Why a Clean Phase I Environmental Site Assessment Can Be Misleading For Those Involved With Post-Closing Construction Activities

A Phase I Environmental Site Assessment is the de facto Environmental Due Diligence standard (ASTM E1527-13) for most commercial property transactions in the United States. The Phase I is used to identify the presence or likely presence of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) hazardous substances or petroleum product releases at a commercial property.  These “Recognized Environmental Conditions” (RECs) can serve as a basis for strict, joint-and-several liability to current and past property owners under CERCLA. 

Most Phase I’s that do not identify RECs will satisfy all stakeholders in a transaction and allow for a smooth closing from an environmental perspective.  However,  a “no REC” Phase I may mean the site is clear of concern from CERCLA hazardous substances and petroleum products but it does not mean the site is clear of other environmental hazards/issues like asbestos, lead, mold and radon.  As a result, sometimes new owners with plans to perform post-closing construction activities can find themselves dealing with environmental issues that were neither planned nor accounted for.  Why?  Evaluating these issues were not part of the Phase I scope.

The ASTM standard for Phase I Assessments identifies a list of “non-scope considerations” that includes: asbestos-containing building materials, biological agents, cultural and historical resources, ecological resources, endangered species, health and safety, indoor air quality (unrelated to hazardous substances or petroleum products, which would be part of the standard Phase I assessment), industrial hygiene, lead-based paint, lead in drinking water, mold, radon, regulatory compliance, and wetlands.  Since these “non-scope considerations” do not fall under the definition of a CERCLA Hazardous Substance they are not required to be evaluated. 

Unfortunately, Phase Is have become a commodity where low cost tends to win.  In order to drive costs down, commodity providers tend to provide the bare minimum with regard to the wants and needs of the customer.  While this bare minimum Phase I may provide CERCLA liability protection, this approach can leave new purchasers in the dark on other environmental issues not picked-up in the standard Phase I work scope.  It only takes one large mold or asbestos problem or a wetland infringement fine to nullify a once-thought good investment. When a consultant is hired for completing a Phase I, they should be asking the right questions to understand the nature of the transaction and the post-closing plans.  If a consultant is not asking about your project you may not be getting all you need out of your pre-acquisition environmental due diligence. 

If you would like to learn more about Recognized Environmental Conditions, register for our webinar on March 17.

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