HARRIS & LEE ENVIRONMENTAL SERVICES

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CERCLA Environmental Lender Liability

Lenders can maintain CERCLA exemption by following ownership / liability tests

The EPA Lender Liability Rule does not encourage controlling borrowers but rather it supports proper loan management.

Also see: Environmental management for banks, financial institutions & other lenders

It may appear the EPA holds financial institutions responsible for the failings of others because lenders have attempted to be responsible in their dealings with developers on environmental issues. However, we must keep in mind that the EPA is responsible for defining and identifying responsible owners and operators in order to assign responsibility for environmental failures, which can have long-lasting and far-ranging effects.

Indeed, the EPA has, on occasion, ruled that lenders have been too involved in the daily operation of a company and, therefore, have been given the responsibility for clean up. Ongoing daily involvement, even if initiated more recently than the violations, confers responsibility because it also suggests some knowledge or awareness of the failures.

Lenders that have failed to conduct due diligence or which were not thorough in protecting their security interests have inherited huge environmental liabilities under CERCLA.

There are, however, important and appropriate lender activities as an owner or operator which are shielded from CERCLA (1980) liability under the secured creditor exemption. The Lender’s Exemption provides that the term “owner” or “operator” specifically does not include a person, who “without participating in the management of a . . . facility, holds indicia of ownership primarily to protect his security interest in the … facility.”

The stated purpose of the EPA Lender Liability Exemption is to define and specify the range of permissible activities a lender may conduct without exceeding the bounds of exemption.

The EPA has defined three key and identifiable elements of activities which lenders may conduct without being deemed to have exceeded the bounds of CERCLA exemption. Those elements are: “indicia of ownership”; the requirement that ownership be held “primarily to protect security interest”; and, the prohibition of secured creditors from participating in the management of a facility.

The key elements, all of which must be in place for the lender to avoid liability, are expanded for clarification:

“Indicia of ownership” is defined by the EPA rule as “evidence of interests in real or personal property.” Qualifying indicia of ownership include a mortgage, deed of trust, legal or equitable title obtained through foreclosure, a guarantee of an obligation, an assignment, lien, pledge, or other right or form of encumbrance against the property.

To avail itself of the exemption, a lender must prove it holds the indicia of ownership principally for the purpose of securing payment, or performance of a loan or other obligation.

There is a two-pronged test for identifying when a lender has crossed the lines and can be deemed to be “participating in management.” Activities of management the secured creditor is prohibited from include: a) exercised decision-making control over the borrower’s environmental compliance; or, b) assumed overall management responsibility encompassing the day-to-day decision-making of the borrower’s enterprise.

Acceptable participation

How can lenders protect their loans if they cannot exercise some control over borrowers? The EPA Lender Liability Rule does not encourage controlling borrowers but rather it supports proper loan management.

The United States Environmental Protection Agency has defined four areas where lenders can be involved in environmental inquiries and loan management without being labeled as having “participated in management” of a borrower’s company.

Acceptable loan management activities from an environmental standpoint may occur:

  • Before the loan transaction takes place, or at the inception of the loan
  • During the tenure of the loan
  • While undertaking a financial workout with a defaulting borrower
  • At foreclosure and when preparing the facility for sale or liquidation

Financial institutions serious about avoiding “unacceptable participation” rulings design and implement their own Lender Loan Management Programs to coincide with the four areas of acceptable participation defined by the EPA. The two most important focused objectives of such a program are to minimize environmental liabilities throughout the life of each loan, and to maintain the Lender’s Exemption when borrower viability appears to be at issue.

A solid Lender Loan Management Program addresses lender conduct from the onset of lending conversation, perhaps even before application, and all the way through to loan termination.

Look before leaping:
Lender Loan Management Program

There are several tools and a number of procedures for the various phases of loan management which comprise an effective Lender Loan Management Program.

At the inception of the loan transaction, a Transaction Screen Questionnaire (defined by the ASTM in protocol E1528-93) is used to determine if a Phase I Environmental Site Assessment will be necessary. It is rare that some form of in-depth evaluation is not required on commercial property. Furthermore, it is inaccurate and can be risky to view the Transaction Screen as a shortcut or substitute for a Phase 1 environmental site assessment because, performed according to ASTM protocol, there are many points where the screen leads directly to a full Phase 1 environmental site assessment.

