Phase I Environmental Site Assessments Gone Wrong

January 18, 2024

environmental site consultants
Conducting proper Phase I Environmental Site Assessments prevents environmental risks leading to substantial financial and legal repercussions.


Conducting Phase I Environmental Site Assessments (ESAs) is important to avoid significant financial risks for buyers and lenders. Inexperienced or unqualified consultants might overlook critical issues, making it vital to choose qualified environmental consultants. We recommend interviewing consultants to discuss project needs and assess their expertise to understand how they handle potential challenges.

It is essential to ensure the consultant’s qualifications. This process includes checking their educational background and professional certifications, such as Professional Geologist (PG), Professional Engineer (PE), and Certified Environmental Professional (CEP).

The ASTM International E1527-21 standard, effective in early 2023, is the current industry benchmark for Phase I ESAs. These assessments serve two primary purposes: due diligence — identifying potential contamination in real estate transactions, and liability relief — aiding purchasers in qualifying as bona fide prospective purchasers (BFPPs) to avoid liability for existing contamination.

To gain recognition as a BFPP, compliance with the All-Appropriate Inquiry (AAI) Rule is necessary. A Phase I ESA conforming to the current EPA-approved ASTM standard demonstrates this compliance.

Under Federal Law, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) holds current property owners liable for environmental contamination in all but limited circumstances, even if the contamination occurred before their ownership. In some states, like New Jersey, claiming the Innocent Purchaser Defense requires additional assessment work.

Risks of Inadequate Phase I ESAs

The case of a financial institution versus an environmental consulting company underscores the risks associated with an inadequate environmental site assessment. The financial institution suffered considerable monetary loss due to an incomplete historical review, which failed to detect signs of contamination. Additionally, the property owner lost both the functional value of their property and the right to legal action against the assessment contractor, as they were not designated as “users” in the environmental report, facing potentially millions in cleanup costs.

A report from the USEPA released three months after the property transaction confirmed radioactive contamination on the site, previously utilized for hazardous material processing. Despite historical cleanup efforts, extensive radioactive contamination remained, with records dating back decades. This contamination significantly devalued the property and increased liabilities for the property owner and the financial institution.

For several months, the property owner delayed informing the financial institution about the contamination and related legal action. A new environmental consultant hired by the property owner estimated remediation costs to be between $4 million and $30 million. The property owner defaulted on their loan from the financial institution 33 months after its initiation, with a remaining balance of $3 million. Subsequently, the financial institution obtained a new appraisal for the property, which indicated an “as is” value of zero dollars.

Key Recommendations:

  • Ensure the Phase I ESA effort and report align with AAI Rule and ASTM standards to leverage CERCLA BFPP defense benefits.
  • Include a clause in the Phase I ESA consultant’s insurance policy naming you as an additional insured party.
  • Secure a reliance letter granting “user” status under the Phase I ESA report for legal and financial protection if not already named the “user.”
  • Check the Phase I ESA contract for limitations of liability, shortening the otherwise available time deadlines to file suit, and other prerequisites to claims against the contractor.

Risks of Using an Inexperienced Consultant

In the T&K Realty case, the environmental consultant performed a Phase I ESA for T&K Realty but failed to identify an underground storage tank despite evidence of a potential tank location. The consultant installed monitoring wells on the property as part of a Phase II ESA. During sewer line construction, workers found and uncovered a tank. They discovered a monitoring well drilled through the tank, releasing its contents. The tank, located next to a garage that serviced motor homes and other vehicles, contained volatile organic compounds like dichlorobenzene, 1,2-dichloroethene, methylene chloride, trichloroethene, benzene, ethylbenzene, naphthalene, toluene, trimethylbenzene, xylenes, solvents, and petroleum constituents. Complicating matters, the consultant used the sewer contractor to try to remove the tank, resulting in the contractor spilling most of the remaining contents on the ground. The release and subsequent spill resulted in groundwater contamination.

