Defining Due Diligence: The Difference Between Phase I and Preliminary Assessment

16 Dec Defining Due Diligence: The Difference Between Phase I and Preliminary Assessment

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When ESA is asked to perform due diligence, almost without exception, people request a Phase I.  But in New Jersey, what they may really need is a Preliminary Assessment (PA). But why?  And what are the differences between the two forms of due diligence?   

Phase I Environmental Site Assessment

Phase I Environmental Site Assessments identify “recognized environmental conditions” (RECs) in connection with a property. The American Society for Testing Materials (ASTM) Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process (ASTM E1527-13) defines RECs 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 into structures 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 minimis conditions that generally do not present a threat to human 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. Conditions determined to be de minimis are not RECs.

Phase I Environmental Site Assessments follow the guidelines established by the current ASTM E1527-13 and, because they are considered non-intrusive investigations, do not include taking samples. The need for further investigation (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 (past and/or present) be reviewed as part of the Phase I process.

Phase I reports may be required when a party wishes to purchase, sell, or refinance a commercial or industrial property. A Phase I Environmental Site Assessment conducted and written in accordance with the current ASTM E 1527-13 is intended to constitute “all appropriate inquiry” (a.k.a. “AAI”) for purposes of an innocent landowner defense, contiguous property owner defense, or bona fide prospective purchaser defense pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, better known as Superfund). However, it is not intended that a Phase I be limited to those purposes only.  

The current ASTM E 1527-13 was developed in response to the USEPA (40 CFR Part 312), Standards and Practices for All Appropriate Inquiries; Final Rule to address CERCLA requirements.  ASTM E 1527-13 AAI-compliant Phase I Environmental Site Assessments require comprehensive record reviews (federal, state, and local), interviews, data gap identification, environmental lien search, and a comprehensive historical records review among other requirements. The legal benefits of an AAI-compliant Phase I accrue only to the person, persons, company, or entity for which the report is written. In addition, the Phase I report’s “shelf-life” is 180 days. If additional due diligence is required after the six-month shelf-life, the report must be, at the very least, revised.

Clients often want to know if an old Phase I report is still “good.” Here is a typical question. “I have a copy of a Phase I written by ESA two years ago. Is it still valid?” The answer can be given two ways. Relative to the property itself, it depends upon what has transpired at the property during the intervening two years. But, relative to AAI, there is no ambiguity: it must be redone.  Here are the facts you need to know:

• The person or entity in receipt of the Phase I can rely upon the report for six months from its date of publication.
• During the period between six months and one year, the site reconnaissance portion of the assessment must be redone along with the records search, interviews, etc. The only things that do not have to be redone are the historical review and the title search.
• If the Phase I is greater than one year old, the entire report must be redone. However, if you have the prior Phase I, it can be used as a template, which may reduce the price of conducting a new Phase I.
• Due diligence reports provide a snapshot in time. An environmental impact could occur the day after a report is produced.

It is also important to note that a Phase I Environmental Site Assessment conducted in accordance with ASTM E 1527-13 does not satisfy the specific requirements of an innocent landowner defense as established by the New Jersey Department of Environmental Protection. But a Preliminary Assessment does.

Preliminary Assessments

Preliminary Assessments are specific to New Jersey. Like an ASTM Phase I, a PA identifies potential Areas of Environmental Concern (AOCs) without taking any samples and thus is also considered a non-intrusive assessment. It provides the same information as an ASTM Phase I Environmental Site Assessment plus additional data. Every PA 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 include a comparison of the results of all past environmental investigations against contemporary standards.  

PAs are normally the preferred form of due diligence when buying commercial or industrial property in New Jersey because they are required pursuant to various New Jersey laws and statutes (e.g., the Brownfield and Contaminated Site Remediation Act (N.J.S.A. 58:10B-1 et seq.)). ESA generally suggests that a PA be written in lieu of a Phase I when the history of the property is dubious or if it is believed that on-site activities may have resulted in some form of environmental impact. PAs must be performed to satisfy the specific requirements of an innocent landowner defense as established by the New Jersey Department of Environmental Protection (NJDEP). The NJDEP makes a clear distinction that a Phase I or Phase II report is not equivalent to a PA and cannot substitute for a PA. In addition, only the PA can be used in an Industrial Site Recovery Act (ISRA) case to meet the 90-day submittal requirement following an ISRA-triggering event.

There are situations, however, when ESA recommends a due diligence report that combines both the Phase I and the PA. This strategy is often used on complex sites where the purchaser wishes to have both federal and state indemnifications. Combined format reports will satisfy both the Federal requirements for an innocent landowner defense and New Jersey’s own requirements. The larger question is: is this more expensive combined form really necessary? For most concerned parties, the answer is no.

Phase II Investigations

Both the Phase I and PA may identify environmental conditions that require further investigation.  Further investigation normally entails the acquisition of either soil or groundwater samples to determine if impacts are present at concentrations above applicable cleanup standards. But sometimes a Phase II investigation may simply entail examining additional aerial photographs, performing a file review, or interviewing additional people.

A sampling will identify the nature of the impact by determining:

• What contaminants are present and in what quantities
• The horizontal and vertical extent of the contamination
• Whether the contamination originates from the site or is entering the site from an off-site source
• Whether the impact affects soil, groundwater, or both
• Whether or not the impact is within environmental compliance standards

It should be noted that several stages of investigation might be required before the above questions can be answered with a reasonable degree of certainty. In general, the results of the first round of sampling will determine if any contamination is present at concentrations above the applicable cleanup standards. If contamination is present, then additional sampling may be conducted to determine the extent of the contamination and its origin. Please note that the issues addressed in this article are complex. Purchasers are advised to seek the advice of an environmental attorney to get a definitive interpretation of the law as it relates to their situation.