Due Diligence - AskESA
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Due Diligence

Due diligence is one of the most frequently requested forms of environmental service. It is a non-invasive investigation (i.e., no samples are taken) that determines if potential areas of environmental concern exist on an industrial or commercial property. When performing due diligence, each practitioner follows a prescribed methodology to ensure consistent quality between all due diligence assignments and from practitioner to practitioner. Due diligence is normally required by lenders, should always be performed by buyers, and is often performed by property owners as well. There are four basic types of due diligence performed in New Jersey:

 

Site Inspection: This is the least expensive form of due diligence. It involves a visit to the site, an interview with the person most knowledgeable about the property, and a letter-report of findings. This form of due diligence is most often used by lenders who make small loans on properties that are believed to be environmentally benign.

 

Transaction Screens: This form of due diligence is used for properties that are believed to warrant a higher degree of inquiry than a Site Inspection. The Transaction Screen was formerly recognized by the USEPA as a means to qualify for innocent landowner defense pursuant to CERCLA. However, via the proposed “all appropriate inquiries” (AAI) rule, the US EPA has rescinded the ability of the ASTM E 1528 Transaction Screen to serve its purpose: “to permit a user to satisfy one of the requirements to qualify for the innocent landowner defense to CERCLA liability.” Specifically, as stated by the US EPA in the supporting documentation for the proposed AAI law, “The less stringent transaction screen (ASTM E 1528) is not an interim standard and does not meet the requirements for obtaining the CERCLA liability protections.” So what does this mean for the average client who wishes to use this form of due diligence? Not much. Use it if appropriate… but know that it will not provide innocent purchaser protection.

 

Phase I Environmental Assessment: The Phase I Environmental Site Assessment is the standard form of due diligence practiced and accepted in all 50 states. The purpose of a Phase I Environmental Site Assessment is to identify “recognized environmental conditions” in connection with a property. The American Society for Testing and Materials (ASTM) defines the term “recognized environmental conditions” as, “The presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances or petroleum products on the property or into the ground, ground water, or surface water of the property.” The term includes hazardous substances or petroleum products even under conditions in compliance with laws. The term is not intended to include de minimus conditions that generally do not present a material risk of harm to public health or the environment and that generally would not be the subject of an enforcement action if brought to the attention of appropriate governmental agencies.

 

A Phase I Environmental Site Assessment follows the guidelines established by ASTM E1527-05, and does not include collecting any samples. The need for any additional work (i.e., Phase II sampling) is determined based on the findings of the Phase I. It is important that all readily available environmental reports written for the subject property be reviewed as part of the Phase I. Phase I reports may be needed when one wishes to purchase, sell, or refinance a commercial or industrial property. A Phase I Environmental Site Assessment conducted in accordance with ASTM E 1527-05 is intended to constitute appropriate inquiry for purposes of an innocent landowner defense pursuant to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). However, it is not intended that its use be limited to that purpose. Additionally, the USEPA recognizes Phase I assessments following ASTM E1527-05 as compliant with the All Appropriate Inquiries (AAI) regulation and may be used to satisfy the statutory requirements for conducting all appropriate inquiries under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Completion of a Phase I Environmental Site Assessment conducted in accordance with ASTM E 1527-05 will not satisfy the specific requirements of an innocent landowner defense established by the New Jersey Department of Environmental Protection.

 

Preliminary Assessment: This form of due diligence is used only in New Jersey, as prescribed by the NJDEP. It provides the same information as an ASTM Phase I Environmental Site Assessment, and then goes beyond the Phase I. Every Preliminary Assessment must follow the format prescribed in the New Jersey Technical Requirements for Site Remediation (N.J.A.C. 7:26E), which differs from the ASTM format and must compare the results of all past environmental cleanups against contemporary standards. Preliminary Assessments are the preferred form of due diligence when buying commercial or industrial property in New Jersey because they are required pursuant to New Jersey’s Brownfield and Contaminated Site Remediation Act (N.J.S.A. 58:10B-1 et seq.). Additionally, a Preliminary Assessment must be performed to satisfy the specific requirements of an innocent landowner defense established by the New Jersey Department of Environmental Protection.

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