An intermediate tool devised by Harris & Lee Environmental Sciences, LLC is a modified or abbreviated environmental site assessment report. It includes a summary computer data radius report, a brief site reconnaissance, and investigative inquiries into historical use. It is performed in conformance with ASTM protocol, and when performed by experienced senior personnel to draw comprehensive conclusions, it will indicate additional environmental conditions which warrant a Phase 1 environmental site assessment. Not only is the client assured costs will be kept to a minimum, the report can be expanded if considerations require additional detail. Though components of the modified assessment are done in compliance with ASTM standards, it does not technically meet ASTM standards because it is abbreviated. Even so, this abbreviated environmental site assessment will satisfy due diligence requirements for the first phase of the Lender’s Exemption rule. Please email for more information.

Finally, ONLY the All Appropriate Inquiries – Environmental Site Assessment, Phase 1 Investigation satisfies the requirement for one of the three landowner liability exemptions provided by the CERCLA Brownfields Amendments. It must be performed in accordance with ASTM E 1527-05. The advantage for lenders is that these landowner exemptions protect the borrower and collateral in commercial real estate loans.

Tenant assessment vs. tenant compliance

The technical term for that time when a facility undergoes a detailed audit in which all phases of environmental compliance are investigated is “multimedia environmental compliance audit.” Put simply, it means the auditor’s investigation will include all areas for which the potential of contamination exists: soil, air, and occasionally, employee safety and health. The Tenant Environmental Compliance Audit examines not only the paper trail, but chronicles the actual daily practices to minute detail. It is a comprehensive audit process which is important in that it detects noncompliance with numerous and varied regulations, many of which impose heavy fines and cleanup requirements.

A Tenant Assessment is not intended to prevent the facility from minimizing fines due to faulty practices, but rather to identify and to prevent faulty management practices which are likely to create liability by extension to the Lender. An example of the difference in tenant assessment vs. tenant environmental compliance would be incorrect completion of a hazardous waste manifest, as opposed to the outright disposal of hazardous waste without any manifest. Incorrect completion of the manifest could lead to financial fines to the facility, but disposal of the hazardous waste without a proper manifest implies an illegal disposal practice which may be viewed as a criminal offense.

The assessment requires an experienced environmental auditor with a broad philosophical outlook because the hazardous waste was generated from the property, the property owner, or the lender in some cases, could be held responsible.

New vs. existing tenant

Potential environmental risk is minimized when, prior to lease development, a visit is made to the potential tenant’s existing facility. A review of relevant processes and how they are presently handled is the best indicator of how the operation will be run once the tenant is situated on the new property. The hazardous waste materials management plan and tools are reviewed and a determination is made as to how well it is followed. Specific issues regarding future compliance can be identified for coverage in the lease agreement.

Lenders should expect to monitor ongoing compliance at tenant facilities on a regular and agreed upon basis. Such monitoring protects the long-term value of the property. The most important aspect of tenant monitoring is to identify and document potential environmental problems which will or may devalue the property, or cause the extension of liability ownership to the Lender.

Depending on circumstances, the EPA has assigned liability of previous owners and lenders to the current occupant of a property. However, because previous tenants and lenders can be assessed penalties, lenders are urged to have pre-evacuation and pre-lease termination assessments of the property. Doing so minimizes the owner and lender exposure by documenting the tenant’s departure activities. It may, on occasion, be prudent to require a tenant to develop a comprehensive closure plan, and to police the implementation of that closure plan, as well as to monitor the effectiveness of such a plan. It is helpful to stipulate and draw a prospective tenant’s attention to this lender option in the lease. The intention is that tenants who are aware they will be monitored are more likely to be well-prepared, and lease termination may be more manageable.

When Borrowers default

The EPA rule does permit a lender to take necessary steps to protect collateral. For loans threatening default or already in default, borrowers may need professional consultation, which can come at the request of the lender. Lenders may foreclose and not be considered owners for purposes of CERCLA liability. The lender may avoid liability if it undertakes to sell, release or otherwise divest itself of the property in a reasonably expeditious manner. In foreclosure, a property may be operated by a lender under the exemption so long it, as the holder, does not improperly arrange for disposal of hazardous substances at the facility or for transport and disposal at the facility.

Essentially, all EPA rules which applied to the previous tenant apply to the lender as holder in a foreclosure.

