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DEAL OR NO DEAL?

ASTM Standard Practice for Environmental Site Assessments:

Phase I Environmental Site Assessment Process

Presented By:Joel R. Burcat, Esq.

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Why Conduct an Environmental Site Assessment (ESA)?

To establish environmental conditions existing at the property:

Buyers: evaluate the “real” cost of the property, to establish “baselines” that will determine relative liabilities of the buyer and seller.

Buyers: limit liability in the event hazardous substances are found to have been released on the property.

Buyers: evaluate environmental conditions of the real property that is being conveyed as a part of the deal.

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Why Conduct an Environmental Site Assessment (ESA)?

Sellers: to establish a baseline for which they are not liable.

Lenders will require an ESA for most commercial properties that they are financing.

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INNOCENT LANDOWNER DEFENSEBuyer of property wants to establish

precondition to “innocent landowner” under CERCLA.

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INNOCENT LANDOWNER DEFENSEThe buyer has “carried out all appropriate

inquiries… into the previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards and practices.” CERCLA, 42 U.S.C. § 9601(35)(B)(i)(1).

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BackgroundIt is not unusual to find significant real estate

transactions from as late as the 1980’s where an ESA was not conducted.

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BackgroundEarly on, many different kinds of

professionals - engineers, geologists, even lawyers – carried out ESAs.

There was no particular format for an ESA, so a recipient of an ESA could get anything from a 2-page letter to a multi-volume report that included significant testing data.

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STANDARDIZATION OF ESAs

ASTM first adopted a national standard for environmental site assessments in 1993.

The current ASTM Standard Practice for Environmental Site Assessments, E 1527 – 05, was approved on November 1, 2005.

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INTERRELATIONSHIP BETWEEN THE ASTM STANDARD AND EPA’S ALL APPROPRIATE INQUIRIES RULE

There is a direct relationship between the ASTM Standard and EPA’s Appropriate Inquiries Rule, 40 C.F.R. §§ 312.1, et seq.

Essentially, the ASTM Standard establishes the requirements necessary for buyers to comply with the All Appropriate Inquiries Rule.

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Purpose of ASTM Standard:1.1Purpose - *** The purpose of this 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 scope of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (42 U.S.C. 9601) and petroleum products. As such, this practice is intended to permit a user to satisfy one of the requirements to qualify for the innocent landowner, contiguous property owner, or bona fide prospective purchaser limitations on CERCLA liability (hereinafter, the “landowner liability protections,” or “LLPs”): that is, the practice that constitutes “all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice” as defined at 42 U.S.C. 9601(35)(B) . . . .ASTM Standard, § 1.1 (emphasis added).

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EPA’s All Appropriate Inquiries Rule explicitly references the ASTM Standard as an “industry standard[] [which] may be used to comply with the requirements set forth in §§ 312.23 through 312.31.” 40 C.F.R. § 312.11(a).

EPA Rule contemplates that other standards may be used to comply with the EPA Rule.

No such standards have yet been acknowledged by EPA.

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SIGNIFICANT POINTS OF THE STANDARD

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ASTM Standard is VoluntaryThe ASTM Standard is not limited to

CERCLA’s “all appropriate inquiry” and may be used for other purposes.

The standard is not intended to be used as a customary practice for residential real estate. ASTM Standard § 4.

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A Phase I Environmental Site Assessment (“Phase I ESA”) will be conducted by a qualified environmental professional.

The purchaser (“User”) will provide relevant information necessary to assist the environmental professional.

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IDENTIFICATION OF LIMITATIONS ON ACTIVITY OR USES OF PROPERTY. ASTM Standard §5

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The purchaser (i.e. “user”) must conduct the following activities under the ASTM Standard. ASTM Standard § 61. Review title and judicial records for environmental liens or activity and use

limitations.2. Identify any special knowledge or experience that is material to identify any

recognized environmental conditions in connection with the property.3. Communicate to the environmental professional conducting the Phase I

ESA any actual knowledge that the purchaser has regarding the property.4. Consider the relationship of the purchase price of the property to the fair

market value of the property if the property was not affected by hazardous substances or petroleum products.

5. The purchaser must communicate to the environmental professional any commonly known or reasonably ascertainable information regarding the property.