T&K Realty had to pay the costs incurred by NYSDEC, the costs to investigate the contamination and remediate the site, and legal costs. These costs amounted to hundreds of thousands of dollars.

Key Recommendations:

  • Hiring reputable experts with a history of thorough and accurate assessments is crucial to avoid subpar assessments that miss significant issues.
  • When identifying a severe problem, stop work. If possible, assess the situation with your consultant or get a second opinion. Do not proceed until you have a plan.
  • Do not assume another party’s contractor, insurance, or Phase I ESA will protect you in a real property transaction. The AAI regulations are strict about who must do what in a Phase I ESA process, as are contract, insurance, and common law rights in court.

Conducting a Phase I ESA has become customary, but one should never underestimate its value. Collaborating with a qualified and competent Environmental Professional (EP) to ensure compliance with ASTM standards and the AAI Rule is essential. Failure to meet these requirements in a Phase I ESA could jeopardize the purchaser’s liability defenses.

Recognized Environmental Conditions – Best Practices

In the case of TC Rich vs. Shah Chemical Corporation (Shah)[1], an interesting situation arose regarding the recognition of a Recognized Environmental Condition (REC) during two separate Phase I ESAs conducted at separate times.

In the initial Phase I ESA TC Rich performed in 2005, they identified only one REC before purchasing the property and concluded that there was no contamination after soil sampling.

However, in 2015, TC Rich conducted another Phase I ESA to secure a loan. This time, the Phase I ESA identified the prior operations of Shah as a REC and initiated a Phase II ESA. The Phase II ESA revealed Tetrachloroethylene (PCE) contamination in soil, soil gas, groundwater, and even indoor air within the property building, consistent with discharges from Shah’s historical operations.

As a result, TC Rich initiated legal action against Shaw to recover toxic cleanup costs for the property, future cleanup costs, past damages, and attorney fees.

Importantly, TC Rich asserted that they neither caused nor contributed to the hazardous substance discharge on the property and had no prior knowledge or reason to believe that the property was contaminated. TC Rich took civil action against Shah for future cleanup costs and neither caused nor contributed to the contamination, leading to a settlement. If necessary, TC Rich could have used the “innocent landowner” defense under CERCLA.

Key Recommendations:

  • Property purchasers should conduct comprehensive due diligence before acquiring a property, including Phase I ESAs. This due diligence should involve hiring qualified and competent EPs who are well-versed in ASTM standards and AAI Rules.
  • If a Phase I ESA does not identify any RECs, it does not mean the property is free from potential environmental issues. Consider periodic reassessments or updates, especially if the property’s use or ownership changes.
  • Assess the potential for contamination in soil, groundwater, soil gas, indoor air, and other environmental media to ensure a comprehensive evaluation.
  • When a property owner intends to secure a loan or faces changing circumstances, consider conducting a new Phase I ESA. In TC Rich’s case, the second Phase I ESA identified previously unrecognized RECs, leading to a Phase II ESA.
  • When environmental issues arise, consult with legal counsel experienced in environmental law to assess potential liability and determine the best course of action.

Conducting thorough Phase I Environmental Site Assessments (ESAs) is essential for uncovering and addressing potential environmental contamination and conditions linked to properties. Inadequate ESAs, often resulting from inexperienced consultants, can have significant financial and legal consequences for the owner, borrower, and/or lender. This is exemplified in various cases, including those detailed herein, which involved a major financial institution, an environmental consulting firm, and situations like T&K Realty and TC Rich.

Compliance with the AAI Rule is an important first step to qualify for the Bona Fide Prospective Purchaser defense under CERCLA, thus helping parties avoid financial liability for contamination caused prior to their ownership.

In summary, compliance with ASTM E1527-21 and the AAI Rule is essential for due diligence efforts to ensure legal protections and the performance of a thorough risk assessment to maintain confidence in real estate transactions, especially in urban and industrial areas with an environmental history.







Posted by Diane Samuels at 6:00 am