Use of expert support

The term “participating in management” as applied by EPA is broad and difficult to interpret. Expert support offering a thorough understanding of the processes and their relationship to all parties is essential to assist lenders in upholding their responsibilities without crossing the line. Technical environmental support should also include appropriate legal assistance to interpret vague language and to assist in refining procedures.

Also see:
Environmental management for banks, financial institutions & other lenders

Robert S. Harris is president and senior scientist of Harris & Lee Environmental Sciences, LLC, a Santa Rosa, California environmental consulting firm serving the western United States. He holds degrees in chemistry and biochemistry, and has 32 years experience in environmental analytical chemistry and environmental toxicology. Mr. Harris has established and operated large laboratories and has developed several ground-breaking methodologies for environmental analysis, including the standard method for analysis of polychlorinated biphenyls in water, soils and oils. His firm has saved lenders, insurance, real estate and law clients millions of dollars, including conversion of waste costing $120,000 per month to a usable fuel. He can be reached by email or phone at (707) 571-8961.

Environmental liability risk management program

The ultimate responsibility for compliance with environmental laws and regulations rests with the property owner. Protect yourself with an environmental liability management program

While the CERCLA Brownfields Amendments  provides three specific landowner environmental liability exemptions, only those who rigorously follow the All Appropriate Inquiries Rule (AAI) prior to purchase are protected.  However, these exemptions do not protect a property owner from environmental liability for damage that occurs during his tenure as owner.

When private property is contaminated or damaged, the ultimate responsibility for compliance with environmental laws and regulations rests with the property owner.

A property may be “clean” when purchased, but the owner must ensure that current uses, by employees, tenants, or even the owner himself, do not create environmental liability that could require costly cleanups and/or reduce the value of the property.

What practical steps can a property owner take to achieve confidence that his property is environmentally safe–without taking actions that could be construed as direct involvement in a tenant’s business management?

Develop an environmental liability risk management program

Property owners who actively manage risk associated with environmental liability can help protect the value of leased and owner-occupied properties and ensure compliance with federal and state environmental regulations.

The objectives of this program should be to identify any potentially environmental damaging processes conducted on the property and help the owner or tenant mitigate such situations before problems occur.

An effective environmental liability risk management program has three parts:

  • New-Tenant Assessment. Prior to lease development, evaluate the facility, review relevant processes, conduct an investigation looking for past environmental hazard violations, and identify issues for specification in the lease.
  • Existing-Tenant Monitoring. To ensure ongoing compliance with lease agreements and environmental regulations, visit tenant facilities on a timely basis. The frequency of visits depends on results of the initial assessment.
  • Exiting-Tenant Assessment. Prior to lease termination, visit the facility to verify the tenant’s lack of impact on the building and environs.

Owner/landlords and developers of commercial and industrial properties find such an environmental liability risk  management program an asset in protecting their investments.

Financial institutions making loans on commercial/industrial properties recognize that owners using an environmental liability management program are serious about preserving property values. In some cases, this alleviates a large concern about commercial/industrial real estate financing and can result in a better loan package with the lending institution.

Law firms charged with writing lease agreements use the environmental liability management program to obtain scientific, regulation-based guidelines for tenant property use to include in the lease.

Tenants also benefit from environmental liability management because the program monitors for practices that are technically substandard, helping them avoid the liabilities inherent to contaminating a property and/or to not reporting the release or use of a hazardous substance.

Harris & Lee Environmental Sciences, LLC offers an environmental liability risk management program designed for owners of single- and multiple-tenant commercial and/or industrial properties. We created the program to assist owners and tenants in avoiding property endangerment and its associated legal responsibilities and costs.

We have extensive experience working with and coordinating efforts among property owners, attorneys, insurance companies, and financial institutions, with the goal of protecting investments by recommending efficient, scientifically sound business practices and procedures that meet regulatory requirements and limit environmental liability for other’s acts. For details on the Harris & Lee Environmental Sciences, LLC Environmental Liability Risk Management Program please email us.

Environmental liability risk management

An environmental risk management plan can help safeguard your property from tenant impact.

Also see:

Dry cleaners pose worst of worst environmental risk for property owners

Create an environmental liability risk management program

Manage environmental risk by monitoring tenants’ impact on the environment

A small commercial strip center has a variety of small businesses located on the premises anchored by one moderately large retail establishment.

