Kane Russell Coleman Logan PC A Brief Discussion of Environmental Liability and the Use of Phase I and II ESAs Bruce M. Flowers Kane Russell Coleman Logan PC 1601 Elm Street, Suite 3700 Dallas, Texas 75201 bflowers@krcl.com 214-777-4206

Disclaimers This presentation is for informational purposes only and does not constitute nor contain legal advice. Further, this presentation does not create (and is not intended to create) an attorney-client relationship. This presentation does not serve as a substitute for obtaining legal advice from a competent attorney licensed in any given jurisdiction. No person gaining access to information through this presentation should act on it without first seeking the advice of competent counsel. KRCL is competent counsel.

I Get it

Outline Sources of Environmental Liability Environmental Due Diligence Environmental Terms to Know CERCLA Liability Available Defenses All Appropriate Inquiry Ongoing Obligations Site Assessment Standards – Phase I and Phase II Phase I Phase II Takeaways

The Beginning of the Modern Environmental Movement Published September 27, 1962

Sources of Environmental Liability Comprehensive Environmental Response, Compensation and Liability Act (1980) Texas Solid Waste Disposal Act (1989) Oil Pollution Act (1990) Resource Conservation and Recovery Act (1976) Clean Water Act (1972) Clean Air Act (1963) Third-Parties Other State and Federal Laws

Environmental Due Diligence Identify environmental concerns Potential liability protection under certain environmental statutes Assess the environmental risk associated with acquiring or funding an interest in commercial real estate Use in negotiating contract terms Minimize potential legal claims Required by most lenders

A Few Terms to Know: CERCLA  - Comprehensive Environmental  Response, Compensation and Liability Act RCRA – Resource Conservation and Recovery Act TSWDA – Texas Solid Waste Disposal Act PRP – Potentially Responsible Party AAI – All Appropriate Inquiry ESA – Environmental Site Assessment Phase I ESA – Non-invasive Phase II ESA – Invasive REC – Recognized Environmental Condition PPM – Parts per million De Minimus – Very small VOC – Volatile Organic Compounds TPH – Total Petroleum Hydrocarbons PCE  - Perchloroethelyne

CERCLA Liability WHO: Potentially Responsible Parties (PRP) Current and former owners and operators Persons who arranged for disposal Transporters Generators Retroactive and Strict Liability Joint and Several Liability Statute of Limitations Six Years (after remediation initiated) or Three Years (after removal completed)

CERCLA Liability Cont’d Plaintiff must prove by a preponderance of the evidence a release (hazardous substance) covered by CERCLA incurred response costs response costs were necessary defendant is a PRP Once a defendant is proven to be a PRP a presumption of liability arises burden shifts to the PRP to disprove liability

PRP Defenses Under CERCLA Act of God Act of War Third-Party with no contractual relationship Innocent Landowner – AAI and no reason to know of contamination Bona Fide Prospective Purchaser – AAI and knowledge of contamination Contiguous Landowner – AAI and onsite contamination coming from contiguous properties

All Appropriate Inquiry The assessment of a property to identify and assess liability for potential environmental contamination. Applies to all entities and individuals purchasing property for non-residential use, who may, seek protection from CERCLA liability for releases of hazardous substances. Also, a factor in determining safe harbor defenses available under other environmental statutes.

Innocent Landowner Defense Satisfy AAI requirements before acquiring title No reason to know of contamination Contamination was present before ownership Contamination caused by third-party with no employment, agency or contractual relationship Satisfy continuing obligations

Bona Fide Prospective Purchaser Defense Satisfy AAI requirements before acquiring title Know, or have reason to know, of contamination Contamination occurred before ownership Have no affiliation(1) with any prior owner or operator Satisfy continuing obligations (1) Could include indemnities owed to seller or previous owners

Contiguous Landowner Defense Satisfy AAI requirements before acquiring title No reason to know of contamination from other property No affiliation with any PRP Not cause, contribute to or consent to contamination Satisfy certain continuing obligations

Ongoing Obligations Comply with and not imped land use restrictions Not impede the performance of any response action Exercise “due care” (ILO) or “appropriate care” (BFPP) by taking reasonable steps with respect to hazardous substances on the property Cooperation, assistance and access Compliance with information requests and subpoenas Providing legally required notices

Phase I ESA Industry Standards EPA rules compliance with the new ASTM E1527-13 standard (as well as the older ASTM E1527-05 standard) satisfies AAI. EPA is seeking to remove rule ASTM E1527-05 from satisfying AAI.

What is a Phase I ESA? A Phase I ESA is a qualitative assessment to identify Recognized Environmental Conditions (RECs). "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 a property or into the ground, groundwater, or surface water of the property.”

Who Can Perform a Phase I ESA? Environmental Professionals PE or PG plus equivalent of 3 years full-time relevant experience; or Government certified to do Phase I’s plus 3 years; or Bachelor’s or higher degree in science or engineering plus 5 years; or 10 years equivalent full-time relevant experience Must remain current via continuing education or similar

What is in a Phase I ESA? Governmental Database Reviews Historic Document Summaries Historic Aerial Photo and Maps Findings and recommendations Site Reconnaissance Interviews with Current Owners Property/Building Descriptions Historical and Current Land Use

A Phase I ESA Does Not Answer Soil and groundwater contamination Asbestos Radon Lead-Based Paint Lead in Drinking Water Wetlands Regulatory Compliance Oil & gas wells Cultural Resources Industrial Hygiene Health and Safety Ecological Resources Endangered Species Indoor Air Quality Mold Biological Agents

ASTM E1527-2013 Phase I ESA Major Revisions Recognized Environmental Conditions (RECs) REC definition “simplified” Revised definition of HREC New definition for a “controlled” REC (CREC) Vapor Migration – potential must be addressed (Note distinction between migration and intrusion). Regulatory File Review If the target property or any adjoining property is identified in government records search, “pertinent regulatory files and or records associated with the listing should be reviewed”

REC-HREC-CREC Relationship Contamination in, at or on the target property. Is it de minimis? Has it been addressed? NO YES YES NO De minimis (“Not a REC”) Would regulatory officials view cleanup as inadequate today? REC (“Bad REC”) YES HREC (“Not a REC”) NO Are there restrictions? CREC (“Good REC”) NO YES

Limitations of the Phase I ESA Limited shelf life – up to 1 year, but: Must be updated within 180 days of transaction close Does not include all environmental concerns or provide protection from all environmental laws Can be used by, and provides protection only for the User Reliance letter allows third party use, with conditions NOTE: ongoing obligations must be satisfied

When a Phase I ESA Recommends Further Investigation Investigate the RECs through a Phase II ESA Determine if soil and/or groundwater is impacted at levels that require corrective action under state standards Determine who is responsible for the cost If no impacts above regulatory limits, the report is issued and the purchaser’s due diligence is complete

What is the Value of a Phase II? Provides baseline environmental liability assessment Evaluate risk tolerance of a potential purchase or lender May affect the outcome and negotiation proceedings of a property transaction

Phase II Scope and Report Collect/analyze soil and/or groundwater samples based on Phase I RECs REPORT Purpose or goals and objectives Summary of field activities Summary of analytical results Health Risk Assessment Data Validation Results & Recommendations

Limitations of a Phase II Not a comprehensive site assessment Scope limitations - locations, COC, media, type testing Data gaps and assumptions Does not quantify the environmental risk Does not usually provide an action plan

Take Away Points Environmental law is statutorily driven Environmental statutes are complex and subject to interpretation Environmental statutes require strict compliance Environmental due diligence is a necessity Always involve an Environmental Professional