Proper Due Diligence Can Unearth What’s Hidden Underneath Old Industrial & Commercial Facilities
A large majority of real estate professionals, from brokers to commercial lenders, continue to believe that a Phase I Site Assessment is sufficient due diligence in a real estate transaction involving commercial and/or industrial property. However, in New Jersey there are two standards a buyer must satisfy in order to qualify for an innocent purchaser defense under State and Federal law. This concept is referred to as All Appropriate Inquiry (AAI); that is, did the buyer (and/or its agents) conduct all appropriate inquiry into the history of the property such that the buyer truly is an innocent purchaser or a bona fide prospective purchaser? To meet both, you need your consultant/Licensed Site Remediation Professional (“LSRP”) to certify that the due diligence meets both the New Jersey Standard, which is a Preliminary Assessment conducted in accordance with the Technical Requirements for Site Remediation, AND in accordance with ASTM E1527-13 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process as approved by the USEPA.
In June 2014, the USEPA finalized the newly adopted ASTM E1527-13 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process. In doing so, the USEPA took the necessary final steps to make it clear that the new Phase I standard would dictate future efforts to meet the AAI requirements to achieve liability protection under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).
While that newly adopted Phase I process satisfies federal environmental requirements, it does not meet the criteria established by New Jersey’s Spill Act. Under New Jersey law, a Preliminary Assessment (PA), not a Phase I must be done in accordance with the Technical Requirements for Site Remediation (“Tech Regs”). The purpose of the PA is to locate, evaluate and assess the potential environmental risk associated with past and current uses of the property.
The PA will then summarize any areas of concern, which are referred to as “AOC’s”. While a PA and a Phase I are similar, and do overlap, it is important to note that AOCs pursuant to a PA have a broader definition than Recognized Environmental Concern (REC’s) as that term is defined and used in Phase I Site Assessments. Another example of the differences is that a PA mandates specific sources to be searched including, historical Sanborn Maps, historical aerial photographs and business directories (such as McRae’s Industrial Directory, New Jersey Industrial Directory, etc). The new Phase I standard, on the other hand, only requires reviewing at least one of the six government records or data bases of government records for the property and adjoining or nearby properties. In short, a PA is more rigorous in certain areas than a Phase I, and to qualify as an innocent purchaser under New Jersey’s Spill Act, the purchaser must conduct a PA in accordance with the Tech Regs.
Purchasers should not ignore New Jersey’s long history of industrial production. Failing to understand that history and failing to conduct all appropriate inquiry for a transaction involving commercial and/or industrial property may subject the buyer to a Pandora’s box of potential future liability for contaminated soil, groundwater and third-party bodily injury claims.