  • One of the small tenants is a dry cleaner which began operations in the strip center shortly after it was constructed.

The dry cleaner initially used an apparatus for its cleaning equipment that was not a closed loop system although he did convert to a closed loop design three years later.

As the economy went through its various gyrations, the financial status of the dry cleaner owner also varied. Personal problems severely affected his ability to perform proper maintenance on the equipment in the business.

  • Accordingly, the required maintenance on the dry cleaning apparatus was “make do” and done in an improper manner.

When the strip center owners were seeking to refinance their property, the lender required an environmental site assessment. Soil samples were collected from beneath the concrete slab underneath the dry cleaning machine.

  • The soil samples indicated that the dry cleaning apparatus had been leaking Perchloroethylene (PCE) solvent.

Before any further progress could be made on the loan, more investigation was required. As the investigation progressed, it became clear that the dry cleaner had been leaking solvents for some time.

  • The PCE contamination plume extended for a distance of over 300 feet from the source.

Had the property owner proactively managed environmental risk by insisting from the beginning that the dry cleaner maintain scrupulous care in the management of the equipment and solvents, this case might never have happened. If, for instance, the owner had insisted that the dry cleaning apparatus be kept inside a secondary containment (in addition to that which is supposedly intrinsic with the apparatus), then small spillage might have been eliminated.

Five key safeguards for environmental risk management:

  • Be sure that tenants are using solvents and chemicals safely.
  • Be sure that tenants have taken every safety precaution with their equipment so that in the event of leaks (for example) the property is not impacted.
  • Be certain that the tenant complies with all local, state and federal regulations.
  • Require that the tenant verify to the property owner that the above items are complete and proper.
  • Consider having a qualified environmental auditor conduct brief but complete audits of the property on an occasional basis.

Importance of Working with an ESA

$10,000,000 to learn what can happen without an ESA

A massive price to pay for avoiding the relatively minor cost of a Phase I environmental site assessment

A successful business had been operating in a relatively large building for several years.  As luck would have it, an opportunity to acquire the adjacent property presented itself. The last business went into bankruptcy.

The successful business owner took advantage of the opportunity to acquire the adjacent property for only the back taxes due, literally a steal considering the apparent value of the property.

The deal closed without an environmental site assessment.

The successful business owner was familiar with the adjacent property as far as his local experience provided but he was not acquainted with uses of the property before he became a neighbor. He did not know the adjacent property had housed several different businesses over the years.

In his haste to commence the transaction and believing that “all there is to know” about the property was known, he closed the deal to buy the property without an environmental site assessment.

What was not known to the successful business owner was the fact that 20 years ago a manufacturer of printed circuit boards had occupied the property. The operators of that business had spilled copious quantities of the chlorinated solvent, Trichloroethylene, as well as various acids and solutions of heavy metals onto the property. In fact, a regulatory agency had  issued an order to cleanup the property while the circuit board manufacturer was still operating.  However, that order was not heeded.

To make matters worse, the regulatory agency was lax in enforcing the cleanup order.

After the successful business owner acquired the property, the regulatory agency sent a notification that cleanup of the site would have to commence immediately. The new property owner, knowing nothing of the prior history, did not believe that there was a problem.                   

As time passed, the agency issued another cleanup order that they began to aggressively enforce.  The former operators of the offending business were nowhere to be found, having left the country or had died with empty estates, the ultimate escape. The successful business owner was viewed as the “Responsible Party” even though he had done nothing to directly contribute to the contamination that was now over ½ mile south of the subject property as it spread in the water table, a problem that could carry a price tag of over $10 million.

This case study is a prime example of the value of the landowner exemptions provided by the CERCLA Brownfields Amendments. Today, if the business owner rigorously followed the All Appropriate Inquiries – Environmental Site Assessment, Phase 1 Investigation while purchasing the property, he would likely be protected.

Cost Effective Analysis Plan for an ESA

Just 27 soil samples from a 100-acre site met the owner’s criteria for economic feasibility and satisfied the federal and state environmental regulators

Also see: Investigate the correct contaminant

A 100-acre site had received fill material for nearly 25 years–since the late 1960s. The majority of the fill came from large operators who had total deposits   of 10,000 to 200,000 yards. The materials were trucked to the site in loads of 10 to 20 cubic yards each and deposited at different places at different times. The source of the fill material in any given area of the site was not known.

