Purchasers of commercial or industrial properties should beware. They can no longer rely on old environmental reports to shield themselves from environmental liability. New Environmental Protection Agency (EPA) regulations require Phase I reports, which provide a general history and analysis of environmental conditions at properties, to be performed or updated by qualified environmental professionals 180 days before purchasers buy property. For a number of reasons, these new rules, which are effective beginning November 1, 2006, are of critical importance to real estate transactions.
The 2002 CERCLA Amendments
Under a federal environmental law requiring cleanup of hazardous waste sites, known as CERCLA or Superfund, with few exceptions, owners of contaminated property are liable for contamination even if they did not themselves dispose of the hazardous substances. Recognizing the chilling effect this law had on real estate transactions, Congress in 2002 amended CERCLA to provide a "bona fide prospective purchaser" defense. This defense protects purchasers of contaminated property as long as they make, among other things, "all appropriate inquiries" into the property's previous ownership, uses and environmental conditions. The Act required the EPA to issue regulations defining "all appropriate inquiries" within two years.
EPA's New Regulations Define Environmental Professional, Require Updated Phase I's
The EPA's new regulations define for the first time, the qualifications for "environmental professionals" authorized to conduct Phase I reports. According to a recent study by Environmental Data Resources, one in seven current consultants will not be qualified under the new Environmental Professionals standard. The regulations also require Environmental Professionals to follow new industry standards for environmental reports. These revised standards add new research requirements and mandate, among other things, interviews with past and present site owners, operators and occupants, searches for environmental cleanup liens, reviews of historical sources and government records, visual inspections and an analysis of commonly known information on the property. The regulations allow purchasers to rely on past Phase I reports performed by others, but only if such environmental assessments comply with then-applicable standards and are properly updated.
Most importantly, the new rules require that the Phase I report be conducted or fully updated within one year of the date of acquisition of property. Additionally, unless the report is conducted within 180 days of the acquisition date, certain aspects of the report must be updated. These updates include interviews with site personnel, and new searches for environmental cleanup liens and government records, as well as a fresh visual site inspection.
Purchasers seeking to avoid significant environmental liability may no longer buy property relying on old Phase I reports performed long ago by third parties such as banks or sellers. In order to protect itself, a prospective purchaser should:
- Hire its own Environmental Professional (as defined in the regulations) to perform a Phase I report which is either dated one year before it purchases the property (with an update), or is dated six months before the acquisition date; or
- If the purchaser chooses to rely on a Phase I performed by a reputable Environmental Professional that conforms to then-applicable standards, it should have the Environmental Professional certify that the purchaser may rely on the Phase I report. The purchaser must make sure that the Phase I was prepared either one-year before it purchases the property (with an update) or six months before the acquisition date. If this time frame has not been met, the purchaser should retain the Environmental Professional to perform the appropriate update.
Most environmental consultants believe that the new regulations will increase the cost of Phase I reports. Even so, the cost of obtaining a Phase I that meets the new regulations should be no more than $3,000 for the average industrial or commercial property. Given potential liability in the millions of dollars, performing an Environmental Assessment is a necessary cost of purchasing industrial or commercial property.
James D. Brusslan is of counsel for Levenfeld Pearlstein LLC and leads the firm's Environmental Law Service Group. He has more than 20 years of experience representing corporate clients, government bodies and citizens in complex environmental litigation and counseling matters.
[email protected] and www.lplegal.com