Mitchell Burack April 1, 2021
FREQUENTLY ASKED QUESTIONS-Part 1—ENVIRONMENTAL DUE DILIGENCE
As always, nothing in this blog is intended as legal advice for a specific situation or for general application; and it should not be used or relied upon in that manner. Good legal advice can only be provided with respect to a specific situation. My blog is an opportunity to share my views on various generic issues which I have encountered, and as such, are intended solely as “food for thought”.
This blog series features short answers to a number of common questions I have encountered pertaining to scope of Phase I investigations, and potential liabilities for historic UST contamination or other site contamination. For anyone interested in diving into the issues in more detail, we will begin a related 90 minute Zoom Roundtable series, in mid-June ( 2021), covering each of the FAQ areas covered in the blogs. If you would be interested in participating, just send me an email at MitchellBurack@BurackEnvironmentalLaw.com.
1. Question: We just completed an ASTM 1527-compliant Phase I investigation for purchase of a property having historic industrial use. The report indicates that Seller received PA Act 2 approval for site remediation 15 years ago, and that this is considered a “Controlled” REC. There is no evidence of any other REC. Do we need to do anything else?
Answer-- Many buyers see a certified Phase I report, confirming an earlier Act 2 approval from DEP, with voluminous appendices attached, and conclude that no further information is necessary. However, there are several additional considerations:
· An Act 2 release does not cover all potential future liability contingencies. The scope of an Act 2 release is tied to the specific contaminants tested for, as part of the site investigation, and to the media addressed ( soil, groundwater, surface water). There may also be significant approval conditions or assumptions articulated in the DEP approval letter. All coverage gaps and approval conditions should be evaluated.
· Act 2 remedies can range from rigorous cleanup, meeting residential Statewide Health Standards, to “site-specific” remedies which rely on risk assessment modelling, and an Environmental Covenant requiring use restrictions and maintenance of a site cap to prevent exposure to residual sub-surface contamination. The amount of effort put into the approved “remediation” needs to be considered, as it may impact property value, as well as compatibility of the property with Buyer’s redevelopment goals.
· Act 2 approval also does not affect liability under federal laws such as CERCLA or RCRA, and may not protect against a state common law damages claim by neighboring property owners. Thus, it is important to consider the extent to which future EPA involvement is reasonably likely; and whether there are any unresolved off-site contamination issues which could blossom into private citizen claims in the future.
· The corollary question is: You are the Seller who acquired this property after the 2005 Act 2 approval ; and the Buyer’s lender is insisting on detailed Phase II investigation, to assure that all is well. You don’t want to open a can of worms but you also seek to sell the property “As-is-where-is”. What do you do? The answer is—you need to obtain as much detailed information as possible regarding the work done in 2005, in order to support a position that no further sampling is truly necessary. Failing that, all you can do is try to limit the location and parameters of sampling in order to minimize the risk of unwelcome surprises.
2. Question: If our ASTM-compliant Phase I report missed anything, I have an “innocent purchaser” liability defense for anything we don’t find—Correct?
Answer-- That would be the general rule; but it is, ( as always) more complicated than that.
· Ostensibly, an ASTM 1527-compliant Phase I automatically qualifies for the innocent purchaser defense, as “All appropriate Inquiry (AAI)” pursuant to EPA regulations. But, what if the Phase I investigation followed the letter of the ASTM 1527 protocol, but was carried out very robotically, with an unacceptably low level of real- world insight, reflecting the very low commoditized fee paid by client? And 15 years later, issues arise, which seem like they should not have been difficult to spot? Is it still AAI? A court will undoubtedly have the opportunity to resolve that question at some point in the future; when a current and past owner become embroiled in a cost recovery suit over future-discovered contamination. In the meantime, reliance on a Phase I investigation or report, which is lacking in insight, and conveys an impression of just trying to get a lender to accept it, is not good practice, with or without an innocent purchaser defense.
· This is especially true since the EPA AAI rule does not apply to government OR private actions under the PA HSCA statute ( innocent owner defined differently); Clean Streams Law ( no innocent owner); or the Tank Act ( no innocent owner).
3. Question: If we do Phase II sampling in areas of suspected historic industrial use, we would also have a “Bonafide Prospective Purchaser” defense for anything we do find—correct? [so long as we subsequently take “reasonable steps” pursuant to EPA 2019 guidance to contain hazardous substance releases and protect occupants from exposure]
Answer--That is correct. BUT:
· If sampling suggests significant historic impact which has not been previously addressed in any way, the reasonable steps burden may become significant, and may be difficult to accurately quantify up front.
· One should also consider that, with or without legal requirements to act, the reasonable care obligations of becoming owner/operator or lessor may require extensive work, just to assure that property is safe for occupancy and that property value is not eroded by unresolved environmental issues.
· Another consideration is that PA environmental statutes do NOT have a BPP defense. This is an important limitation; because a majority of properties having historic environmental issues will eventually be resolved under State programs ( unless there are RCRA corrective action or PCB issues); and most remedial cost liability disputes, if any, will be resolved as private cost recovery actions between past and present owners and tenants, with claims under both State and federal laws. CERCLA liability is only one potential piece of the puzzle for most sites.