Top 5 Mistakes Buyers Make During Environmental Due Diligence (and How to Avoid Them)

For prospective buyers of commercial and industrial real estate, conducting environmental due diligence is a critical step in the transaction. It is not only a best practice to ensure informed decision-making, but also a key tool for mitigating liability, particularly when guided by a California environmental attorney. Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), buyers that conduct “all appropriate inquiries,” or “AAI,” and meet other applicable requirements will have defenses from liability for contamination existing prior to purchase.

When conducting environmental due diligence, there are both critical steps to take and pitfalls to avoid. This article focuses on common environmental due diligence mistakes that can threaten buyers’ ability to secure liability protection under CERCLA. We outline five frequent errors and provide tips to help prospective buyers avoid them.

Common Buyer Mistakes During Environmental Due Diligence

Prospective buyers can make many mistakes when approaching environmental due diligence, but a few stand out as especially common. These include:

#1: Failing to Hire a Qualified Consultant

Environmental due diligence requires engaging an outside environmental consulting firm. It is imperative that prospective buyers hire consultants with experience conducting Phase I environmental site assessments (ESAs) and a clear understanding of the ASTM-1527-21 standard, and any updates to that standard.

#2: Failing to Conduct a Phase I ESA That Meets the ASTM-1527 Requirements

Conducting a Phase I ESA is an essential step for making an informed buying decision and securing liability protection under CERCLA. As a result, a Phase I ESA is not something that buyers can skip in order to save money during their due diligence. A Phase I ESA is an important part of conducting AAI under CERCLA, and it provides critical insights for the next phases of the environmental due diligence process. Without conducting a Phase I ESA, a prospective buyer will not meet CERCLA’s requirements for liability protection. To qualify for the innocent landowner defense under CERCLA, the Phase I ESA must comply with the ASTM 1527 requirements. Although ASTM International established the standards for use by engineers and consultants, EPA adopted reference to the ASTM Standard as a mechanism to satisfy the “all appropriate inquiries” requirement. 

The ASTM 1527 was most recently updated in 2021, replacing the prior 2013 version. The 2021 Standard revised key definitions, such as “review of land title records,” “property use limitations,” “likely,” “significant data gaps,” “presumed viability,” and clarified the “level of inquiry” required based on the future intended uses of the subject property. It requires that a Phase I describe the specific features, activities, uses, and conditions both present and absent. While a prior ESA may be used as guidance, it shall not be relied on as representative of current features, activities, uses, or conditions.  The Standard also allows for the consideration of emerging contaminants for inclusion as non-scope items. However, once an emerging contaminant is defined as a hazardous substance under CERCLA, as is now the case with PFAS, these substances must be evaluated within the scope of E1527-21.

Conducting a Phase I that does not meet the most recent ASTM 1527 standards is essentially the same as not conducting a Phase I ESA. The ASTM standards are there for a reason, and CERCLA liability protections depend on strict compliance with those standards. If a consultant fails to perform key tasks, such as visiting the property, interviewing employees, or reviewing documents, important clues to potential RECs may be missed. A buyer who relies on a Phase I that does not follow the ASTM standards risks the ability to claim the innocent landowner defense if challenged at a later date..

#3: Relying on an Outdated Phase I ESA

If a Phase I ESA is more than six months old, then it is considered outdated under ASTM International standards. EPA has adopted the ASTM International standards for establishing compliance with the AAI requirements under CERCLA. Thus, even if no new environmental issues have arisen since the report was prepared, an outdated ESA will ultimately fail to serve its intended purpose, which is to provide the buyer with a basis for claiming the “innocent landowner” exemption from CERCLA.

Some buyers think they can rely on a Seller’s Phase I from a previous transaction, but a Phase I must be “fresh,” meaning it must have been conducted within the past six months.  In addition, most consultants limit the reliance on a Phase I to the party that hires them to perform it. Finally, ASTM-1527 standards are periodically updated, and these updates could change the outcome of an ESA. For example, earlier versions of the ASTM standard did not require prior owners and operators to evaluate potential Recognized Environmental Conditions (“RECs”).  As a result, Phase I ESAs prepared under an older standard may have issued a “clean” report–that is, no RECs– even where current standards would flag a REC based on a former owner’s operations. Therefore, it is incumbent upon a new buyer to perform a new Phase I.  

#4: Ignoring Potential Issues that Are Beyond the Scope of a Phase I ESA

While conducting a Phase I ESA is a critical step for assessing the environmental liability risks associated with the purchase of commercial or industrial real estate, it is not sufficient on its own. This is because there are a variety of potential issues that are beyond the scope of a Phase I ESA.

These include business environmental risks (BERs), among others. BERs are defined by the ASTM as “a risk that can have a material environmental or environmentally-driven impact on the business associated with the current or planned use of commercial real estate, not necessarily related to those environmental issues required to be investigated in this practice.”

The following are all examples of potential BERs that would not be identified in a Phase I ESA:

• Permit violations and other forms of regulatory noncompliance of operations on the property that could result in a material capital cost to maintain the real property
• Presence of asbestos or lead paint 
• Presence of historical fill material
• Land use zoning issues
• Potential habitat destruction
• The risk of liability related to waste generation and disposal
• The risk of regulation of greenhouse gas emissions from the real property 
• The risk of depletion of natural resources that could result in land use rezoning

Again, these are just examples—there may be other environmental risks that are beyond the scope of a Phase I ESA, which can be identified by a California environmental attorney.

#5: Overlooking (or Discounting) RECs or Other Risks

For prospective buyers, simply hiring a qualified consulting firm to conduct a Phase I ESA isn’t enough. Prospective buyers must also carefully assess their consulting firm’s findings, including (but not limited to) any RECs identified in the Phase I ESA report.

If a REC is identified, the buyer’s consultant should recommend further investigation to verify the presence or absence of contamination in the subsurface via a Phase II. A Phase II is not required, however, and whether or not to pursue one will be a business decision subject to multiple factors. 

If a Phase II is performed, and it confirms the presence of contamination in the subsurface, the buyer may request that their consultant prepare a Remediation Cost Estimate (RCE) to assist in negotiations with the seller to allocate responsibility for current cleanup costs and future risks.

It should be noted here that if a Phase II is conducted, the current property owner may have an obligation to report the findings to a state agency, potentially leading to agency oversight, further investigation, or remediation.

Avoiding These (and Other) Mistakes During the Environmental Due Diligence Process

So, what can and should prospective buyers of commercial and industrial properties do to avoid these and other mistakes? The simple answer is to take an informed approach to environmental due diligence by working with experienced California environmental counsel. Identifying the risks through the due diligence process is only the first step. The next is negotiating the deal documents to manage and allocate those risks, again with guidance from counsel. After the purchase is complete, the buyer should also consider consulting counsel to meet compliance obligations related to the property and any operations conducted there to mitigate future liability.  

Speak with a California Environmental Attorney at Bick Law LLP

The attorneys at Bick Law LLP advise prospective buyers on all aspects of the environmental due diligence process. If you would like to speak with a California environmental attorney at our firm, we invite you to get in touch. Call us at 949-432-3500 to schedule a confidential initial consultation today.