Environmental due diligence is an important consideration in most real estate transactions and development, but takes on particular importance when transferring, redeveloping or acquiring current or former service stations.
Environmental due diligence provides prospective purchasers, developers, and lenders with information necessary to make good business decisions regarding environmental risk. A Phase I Environmental Site Assessment (“ESA”) is a mandatory requirement for obtaining bona fide prospective purchaser or innocent purchaser status, which provide protection from liability under the federal Comprehensive Environmental Response and Liability Act (“CERCLA”).
While CERCLA does not cover petroleum compounds, service stations can have contamination related to non-petroleum compounds used on-site or off-site, such as solvents used for degreasing.
Most state environmental liability schemes require preparation of at least a Phase I ESA. Phase I ESAs provide insight into environmental conditions on a site, including soil and groundwater contamination, vapor intrusion risks, and the presence of emerging contaminants of concern, such as per- and polyfluoroalkyl substances, commonly known as PFAS or “forever chemicals.”
Phase I ESA
These standardized environmental due diligence studies are performed by environmental professionals to identify the potential for environmental contamination that may impact development or result in liabilities, including remediation and associated costs.
In preparing these assessments, environmental professionals follow standards published by the American Society for Testing and Materials (“ASTM”) to evaluate historical information, interview current owners and operators, and visually inspect the site to evaluate the potential for contamination on the site warranting further investigation.
Phase I ESAs do not involve intrusive or destructive testing and instead identify indicia of potential contamination. Phase I ESAs can be relatively inexpensive while providing significant information to guide business decisions. If the potential for contamination exists, the environmental professional will identify it most commonly as a Recognized Environmental Condition, or REC, and recommend further action, often in the form of a Phase II ESA.
Phase II ESA
A Phase II ESA, also guided by ASTM standards, is designed to confirm whether any contamination actually exists. This generally includes soil, groundwater and/or vapor sampling and laboratory analysis of samples.
A Phase II ESA is tailored to address the RECs identified in the Phase I ESA. As such, there is a greater degree of variability in Phase II ESAs, both in what sampling and testing is being performed and in the cost. The environmental professional will use the results of the Phase I ESA to develop a work plan based on the suspected contamination and plans for redevelopment. The results of the testing are then compared to state and federal cleanup standards to determine whether remedial action is needed.
Why It’s Important
As with any business risk, information is critical to sound decision making.
If a downstream energy business seeks to expand its operations by purchasing additional service stations, knowing whether past operations resulted in contamination may weigh into the decision to move forward.
Similarly, when considering whether to redevelop an existing site, either for expansion or prospective sale, environmental due diligence can assist in understanding the potential for environmental contamination from neighboring sites or unknown issues from the existing site.
Up-to-date environmental information can help save tens, if not hundreds of thousands of dollars in additional, unanticipated costs.
Further, environmental due diligence is a requirement to obtain state and federal liability protection under environmental regulatory schemes. A Phase I ESA and appropriate follow-up is necessary to comply with the federal All Appropriate Inquiries rule. Many states also offer various forms of liability protection if environmental due diligence was properly conducted.
These protections can include determinations that no action is needed to address contamination on the site, determinations that prospective purchasers are not associated with the contamination, and in instances where some remediation is necessary, clearance letters to certify that no additional remedial work is necessary.
These protections vary from state to state, but there are some generalities. For example, a purchaser most often cannot obtain liability protection for past contamination associated with ongoing operations. Alternatively, if a purchaser intends to continue operating a gas station but plans to convert a former repair shop to a convenience store, environmental due diligence can delineate certain contaminants such as solvents or other repair-specific chemicals.
A purchaser can work with state environmental agencies to address immediate risks to health and safety, if any, arising from the past use of these contaminants and obtain a regulatory determination that future operations of the site have no association to past contamination.
Emerging Issues
Two issues highlight the importance of environmental due diligence and its ability to inform decision-making.
1. Vapor Intrusion
Vapor intrusion is already a concern identified by many state environmental agencies, and other states are taking notice. Vapor intrusion refers to chemical vapors from contaminated soil or groundwater that migrate into indoor air spaces. This can occur through cracks in foundations, penetrations from utility services, or even the permeable nature of concrete.
States such as Minnesota have developed extensive guidance or regulations to address this concern. This can include scientific and technical guidance and limits above which mitigation systems are needed.
In many instances, although soil or groundwater contamination may not rise to a level requiring remediation, the vapor associated with that contamination could exceed established limits and require mitigation. This could be as simple as sealing foundation cracks or as complex as active systems that depressurize the sub-slab air space or expel the build-up of vapor from indoor spaces.
2. PFAS
PFAS is a broad term that refers to thousands of chemical compounds that do not break down in the environment and that were and are still used in many industries.
Although not common in service station operations, PFAS are prevalent in the environment and have been located in soil and groundwater at sites without a history of PFAS use due to proximity to other industrial operations, such as metal plating, fabrics or cookware coating, or food packaging.
As PFAS remediation is in its early stages and using new or novel technologies, costs for PFAS remediation are difficult to estimate and can be significant. Environmental due diligence can identify the potential for PFAS contamination and can also involve testing for PFAS at potential sites.
Conclusion
We recommend that companies seek legal and environmental professional advice when transferring, redeveloping or acquiring current or former service station sites. If you’d like to learn more about the legal implications of environmental due diligence, visit us at winthrop.com.
The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.
