Written by Kevin McCartney, PG, Principal, who leads the Real Estate and Transaction Support Practice for BBJ Group in our Chicago, IL office.
Most buyers of commercial real estate know they face environmental risk, and they also know a Phase I Environmental Site Assessment (ESA) will help them clarify that risk.
Many also are aware that obtaining a Phase I is necessary to complete “All Appropriate Inquiries” (AAI), which can give them access to liability defenses under the federal Superfund law.
What is an All Appropriate Inquiry?
AAI is the process of evaluating a property’s environmental condition and assessing potential liabilities for contamination. AAI, derived from CERCLA (“Superfund”) and established in the Federal Register (40 CFR Part 312), allows a party to obtain protections from potential liability as a bona fide prospective purchaser, innocent land owner, or contiguous property owner. The primary means to satisfy AAI is through completion of a Phase I ESA conducted in accordance with ASTM E1527-13.
Less well known is that a Phase I ESA by itself may not satisfy AAI or adequately assess the Phase I user’s (e.g., a prospective purchaser) potential risk. Effective due diligence, including AAI, requires a team effort by the user of the Phase I and its environmental consultant to confidently assess and manage the full range of risk.
Why Buyers and Environmental Consultants Need to Work Together
By design, successful completion of AAI requires both the user of the Phase I ESA and its consultant. This requires user participation that is often skipped or ignored.
For example, AAI requires the user to review title records for environmental liens, which the Phase I consultant can do for the buyer – if requested, but is not expressly required under AAI. Even a technically complete Phase I ESA may therefore not entirely satisfy AAI.
Also, even where AAI is complete, the CERCLA liability protections may not offer sufficient risk protection for a prospective purchaser of a property or business. For example, depending on the history of the property and how it will be used after purchase, the prospective purchaser could face regulatory compliance issues at the State and federal level, liability under OSHA and hazardous waste laws, and even third-party tort claims from tenants and neighbors of the property. This spectrum of potential risks can also be assessed during the AAI process to ensure that liabilities are defined with practical methods for resolution before the closing of an acquisition.
When consultant and buyer work together to clearly scope and manage these risks, the buyer can proceed to purchase with well-founded confidence.