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In our latest webinar, Jim Lang, Waterfront Law Team and Charles Hall, Director of Environmental Sciences at MSA in Virginia Beach explain the Phase I Environmental Site Assessment, describe how the Phase I Environmental Site Assessment shields the perspective purchaser from the CERCLA liability, and they outline the reasons why it is unwise to skip a Phase I Environmental Site Assessment when purchasing commercial real estate.
Love Canal was the “Time Bomb” that Led to Wide Ranging CERCLA Liability for Purchasers of Commercial Real Estate
In the 1890’s William T. Love wanted to build a canal connecting the upper and lower Niagara Rivers to generate power, cheaply, to fuel the industry and homes of his planned model city. The state assisted the project through use of condemnation to acquire the land. Love started his canal, but he could not finish it, leaving an unused trench one mile, 15 feet wide and 10 feet deep. In 1942, Hooker Chemical and Plastics Corporation purchased the trench. During its eleven years of ownership, Hooker disposed of 21,000 tons of hazardous chemicals in the Love Canal. By 1953, waste from Hooker Chemical and Plastics, the US Army and the City of Niagara Falls filled the canal. The land was acquired by the Niagara Falls Board of Education, with a full disclosure form Hooker as to what lay underneath the ground and the “99th Street School” was built on the site. Additionally, 800 homes, 240 low-income apartments and three schools were built in the neighborhood. Fast forward to 1978 and a record rainfall resulting in contaminants seeping into the homes and schools and puddles of toxic chemicals on the ground as well as the air being tinged with a faint choking smell. The NY Times ran an expose in August of 1978 which led to 98 families being evacuated and President Carter approving emergency financial aid (first time emergency use funds were used for something other than a natural disaster).
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
Established in 1980, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or “The Superfund Law” was enacted to clean up leaking hazardous waste disposal sites. It created a wide range of “responsible parties”, each of whom are financially responsible for cleaning up the property. The liability is expansive because it is “strict”, it is “joint and several” and it is “retroactive”. If no responsible party funds the clean up, the “Superfund” provides a federal fund to clean up uncontrolled or abandoned hazardous-waste sites as well as accidents, spills and other emergency release of pollutants and contaminants into the environment. If the EPA uses superfund dollars to clean up the site it can then bring a legal action against the responsible parties to force them to reimburse the fund. When a responsible party pays for the clean up it can bring a legal action against the other responsible parties to force them to share in the cost.
“Brownfields” Amendment to CERCLA
Prior to 2002, no one would purchase contaminated property because doing so would make them a responsible party (i.e. after they closed the transaction the EPA could force them to pay the full cost to clean up the property). Technically speaking there were two defenses available to the purchaser but they were not very useful. Those defenses were that the hazardous substances were released by “an act of God” or the hazardous substances were released by “an act of War.”
In 2002, the Small Business Liability Relief and Brownfields Revitalization Act was enacted. This Act amended CECLA by providing two new defenses that would shield the person considering the purchase of contaminated property from becoming a responsible party. The two liability shields created by the Brownfields legislation in 2002 are the “Innocent Landowner” defense and the “Bona Fide Prospective Purchaser” defense. The 2002 Brownfields amendments also provided funds to assess and clean up brownfields and provided funds to enhance state response programs.
Innocent Landowner & Bona Fide Prospective Purchaser Defenses
Prospective buyers may use the Innocent Landowner defense when the Phase I Environmental Site Assessment is “clean” but after taking ownership legacy contamination is discovered. In this defense, the hazardous substances were released by an act of a third party, the defendant exercised due care and the defendant took precautions against foreseeable acts of the third party.
Potential prospective buyers may use the Bona Fide Prospective Purchaser defense when the Phase I Environmental Site Assessment finds contamination prior to taking ownership. In this defense, potential prospective buyers report the findings of the Phase I to regulators, after taking ownership they arrange for continuing releases stop and they act to prevent or limit human, environmental or natural resource exposure.
Prospective buyers should never contract to purchase commercial real estate without a clause in the contract that provides for a suitable “study period.” The study period gives the prospective purchaser the time needed to complete the Phase I and to complete the other investigations that will inform the purchaser as to whether the property is suitable for the purchaser’s intended purpose (zoning and title, to name a few). If the purchaser decides not to purchase prior to expiration of the study period, all the purchaser’s earnest money deposit is returned.
Phase I Environmental Site Assessment
There are several reasons for a Phase I Environmental Site Assessment: evaluation of property to determine the potential for environmental conditions that might present a current or future risk; to obtain CERCLA liability protections; used by landowners or investors, lenders, attorneys, businesses and developers and it is an ASTM (American Society for Testing and Materials) Standard.
There are four main steps in the Environmental Site Assessment process: (1) review of the environmental records, (2) site visit to assess the site for evidence of releases of contaminants, (3) interviews with individuals with knowledge of the current and past use of the property, and (4) reporting of the assessment findings.
The typical time to complete an Environmental Site Assessment is two to three weeks. Potential time constraints to consider when conducting the investigation include whether the land is developed or undeveloped, access to the site, the environmental history, personal interviews with past or current owners / tenants and reporting.
An Environmental Site Assessment typically costs roughly $2,000 while a larger, more complicated Assessment may cost upwards of $5,000.
For additional resources, please visit:
Get a Phase I Environmental Site Assessment Before Purchasing Commercial, Industrial or Agricultural Real Estate: https://www.waterfrontpropertylaw.com/blog/posts/phase-i-environmental-site-assessment-purchasing-real-estate/
To watch our full Phase I Environmental Site Assessment webinar, click here. Be sure to sign up for our email newsletter for future webinar announcements.