6. The purchaser must convey to the environmental professional the reason why the purchaser wants to have the Phase I Environmental Site Assessment performed. If the purchaser does not do so, the environmental professional shall assume that the purpose is to qualify for limited liability protection under CERCLA.

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PHASE I ENVIRONMENTAL SITE ASSESSMENT. ASTM Standard § 7

The purpose of the Phase I ESA is to identify recognized environmental conditions in connection with the property.

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PHASE I ENVIRONMENTAL SITE ASSESSMENT. ASTM Standard § 7

There are four components to a Phase I Environmental Site Assessment:

1. Records review.2. Site reconnaissance.3. Interviews with present and past owners,

operators, and occupant of the property and interviews with local governmental officials.

4. Preparation of an evaluation and report.

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PHASE I ENVIRONMENTAL SITE ASSESSMENT. ASTM Standard § 7

The Phase I Environmental Site Assessment does not include any testing or sampling of materials.

The ESA must be performed by an environmental professional or conducted under the supervision of such a professional.

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RECORDS REVIEW. ASTM Standard § 81. A records review shall be conducted to obtain

and review records that will help identify recognized environmental conditions.

2. Records relating to the property and nearby properties must be reviewed.

3. Specifically identified environmental information shall be obtained.

4. Likewise, historical use information shall also be obtained.

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SITE RECONNAISSANCE. ASTM Standard § 9

1. Reconnaissance of the site.2. Identify the uses and conditions of the

site.3. Extensive detail regarding observations,

reporting the observations and using the observations as the basis for interviews.

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INTERVIEWS WITH PAST AND PRESENT OWNERS AND OCCUPANTS. ASTM Standard § 101. The objective is to obtain information indicating

recognized environmental conditions in connection with the property.

2. The ASTM Standard contemplates that the environmental professional will conduct the interviews.

3. Persons to be interviewed include:Key site managersOccupantsPast owners, operators and occupants

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INTERVIEWS WITH STATE AND/OR LOCAL GOVERNMENTAL OFFICIALS. ASTM Standard § 11

Objective – to obtain information indicating recognized environmental conditions in connection with the property.

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EVALUATION AND REPORT PREPARATION. ASTM Standard § 121. The Phase I ESA should generally follow the format

contained in Appendix 4 of the ASTM Standard.2. The report is required to contain a findings section which

identifies known or suspect recognized environmental conditions and historical recognized environmental conditions. It should also contain de minimis conditions.

3. The environmental professional’s opinion(s) of the impact on the property of conditions identified in the findings section is integral to the report.

4. Recommendations for additional investigations, if any, to detect the presence of hazardous substances or petroleum products should also be contained in the report.

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DISCUSSION SCENARIO, part IBuyer is purchasing industrial property and other assets from the current owner/operator of the property in Pennsylvania. The arrangement is that the Buyer may terminate the deal and receive back her deposit at the close of all due diligence, including environmental. The Buyer does not have to disclose why she is terminating the deal, except to say that it is as a result of due diligence. Buyer conducts a Phase I ESA for the property. Buyer also conducts other due diligence related to the transaction.

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DISCUSSION SCENARIO, part IIThe environmental problems include some evidence of old releases of hazardous substances, suspected leaks from USTs, historical uses that are not compatible with the Buyer’s proposed use and a history of inspection reports that indicate numerous violations implying serious spill problems.

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DISCUSSION SCENARIO, part IIBuyer detects too many environmental problems during due diligence and terminates the deal. In accordance with the agreement between the Buyer and Seller, the Seller is only told that the deal is off because the Buyer was not satisfied following due diligence. The Seller did not get a copy of any ESA Reports.

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DISCUSSION SCENARIO QUESTIONS

1. Does the Buyer have to report any of her consultant’s findings to DEP or EPA?

2. Does the Buyer’s consultant have to report any of this to DEP or EPA?

3. Does the Seller have to report anything to DEP or EPA?

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Contact InformationJoel R. Burcat, Esq.2 North 2nd Street, 7th FloorHarrisburg, PA 17101 Phone: 717-257-7506Fax: 717-257-7598E-Mail: jburcat@saul.comWeb: www.saul.com

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Saul Ewing’s Office LocationsBaltimore, Maryland100 S. Charles StreetBaltimore, MD 21201-2773410.332.8600fax: 410.332.8862

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