Do I Need to Buy a Phase I Environmental Site Assessment Before I Buy Real Property?

Posted by Ellen Hames on Friday, November 22, 2019

Purchasing contaminated real property can potentially bring significant liability upon a buyer. Conducting a Phase I Environmental Site Assessment (a “Phase I”) early in the due diligence process can provide a purchaser with a defense to such liability if done right. A Phase I is a relatively minor upfront cost to avoid potentially costly issues down the road, and as a result is always recommended.

Broad federal authority to impose liability for environmental contamination is found under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”). Liability under CERCLA is imposed on owners and operators of real estate in the absence of fault, knowledge, or any other wrongdoing by the person held responsible and any one potentially responsible party can be held jointly and severally liable for the entire cost of the cleanup.

In order to address the fear of liability for purchasing contaminated property and the “brownfields”—empty deserted areas of urban properties where potential purchasers refused to purchase contaminated properties due to fear of liability—that resulted, CERCLA was amended. The Small Business Liability Relief and Brownfields Revitalization Act provides immunity from liability under CERCLA for the following landowners who qualify: (1) bona fide prospective purchasers; (2) contiguous property owners; and (3) innocent landowners.

In order to qualify, landowners must make “all appropriate inquiries” regarding the environmental condition of the real property prior to purchase, in addition to other elements that must be satisfied. As long as a purchaser obtains a Phase I based on the standards set forth in the ASTM E1527-05 Environmental Site Assessment Process, the Environmental Protection Agency (the “EPA”) considers the “all appropriate inquiry” standard met. As a result, a transaction can still be consummated despite the knowledge of environmental contamination as long as the purchaser meets the required elements of the defense under CERCLA, including obtaining a Phase I.

Transaction structure is important to consider when undergoing a Phase I. A purchaser in an asset sale transaction may assert the defense, since it is the direct purchaser of the real property. A purchaser in a stock sale transaction is not able to assert the defense, since it is acquiring the current owner of the real property instead of directly acquiring the real property. A Phase I in a stock purchase deal involving real property can still provide a purchaser with value, however, by providing information regarding the level of contamination on the property in question – which the purchaser can use to determine whether or not to go through with the purchase and to negotiate terms. Timing is also an important consideration as a Phase I only provides protection for so long before an update or new Phase I will be required.

A Phase I may uncover hidden environmental liability and is relatively cheap insurance for a buyer of real property to protect against substantial costs down the road. Based on the benefits as well as the relatively minimal cost of a Phase I compared to the potential cost of environmental cleanup liability, a Phase I is recommended prior to purchasing real property.