Because it was a well-known land mass and had received a large quantity of fill, the site was investigated by the Technical Assistant Team of the EPA.                   

    • The investigation resulted in the discovery of zones of waste oil contaminated soil in the fill material deposited at the site.

The owner was directed to conduct an environmental site assessment to determine the presence of hazardous waste. The EPA suspected that hazardous oil refinery waste was included in the fill material.                   

The owner was understandably concerned about the cost of complying with the environmental regulatory agencies’ request.                    

  • For economy, he needed a site sampling and analysis plan that would utilize the minimum number of samples possible and yet still meet the close scrutiny of the federal and state regulatory agencies.    

Harris & Lee Environmental Sciences, LLC developed a cost-effective plan that satisfied the criteria of the environmental regulatory agencies. The plan was designed to collect the minimum number of samples adequate to allow accurate and precise measurement of the chemical properties of the fill material. If the measurements were accurate (free of error) and precise (repeatable), they would meet regulators’ requirements for statistically reliable estimates of conditions at the site.

  • Data supplied by the regulatory agencies was used to calculate and estimate the characteristics of a typical “hot spot.”                     
  • Next, statistical analysis was performed to estimate “consumer’s risk” and to establish the mathematical probability of not finding the typical “hot spot.”
  • Additional analysis estimated the probability of a “hot spot” existing even if none were found through sampling and the mathematical probability of finding an existing “hot spot.”
  • Together with the application of standard statistical methods, these analyses allowed determination of the adequate and reasonable number of samples.

The plan ultimately proposed by Harris & Lee Environmental Sciences called for collection of just 27 samples from the 100-acre site.

  • The plan met the owner’s need for economic feasibility and satisfied the federal and state regulatory agencies’ criteria for the environmental assessment of the site.

Return to Environmental Site Assessments Overview

Investigate the Correct Contaminant

Inadequacies in environmental site assessment led to costly erroneous conclusion of oil contaminated soil

The application of inappropriate tests during the environmental site assessment led to erroneous conclusions of oil contamination and $100,000 down the drain

Also see: Contaminant Sleuth: Robert Harris detects toxins in food, wine, soil

A land development company in Northern California began improving a 13-acre site for inclusion in a nearby light industrial park.  The improvements included adding fill soils from various nearby locations to bring the parcel “up to grade” and retard potential flooding. When grading was accomplished, the site was put on the market and attracted the attention of a large industrial concern.

The buyer requested a Phase I site assessment that was conducted at the land owner’s expense by a local civil engineering firm. It included shallow soil borings and chemical analysis.

  • The engineering firm’s laboratory, chosen for cost reasons only, performed “customary” analyses and reported that the soils were contaminated with used motor oil.

This finding extinguished the buyer’s interest in the property and compelled the owner to undertake extensive additional soils and groundwater testing.

  • Five years later the owner had spent over $100,000 on environmental assessments and consulting without conclusive results.

The next step, he was told, was a full-scale risk assessment of the property, at a cost in excess of $250,000. At the suggestion of his bank, the property owner contacted Harris & Lee Environmental Sciences, LLC and requested an evaluation of the work done to date on the property. The bank was aware of Harris & Lee Environmental Sciences expertise in environmental chemistry and toxicology.

No oil found in the soils

In reviewing the engineering firm’s data on the site, Harris & Lee Environmental Sciences quickly determined that inadequacies in the initial environmental site assessment analysis plan led to the application of inappropriate tests and, likewise, to erroneous conclusions of oil contamination.                    

All of the analytical chemistry performed to evaluate the site for organic constituents was faulty due to application of incorrect analytical procedures.                   

  • Specifically, the California Leaking Underground Fuel Tanks (LUFT) procedure was used, even though it is only for samples taken from directly underneath a leaking tank.
  • In addition, the EPA Toxic Characteristic Leaching Procedure (TCLP) was used, even though samples from sites such as this are specifically excluded from the testing procedure.

Harris & Lee Environmental Sciences, LLC developed a new soil sampling and analysis plan for the property, one that would properly characterize the site through the use of appropriate EPA protocols. The analyses were conducted by laboratories Harris & Lee Environmental Sciences, LLC had audited and qualified as competent for these tasks. 

