The PanTerra Group
Who Should Perform an ESA
To establish the innocent landowner defense under federal, state, and local environmental rules and regulations, various levels of environmental investigations may be required. To properly differentiate between the various levels of environmental inquiries, also known as Environmental Site Assessments (or ESAs), it is helpful to understand the considerations behind the need for conducting these assessments.
CERCLA is the acronym for the federal statute entitled The Comprehensive Environmental Response, Compensation and Liability Act of 1980. Also known as Superfund, the statute was enacted to provide the federal government and the states with the authority to identify and impose liability on parties deemed responsible for damage to the environment caused by the release of hazardous substances. The expression "hazardous substance" is much broader than the term "hazardous waste" and includes all hazardous wastes as well as many other materials. However, the term "hazardous substance" does not include asbestos or petroleum products or their fractions (i.e., gasoline, diesel, used oil, and kerosene), or natural gas. Under CERCLA, owners or operators of property are absolutely liable for remediating their property, regardless of whether they are responsible for its contamination and in spite of any past or present legality of the waste generation or disposal.
However, CERCLA does provide an innocent landowner defense which is available to the purchaser or prospective operator who can demonstrate that they conducted all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice. 42 USC §9601(35)(B). Thus, a purchaser or prospective operator is not liable for a pre-existing environmental condition if he can show that he conducted an appropriate inquiry of the property prior to the purchase. This leads us naturally to the question of what level of probing constitutes an appropriate inquiry?
Unfortunately, Congress has left to the courts the business of interpreting the meanings of appropriate inquiry and of good commercial or customary practice. This lack of a consistent definition has also led to a confusion of terms and requirements for the due diligence process. For example, the initial property evaluation process may be referred to variously as a Phase I, an Environmental Site Assessment (ESA), a Due Diligence Evaluation, a Transaction Screen, or a Preacquisition Assessment. Even more confusing is the fact that environmental evaluations of property are typically performed in phases, with each successive phase serving to further reduce the innate uncertainties in the evaluation process. It is often impossible to tell from the term employed the level of diligence used in evaluating property for environmental problems.
Phase I Environmental Site Assessments typically do not involve the intrusive sampling of soil, water, or air to determine the presence or extents of contamination. They do, however, seek to determine whether there have been past or present releases of petroleum products even though such releases are not covered under CERCLA.
Case law indicates that the level of environmental inquiry required to establish the innocent landowner defense is not the same for every property or even for every party in a real estate transaction. Congress stated that those engaged in commercial transactions should, however, be held to a higher standard than those who are engaged in private residential transactions. H.R. Rep. No. 962, 99th Cong., 2d Sess. 187 (1986) reprinted at 1986 U.S. Code Cong. and Admin. News 3276, 3280.
Requiring an environmental assessment is not only advantageous for the purchaser or prospective operator, but also has positive implications for the seller as well. Primarily, the seller may wish to define site conditions so as to protect against future joint and several liability claims. In addition, a property which has been shown to have a low likelihood of environmental degradation may command a higher price and the absence of contamination can even be used as a bargaining tool.
The performance of each phase is not necessarily required for every property transaction. Thus, if a Phase I Environmental Site Assessment is conducted and there is no significant evidence of prior contamination or violation of environmental regulations, there is no need to proceed to a Phase II. However, a Phase II should routinely be conducted for certain real estate transactions, especially those where the likelihood of contamination is high, where one or more parties are environmentally sophisticated, or where past activities on the site are not normally considered environmentally benign.