Phase One Environmental Reports - Due Diligence Explained

In 1980, Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C 9601 et seq., as a method to require the cleanup of contaminated properties and to force certain parties to conduct and pay for the cleanup of contaminated sites. Significant amendments to CERCLA were added in the Superfund Amendment and Reauthorization Act of 1986.

CERCLA is unique among the federal environmental laws, because it does not have as its prime purpose the prevention of pollution or harm to the public health and environment. Instead, CERCLA imposes a response and liability scheme to address contamination which, for the most part, has already occurred.

The ownership of property in the United States rests on a foundation of constitutional and statutory laws and judicial interpretations which have been formulated and tested through the years. Many times the purpose of a title search is to identify who has fee title to the property or to determine if there are any encumbrances such as mortgages, judgements, or easements that would effect the title. Title Companies offer title insurance against loss resulting from defects of title to a specifically described parcel of real property. Environmental Title Reports or Historical Chain of Title Reports are conducted to satisfy one of the requirements outlined in CERCLA, such as the "innocent landowner" defense.

The following parties, often referred to as "potentially responsible parties" or "PRPs", are subject to CERCLA liability, as per 42 U.S.C. 9607 (a):

    1. The present owner or operator of the contaminated facility.
    2. Any person who owned or operated the facility at the time at which hazardous substances were disposed at the site.
    3. Any person who arranges for the disposal, treatment, or transport of hazardous substances owned by or possessed by such person.
    4. Any person who accepts hazardous substances for transfer to a disposal or treatment site selected by such person.

There are three statutory defenses to liability for PRPs. As per 42 U.S.C 9607(b), a PRP is not liable if the release of hazardous substances was caused by:

    1. An act of God (e.g., hurricane, tornado)
    2. An act of war.
    3. An act or omission of a third party other than an employee or agent and other than a person whose act occurs in connection with a contractual relationship. A defendant cannot rely on this "third party" defense unless the defendant (i) exercised due care with respect to the hazardous substance and (ii) took precautions to prevent the foreseeable actions or omissions or the third party. Due to the narrow scope of this defense, its principal effect is to provide a defense to an owner or operator who is the victim of a "midnight dumper".

The Innocent Landowner defense arises out of the statutory definition of "contractual relationship" referred to in the third party defense. Congress defined "contractual relationship" to include real estate transactions, and then provided that an owner of contaminated property can establish a defense to CERCLA liability if (i) the property was acquired after the hazardous substance was disposed there and (ii) at the time of acquisition, the owner "did not know and had no reason to know" that the hazardous substance was disposed on the property. Further, an owner can establish that he or she had "no reason to know" only if he or she conducted appropriate due diligence prior to the acquisition.

To establish that the defendant had no reason to know…the defendant must have undertaken, at the time of acquisition, all appropriate inquiry into the previous ownership AND uses of the property consistent with good commercial or customary practice in an effort to minimize liability.

From 42 U.S.C 9601(35)(B) (emphasis added)

According to CERCLA all appropriate inquiry into the previous ownership must be undertaken to comply with the innocent landowner defense. As a party to a commercial real estate transaction it is imperative that the environmental due diligence adheres to both Statute 9601(35)(B) and ASTM Phase I ESA. The American Society for Testing and Materials (ASTM), which is a private not-for profit standards-writing organization, has developed a standard (Designation E 1527-00) for conducting a Phase I Environmental Site Assessment (ESA). The Phase I ESA standards were written to establish good site assessment practices that satisfy the due diligence responsibilities of participants in commercial real estate transactions.

This practice is intended to permit a user to satisfy one of the requirements to qualify for the innocent landowner defense to CERCLA liability: that is, the practices that constitute "all appropriate inquiry into the previous ownership AND uses of the property consistent with good commercial or customary practice" as defined in 42 U.S.C.9601(35)(B).

From ASTM Phase I ESA Designation E 1527-00, 1.1 (emphasis added)

According to the ASTM (ASTM Designation E 1527-00, 7.3.4), standard historical sources include aerial photographs, fire insurance maps, property tax files, recorded land title records, minute topographical maps, street directories, building department records, and zoning and land use records.

Historical chains of title can reveal previous owners and historical uses of a property, but according to the ASTM it cannot be the sole historical source consulted. Though the ASTM standard prescribes many historical sources for determining previous uses of the property, directories, photographs, and maps do not provide the required information to identify a list of previous owners.

This exclusion by the ASTM has led to confusion by professionals in the environmental, financial, and real estate communities, incorrectly believing that historical title records can be eliminated as long as other historical sources of information have been utilized in the report. As a result of consultants’ recommendations of sources that do not include a chain of title, potentially responsible parties and details of particular ownership are not identified. Yet to satisfy due diligence and one of the qualifying requirements to the innocent landowner defense, both previous ownership and uses of the property must be identified as per both 42 U.S.C 9601(35)(B) and ASTM Phase I ESA standards (above).


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Links to references:

ASTM Phase I ESA Designation E
United States Code (USC) Title 42, Chapter 9601