The resulting data showed that there was no motor oil on the site. Rather, the improper chemistry techniques of the engineering firm’s laboratory had mistakenly identified naturally occurring organic matter as petroleum compounds.

Back to environmental site assessments overview

Dry Cleaners Pose “Worst of Worst” Env Risk

by Robert S. Harris

One of the most challenging types of property to evaluate for environmental risk is the retail shopping mall or small strip center

Dry cleaners use a solvent in the cleaning process called Tetrachloroethylene (also known as Perchloroethylene, or Perc), a significantly toxic chemical. It is particularly obnoxious and difficult to remove from the environment and, over time, it degrades into a potent carcinogen.

Perc is heavier than water; it sinks to the bottom of the body of water it is in.

  • Thus, when Perc is spilled or leaks from a dry cleaner operation, it moves into the groundwater and continues to work its way down until it contaminates the deeper aquifers from which wells typically draw their water.

The result is a major contamination situation that may effect many water wells in an area and can cost up to tens of millions of dollars to clean up.

Property owners are ultimately responsible for environmental contamination

Typically, the dry cleaners that created the mess are “Mom & Pop” operations with limited financial resources, if any, to deal with the clean up. Hence, the regulators move on to the next level of responsibility, the property owner.

All Appropriate Inquiries – Environmental Site Assessment, Phase 1 Investigation is essential when purchasing a retail mall or strip center

One of the most challenging types of property to evaluate for environmental liability risk is the retail shopping mall or small strip center, a typical location of dry cleaners – past and present. In fact, these types of commercial entities can be, and are, the most difficult of business properties to evaluate when performing an environmental site assessment. Some of the reasons for this are:

  • Small strip centers and shopping malls typically have many different small businesses that move in and out frequently.
  • Property managers change on a surprisingly regular basis; on average commercial property managers work with a specific retail property for only about 5 years. New property managers do not usually keep records of tenants that were present on a property prior to their involvement, making it difficult to recreate an accurate history of occupancy.

From this scenario come the following principles:

  • When purchasing property that is or has been used for commercial entities, the All Appropriate Inquiries Rule must be rigorously followed for the purchaser to benefit from a liability exemption under CERCLA.
  • If environmental risk insurance is available to a property owner, it is likely to be very expensive because of the likelihood of contamination and the cost of remediation.
  • Owners of a property with a dry cleaner present in one of the units should closely monitor the tenant or create an environmental liability risk management program that includes a requirement that the dry cleaner use secondary containment to include not only the dry cleaning unit itself, but all of the chemicals and filters that come in contact with the solvent. No secondary containment, or inadequate secondary containment, virtually assures that Perc will contaminate the property. In that event the property owner may well be “taken to the cleaners” himself, facing up to an 8-figure cleanup cost.

Robert S. Harris is president and senior scientist of Harris & Lee Environmental Sciences, LLC, a Santa Rosa, California environmental consulting firm serving the western United States. He holds degrees in chemistry and biochemistry, and has 32 years experience in environmental analytical chemistry and environmental toxicology.  Mr. Harris has established and operated large laboratories andhas developed several ground-breaking methodologies for environmental analysis, including the standard method for analysis of polychlorinated biphenyls in water, soils and oils. His firm has saved lending, insurance, real estate and law clients millions of dollars, including conversion of a waste costing $120,000 per month to a usable fuel.

Inadequacies in ESA Costly in Oil Contaminated Soil

The application of inappropriate tests during the environmental site assessment led to erroneous conclusions of oil contamination and $100,000 down the drain

Also see: Contaminant Sleuth: Robert Harris detects toxins in food, wine, soil

A land development company in Northern California began improving a 13-acre site for inclusion in a nearby light industrial park.  The improvements included adding fill soils from various nearby locations to bring the parcel “up to grade” and retard potential flooding. When grading was accomplished, the site was put on the market and attracted the attention of a large industrial concern.

The buyer requested a Phase I site assessment that was conducted at the land owner’s expense by a local civil engineering firm. It included shallow soil borings and chemical analysis.

  • The engineering firm’s laboratory, chosen for cost reasons only, performed “customary” analyses and reported that the soils were contaminated with used motor oil.

This finding extinguished the buyer’s interest in the property and compelled the owner to undertake extensive additional soils and groundwater testing.

  • Five years later the owner had spent over $100,000 on environmental assessments and consulting without conclusive results.

