Hamer: Commercial property environmental due diligence

Here we are, more than 20 years from the passage of the Brownfields Law with protections for prospective property purchasers against environmental liability from past contamination. And yet, even with so much experience and time passing, so much potential liability continues to pass to prospective landowners and leaseholders, from either the incomplete or improper use of the standard, or worse, the complete failure to perform an inquiry at all. Many new property owners and lessors also aren’t aware of — and don’t budget for — the duty to perform ongoing obligations in order to keep whatever legal defenses they may have from their environmental site assessment (aka Phase I’s) … even though the last thing a purchaser wants to get from their new investment is a surprise lawsuit or regulatory action to do some major cleanup.

I’ll address the ongoing obligations first, because those are so often a big surprise to new property owners. After one has jumped through the hoops to secure a bona fide prospective purchaser (BFPP) defense, it can be horrifying to find out that the defense has been lost. But within CERCLA, there are multiple continuing obligations that the purchaser must continue to meet to preserve their BFPP defense. Even innocent landowner and contiguous property owner defenses — which apply only when there is no knowledge of existing contamination at the time of purchase — require certain reasonable steps during their ownership.

For the BFPP, the U.S. Environmental Protection Agency requires that they take reasonable steps for preexisting contamination on the property: to stop any continuing releases; to prevent any threatened future releases; and to prevent or limit human, environmental or natural resource exposure. (CERCLA §§ 101(40)(B)(i)-(viii) and 107(r)). This can mean undertaking environmental investigations and cleanups of properties and addressing any ongoing releases, from tank removals to remedial activities. Secondary “releases” often occur and must be addressed during site redevelopment activities, such as grading and digging basements and new foundations.

While courts ultimately have the final say, EPA may use its “discretion not to pursue the owner as a PRP as a result of that post-acquisition disposal if the owner undertook the activities in a reasonable manner given the type, amount, and location of the contamination at the site, and the owner proactively and subsequently took reasonable steps to manage the [secondary] release.” (“Common Elements,” EPA; July 29, 2019, at 11)

Essentially, a purchaser or leaseholder’s responsibilities do not end at closing but continue for the duration of their interest. And in Indiana, those parties may also find themselves liable not just under CERCLA or state regulations, but under our Environmental Legal Action (ELA) statute, Indiana Code § 13-30-9-1. Under this statute, any party may bring a contribution action for remedial costs against any party that causes or contributes to contamination. Further, simple knowledge of potential contamination (at the time of purchase) without taking action to address it can cause liability under the ELA. JDN Properties, LLC v. VanMeter Enterprises, Inc., 17 N.E.3d 357, 363 (Ind. Ct. App. 2014). Even landowners may be held liable where the polluter is a tenant and the landowner has knowledge of the tenant’s actions. Id.

Of course, there are several other common issues that persist when conducting commercial property transfers, notably failure to adequately name all parties wanting to rely upon the due diligences, failure to allow for adequate time to receive necessary responses to various information requests or having certain data be stale, and failure to request all necessary non-scope items for a particular property — not just jump through the basic “hoops” of an inquiry.

To use the defense provided by a Phase I, the user must be specifically, properly and fully identified on the report or have a reliance letter from the consultant. Often when a prospective purchaser is completing an inquiry, a lender is the actual entity ordering the Phase I. But unfortunately, the new property owner itself often is not listed as an authorized user to enjoy the legal privity necessary to utilize the Phase I and its defenses. Increasingly, the property owner is essentially an assetless holding company, controlled by another business or by individuals who are not named as authorized users and who could become targets for recovery in the future. Even if the environmental consultant may charge a percent premium to add additional authorized users, that cost could pale in comparison to the potential future liability to be avoided. I recently worked through one Phase I in which there were more than a dozen authorized users, but for good reason … and with no extra cost.

Another common issue is only allowing a short time frame to complete the Phase I for closing. Most consultants request at least 30 days, which is the minimum necessary to have all the records inquiries returned by outside parties. Even if an inquiry is made, say to a local fire department or for property records, without time to secure adequate responses and follow up on data gaps, the new property owner user could be left with unforeseen liabilities. The time needed is even greater if a Brownfields application and comfort letter is desired, with a minimum of three to four months necessary. As the expression goes, haste makes waste, and an incomplete response could lead a buyer into a deal or liability they otherwise would avoid.

Next up is one of my big pet peeves: the failure to include all necessary non-scope items in a Phase I for a particular property. Yes, a Phase I may provide protections under federal statute, but a stock Phase I is not necessarily adequate. The work and the document can also provide defenses to many state actions, including from third parties, and provide needed intelligence to thoroughly vet a future work needed on a property — but only if the Phase I is thorough.

For instance, I recently worked through issues where a consultant initially refused to consider PFAS (per-and polyfluoroalkyl substances) as a non-scope item. This was hugely problematic because the property was located near a fire department that had stored/used aqueous film forming foam — a known source of potential PFAS contamination. Even though PFAS is still pending a hazardous substance designation by EPA, we know that classification is coming soon, and huge financial liabilities in the millions and even billions of dollars are already here for property owners and municipalities across the U.S.

Asbestos is another common non-scope item many people discount. Contrary to popular belief, even if your property was constructed after the 1980s or even recently renovated, asbestos could still be used in the building products and be present. This can complicate redevelopment, cause unexpected delays and create plenty of liability if not planned for.

Of course, it never ceases to amaze me when I get asked about whether just a “transaction screen” is acceptable or whether a Phase I really is necessary, particularly if there is no financing. First off, your potential environmental liabilities do not depend on whether there was financing or not, or whether a lender forced the issue. Even if you could do a “transaction screen” for that property only worth a penny less than the $150,000 threshold used, the property cost pales in comparison to the potential risk, particularly for certain emerging contaminants.

Given the potential dollars on the line, the cost of a good Phase I report and its due diligence is always a worthwhile investment. Way back in 2008, an EPA study found the median cost of cleaning up after an underground storage tank at more than $210,000, though many remedial efforts can run a $1 million or more. And petroleum is a relatively “easy” contaminant to investigate and remediate. A 2021 audit from the California State Water Resources Control Board found the average cost to clean up dry cleaner solvents like perchloroethylene was over $600,000. Addressing more difficult-to-remediate contaminants — polychlorinated biphenyls, PFAS, etc. — can easily cost multiple times more.

So the bottom line here is to not get complacent about doing due diligence during property transactions, including leases, and remember your ongoing obligations during commercial operations. Don’t be penny wise and pound foolish — use a qualified and technically proficient environmental consultant to thoroughly investigate and complete your all-appropriate inquiries. And of course, should questions or issues arise, consult your friendly neighborhood environmental attorney!•

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Melissa A. Hamer is an attorney at Kroger Gardis & Regas LLP. Opinions expressed are those of the author.