for at least limited Phase II sampling?
This approach makes intuitive sense but must be tempered by the delicate dynamics of the transaction in which the Phase I is being performed. [“If I find something then I am no longer an innocent purchaser and I also may not get the loan.”] ASTM 1527 also significantly limits the option of providing sampling recommendations. Consultants are apparently not required to make any Phase II sampling recommendations, but “should” provide a recommendation for further investigation “in the unusual circumstance when greater certainty is required regarding the identified recognized environmental condition”. [ Emphasis added] I assume this means that sampling recommendations are only allowed for follow up on a condition already classified as REC.
The limitation is likely intended to protect clients from unwanted professional opinions that soil or groundwater sampling is necessary, and to protect consultants from feeling obligated to provide such opinions. Nevertheless, many clients really do want to make informed decisions and they expect environmental professionals [both consultant and Counsel] to guide them on the necessary scope of inquiry, in addition to being advocates in the loan application process.
So what do you do?
There is no ANSWER per se—but I think any decision should consider the following:
1) Has the client communicated awareness of the implications of historic site use and a business decision to deal with specific soil and groundwater conditions post-closing as part of construction design?
2)Has the client conveyed exuberance over passing the Phase I test which suggests inadequate appreciation of potential site conditions?
3) Has the client given strict instructions to stay within the lines of the ASTM 1527 protocol?
With respect to #3—Consider that ASTM 1527 also defines specific"User Obligations", which include communicating to the consultant whether the purpose of the investigation is to achieve AAI, or whether there is a broader purpose. That conversation seems like a very good time to explain to the client that CERCLA AAI does not always equal adequate Phase I due diligence. It is also not necessarily sufficient to pass muster under state site cleanup laws. The protocol acknowledges that it is not intended to replace professional judgment, or to “represent or replace the standard of care by which the adequacy of a given professional service must be judged”. However, several pages later it says “…this practice is intended to reflect a commercially prudent and reasonable inquiry”. That is all rather fuzzy—but the take home point would be that consultants should not be so quick to subjugate themselves to a narrow interpretation of ASTM 1527—whether dictated by a client, or by internal policy. There is a larger universe, in which clients discover environmental problems after closing, and end up in court trying to demonstrate innocent landowner status while seeking cost reimbursement from the seller. In those cases, the defendant argues that the Phase I was unduly narrow, or that the buyer ignored Phase I information. The Buyer may then argue that if they do not get the defense, the consultant is at fault for not discovering AND highlighting a particular concern that has now become a problem.
What about review of agency documents?
Prior to 2013, ASTM 1527 did not require review of agency file documents. Now ASTM 1527-13 requires review and consideration of such documents if they are “reasonably ascertainable”—defined as either received within 20 days of a records production request, or made available for inspection within 20 days of an inspection request.
Here we have another example of focusing on performance standard exceptions, at the expense of quality assurance. I agree that a consultant should not be blamed if good faith efforts to obtain documents have failed and time is running out on due diligence. However, the ASTM definition conveys a low level of urgency for what is often a critical component of the Phase I. If a property does not visually reveal impacts from historic use, but industrial operations were present during the last 25 years, the state agency may possess critical file documents. Local land use agency files may have site plans going back even further. If there is a delay in seeing such documents, consultants, counsel and the client need to be discussing options for delaying completion of the report or constructively addressing the inability to include discussion of agency documents. Without that conversation, I think it is unacceptable to submit a draft (or final) report identifying the absence of document review and saying that the report will be supplemented “when and if” documents are received and” if” significant information is deemed necessary to add.
What about the fact that the average fixedprice of a Phase I investigation is reportedly below $2,000?
For any site having reasonablepotential forhistoric impact I think it is very difficult to do an excellent job and make a profit with a fixed price of$2,000. Especially if there are state and/or Township/municipal documents to review. This unfortunate market phenomenon reinforces perception of Phase I reports by clients, as an administrative inconvenience versus an important risk management tool. It also reinforces perception by consultants as a line of work where liability risk far exceeds revenue. I think that is a bad combination for all kinds of reasons.
Speaking for myself, there is a time and a place for fixed price contracts, and Phase I investigation is neither. If I am able to join the legal team sufficiently early, I always recommend that the Phase I be billed as time and materials, with a budget estimate not to be exceeded without authorization. I also insist that the scope of work reflect complete and careful review of both state and local agency document files, pre-final report consultation with counsel and client, and whatever site reconnaissance time may be necessary to get it right. I need that level of effort in order to give sound advice to a client investing in real estate or acquiring a company. And once they understand the need most clients view the effort as a worthwhile investment of $5,000-7,500 for due diligence. Food for thought. ----------------------------
This blog is intended solely as generic commentary and should not be considered as legal advice. It is also not intended as criticism of any company or individual.