The next step, he was told, was a full-scale risk assessment of the property, at a cost in excess of $250,000. At the suggestion of his bank, the property owner contacted Harris & Lee Environmental Sciences, LLC and requested an evaluation of the work done to date on the property. The bank was aware of Harris & Lee Environmental Sciences, LLC’ expertise in environmental chemistry and toxicology.

No oil found in the soils

In reviewing the engineering firm’s data on the site, Harris & Lee Environmental Sciences, LLC quickly determined that inadequacies in the initial environmental site assessment analysis plan led to the application of inappropriate tests and, likewise, to erroneous conclusions of oil contamination.                    

All of the analytical chemistry performed to evaluate the site for organic constituents was faulty due to application of incorrect analytical procedures.                   

  • Specifically, the California Leaking Underground Fuel Tanks (LUFT) procedure was used, even though it is only for samples taken from directly underneath a leaking tank.
  • In addition, the EPA Toxic Characteristic Leaching Procedure (TCLP) was used, even though samples from sites such as this are specifically excluded from the testing procedure.

Harris & Lee Environmental Sciences developed a new soil sampling and analysis plan for the property, one that would properly characterize the site through the use of appropriate EPA protocols. The analyses were conducted by laboratories Harris & Lee Environmental Sciences had audited and qualified as competent for these tasks. 

The resulting data showed that there was no motor oil on the site. Rather, the improper chemistry techniques of the engineering firm’s laboratory had mistakenly identified naturally occurring organic matter as petroleum compounds.

CERCLA Historical Background

2013: ASTM E 1527-13: The standard methodology for performing Phase I’s has been updated for the first time since 2005. The new standard became official on November 13, 2013.  The major changes in the new revision include the following:

  • New definitions for Recognized Environmental Conditions (RECs)
    • Historical RECs – must be cleaned up so that no “activity or use limitations” remain on the property. This means that the site must at least meet residential use contamination screening limits, or the former HREC will now be considered an REC
    • Controlled RECs – this is a new term created for past contamination that has been remediated to the satisfaction of the oversight agency, but some contamination remains on the site that pose “activity or use limitations.” Examples could be a site that  could not be converted to residential use or have subsurface disturbance without additional environmental investigation, oversight or controls. The Controlled REC is listed under the recognized environmental condition
    • RECs – the definition has been simplified and the new category of Controlled REC has been added.
  • Files Reviews are No Longer Discretionary
    • In the past, some environmental firms, in an effort to minimize cost and/or time, have skipped performing agency file reviews. This step is no longer discretionary in the new standard. (Note: HLENV has always performed agency file reviews for Phase I Reports.)

2005: ASTM E 1527-05: The Federal EPA  finalized “Standards and Practices for All Appropriate Inquiries,” published in the Federal Register, Part III Environmental Protection Agency, 40 CFR Part 312 dated November 1, 2005.

  • The effective date for these regulations is November 1, 2006. The EPA specified ASTM 1527-00 for Phase I Site Assessments as the designated “interim standards.”
  • After November 1, 2006  only ASTM E 1527-05 will meet the AAI regulations.

2002 Brownfields Amendments: The passage of the Small Business Liability Relief and Revitalization Act, the Federal “Brownfields Act,” an amendment to CERCLA, required EPA to develop standards and practices for conducting “all appropriate inquires.” The ASTM E-1527-97 and -00 were found to be inconsistent with applicable law because neither met the statutory criteria.

  • The 2002 Brownfields Amendments added potential liability protections for “contiguous property owners” and “bona fide purchasers” who also must demonstrate they conducted all appropriate inquiries, among other requirements, to benefit from the liability protection.

1993: American Society for Testing and Materials (ASTM) published the ASTM E-1527 Standard Practice for Phase I Environmental Site Assessments and ASTM E-1528 Standard Practice for Transaction Screens. These standards were the accepted standards for the minimum levels of environmental due diligence within both the environmental consulting, legal, and financial services industries.

1986: Congress passed the “Superfund Amendment Reauthorization Act,” aka, SARA. As part of SARA, the EPA included liability protection known as the “innocent landowner provision” for purchasers of property, as long as the purchaser completed “All Appropriate Inquiry” consistent with “good commercial real estate practices.” Congress created the “innocent landowner” provisions in 1986.

