Environmental Due Diligence for Purchasers: Top 10 Phase I Issues

A critical element of buyers' successful environmental due diligence involving acquisition of real property is the completion of a Phase I environmental site assessment (Phase I), which identifies the presence of recognized environmental conditions (RECs) related to releases of hazardous substances or petroleum constituents.

As environmental consultants become more comfortable with the current standards, it is important to note the common missteps consultants can make that could deprive a purchaser of the all-important bona fide prospective purchaser (BFPP) status. Environmental counsel are also concerned about clients' tendency to rely on environmental consultants exclusively regarding due diligence with a Phase I, as well as clients' misperception that a Phase I guarantees the discovery of all contamination. This advisory summarizes the most common issues observed by this and several other practitioners in their combined experience.

The top ten common issues seen by practitioners include:

  1. Failure to follow the correct standard

    All consultants should be utilizing the ASTM E1527-13 standard for urban property rather than ASTM E1527-05. Given that Phase I reports are quite formulaic, lending themselves to cottage shops completing these reports en masse from a centralized Phase I template, it is essential that the new standard has been completely and thoughtfully incorporated into a consultant’s Phase I report template. Many smaller shops have not fully transitioned and may not be aware of the remaining deficiencies or their significance.

  2. Failure to follow recommended format

    While it is not mandatory that the ASTM E1527-13 recommended format be utilized, if the Phase I is formatted as recommended by Appendix X4, it is much easier to identify missing elements of the required standard. Moreover, it is likely that any future reviewing court will rely on the formatting as assurance that the standard was properly followed in finding that the purchaser properly completed all appropriate inquiry (AAI) and is entitled to BFPP status.

  3. Failure to include exact certification language

    The due diligence required for AAI includes mandatory language certified by the environmental professional (defined by 40 CFR 312.10) issuing the Phase I, as set forth by 40 CFR 312.21(d). Counsel often sees consultants qualifying the required language, such that the all important certifications are no longer valid. This required certification language is mandatory for completion of AAI, and no changes are allowed.

  4. Improper use of the defined terms

    The principle goal of completing the Phase I is to identify RECs for which the purchaser can later assert its BFPP defense to avoid Comprehensive Environmental Recovery, Compensation and Liability Act (CERCLA) liability. The REC definition extends to the presence or likely presence of hazardous substances or petroleum products in, on or at the property due to a release, conditions indicating a release or posing a material threat of a future release, except those releases that result in mere de minimis impacts. Consultants often over apply this definition to scenarios where there is no actual evidence of a release or likelihood that there would have been a release, or that even if there had been a release, the release could have impacted the subject property in a manner that was more than de minimis, or impacted the subject property at all. Often this issue arises from RECs identified on adjacent properties where groundwater flows parallel to the property (cross gradient) or away (down gradient) from the subject property. RECs are also often identified with respect to historic property uses with no known historic releases or any information that would lead to the recognition that a historic release was likely rather than merely theoretically possible.  

  5. Failure to state the purpose of the Phase I

    Phase Is are often completed for reasons other than achieving AAI to support a purchaser’s claim of BFPP status. Given the need to properly identify the user and reliance parties, as well as evaluate the relative importance of completing individual elements of the Phase I standard, the consultant should ask and incorporate the specific purpose of the Phase I in the report.

  6. Including recommendations for site sampling

    Recommendations for Phase II sampling are specifically recognized as non-scope services and are not a required element of the Phase I standard. Counsel recommends such recommendations not be included in the Phase I to avoid creating unnecessary issues in future sales when the current purchaser/future seller is asked provide the future purchaser with copies of all prior Phase Is. There is no reason to create such future issues when the consultant can provide a proposal for onsite sampling via a separate letter. Because consultants can be motivated to include recommendations for additional sampling work in the Phase I report to expand their project scope of work, counsel generally recommends the client specifically request the consultant not include such recommendations in the Phase I and instead discuss the recommendations with client and counsel.  

  7. Failure to conduct proper file review and include proper documentation in appendices

    The ASTM E1527-13 recommends but does not require a review of regulatory files, relying on the environmental professional to justify why a file review is not necessary. Often, due to the timing and relative urgency of the Phase I completion, the time consuming step of conducting a file review is rationalized as not necessary where such a review could have revealed documents and agency decision making critical to the Phase I findings. Counsel often finds that the lack of regulatory file review is not properly justified and constitutes a data gap that can limit options for managing risks from potential liability. The lack of a proper regulatory file review can also result in failure to include sufficient documentation in the appendices to support the Phase I conclusions.

  8. Reusing text from the last Phase I completed

    Because Phase I reports are completed routinely, consultants often pull up the last completed Phase I or the last Phase I for a similar property and utilize that prior report as a template for the current draft. When this shortcut is used, unrelated text from the last report often remains imbedded in the new Phase I posing latent problems that can invalidate the certification and thus the Phase I.

  9. Improperly identifying the user

    Often consultants are confused about the identity of the user. The user is the entity which will rely on the Phase I for the CERCLA landowner liability defense and which must complete a user survey providing specific representations. Sometimes a different entity may pay for the Phase I and other times a landowner user completes a Phase I prior to a sale, which can be updated later by the purchaser user. In any case, the user survey must be completed by the entity intending to rely on the Phase I for demonstration of AAI and properly incorporated into the final Phase I.  
  10. Issuing the Phase I as final without counsel review of the draft

    When environmental counsel is available, counsel will want to review the draft of the Phase I report before it is finalized to ensure resolution of any issues listed above as well as any other problems that could result in issues for the client. Generally, environmental consultants welcome the additional review and opportunity to potentially improve their process and correct any inadvertent errors.

When completed properly, a Phase I allows the purchaser to demonstrate completion of AAI in asserting BFPP, innocent landowner or contiguous property owner status—the essential landowner defenses to liability under CERCLA. To manage potential risks, avoid unnecessary obstacles and resolve less obvious issues, environmental counsel are best utilized as members of the initial team.

If you have any questions about completing environmental due diligence, please contact Mary Ellen Ternes or any other member of Crowe & Dunlevy's Real Estate or Energy, Environment & Natural Resources practice groups.

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