1980: The Comprehensive Environmental Response Compensation and Liability Act (CERCLA) passed by Congress, aka, SuperFund. The law gave the EPA broad powers to investigate and remediate the worst contaminated sites in the country. The initial investigation consisted of a detailed review of the available background information, inspection of the off-site area and inspection of the on-site area. This process was known as “Preliminary Environmental Site Assessment” or “environmental due diligence.” This is the precursor to the Phase I Environmental Site Assessment process.

  • CERCLA contained a concept called “strict liability” – liability without fault. This meant that an “innocent purchaser” of a property could be held liable although they did not cause the contamination.

CERCLA Liability Limits

Key Points

Under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), persons may be held strictly liable for cleaning up hazardous substances at properties that they either currently own or operate or owned or operated at the time of disposal. Strict liability in the context of CERCLA means that a potentially responsible party may be liable for environmental contamination based solely on property ownership and without regard to fault or negligence.

However, the CERCLA Brownfields Amendments provides three landowner liability exemptions:

  • Innocent landowner
  • Bona fide  purchasers
  • Contiguous property owners

There is no protection under CERCLA for a current property owner when hazardous substances are released.

CERCLA Background

Overview of All Appropriate Inquiries (AAI) Requirements for Phase I Site Assessments

Innocent Landowners, Standards for Conducting All Appropriate Inquiries: 40 CFR Part 312

Innocent Landowner Protection

In 1986, the Superfund Amendments and Reauthorization Act (SARA) created an “innocent landowner” defense to CERCLA liability by adding Section 101(35)(B). This section states: “for those persons who could demonstrate, among other requirements, that they “did not know and had no reason to know” prior to purchasing a property that any hazardous substance that is the subject of a release or threatened release was disposed of on, in, or at the property. Such persons, to demonstrate that they had “no reason to know” must have undertaken, prior to, or on the date of acquisition of the property, “all appropriate inquiries” into the previous ownership and uses of the property consistent with good commercial or customary standards and practices.

Brownfields Amendment Liability Limitations

The Brownfields Amendment clarified liability provisions for innocent landowners and added protections from liability for bona fide purchasers and contiguous property owners who meet certain statutory requirements. The All Appropriate Inquiries Rule issued by the U.S. Environmental Protection Agency on November 1, 2005 established the specific regulatory requirements and standards for conducting All Appropriate Inquiries.

Generally, under the CERCLA Brownfields Amendments, the following conditions would minimize a purchaser’s exposure to liability for past environmental contamination. The advantage for lenders is that these landowner exemptions protect the borrower and collateral in commercial real estate loans.
For the Innocent Landowner Exemption:

  • Did not cause or contribute to hazardous substances
  • Property acquired by inheritance or bequest
  • After completing All Appropriate Inquiries & ASTM E 1527-05 did not know and had no reason to know of “release or threatened release” at the time of acquisition

For the Bona Fide Purchaser Exemption:

  • Acquires ownership after 1/1/05
  • Hazardous substances released before purchase
  • No potential liability or connection with Potentially Responsible Party other than through purchase agreement
  • Rigorously completes All Appropriate Inquiries & ASTM E 1527-05
  • Appropriate care in dealing with hazardous substances
  • Cooperates with regulatory agency’s mandated remedial work, contractors, etc.

For the Contiguous Landowner Exemption:

  • Adjacent Property Owner
  • Did not cause, contribute, or consent to release or threatened release
  • After completing All Appropriate Inquiries & ASTM E 1527-05 did not know and had no reason to know of “release or threatened release” at the time of purchase
  • No potential liability or connection with neighboring Potentially Responsible Party

Harris & Lee Environmental Sciences, LLC strongly recommends purchasers seek legal advice before acquiring a property with known environmental damage. This information should not be construed as legal interpretation or legal advice. Our intent is to simply point out that these exemptions exist.

Residential Uses

In the case of property acquired by a non-governmental entity or non-commercial entity for residential or other similar uses, the current standards (ASTM and AAI) may not be applicable. For those cases, the Brownfields Amendments to CERCLA establish that a “facility inspection and title search that reveal no basis for further investigation shall be considered to satisfy the requirements for all appropriate inquiries”.

  • The definition of “facility inspection” is open to conjecture. It can mean more than just inspecting; it may include an investigation into nearby environmentally active sites.
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