Since 2005 the mechanism for property purchasers to use the Phase 1 ESA process to establish “innocent owner” status has been used to mitigate liability from environmental factors resulting from prior property usage. The ASTM standard E-1527-05 and subsequent modifications allow for a property owner to perform certain due diligence as part of their purchase. Lenders are often a part of this process.
The current problem with Phase 1 ESA’s (and Phase 2 if indicated) is that the current budgets for performing these site assessments are insufficient to perform all of the steps as the standard is strictly interpreted. Mapping, soil sampling, groundwater topography, and records analysis are all expensive engineering projects which do not always fit in the budget set aside for the transaction. This is especially noticeable on small to mid-range properties. For example, a $300,000 commercial property transfer is unlikely to have $5000 available in the closing costs to perform all of the environmental, engineering, and title search due diligence described in the standard.
Environmental engineers are becoming experts at discovering methods to obtaining the necessary information using the limited resources at hand. From what is visible in the title searching industry this is apparent. Part of the problem with the ASTM standard is the idea of an environmental lien. In the land title search industry there are mechanics liens, tax liens, and child support liens, but until the early 2000′s the term “environmental lien” was not something seen in land records. The standard described the types of records which could be considered to be an environmental lien many of which were not a “lien” in the traditional sense of the real estate industry.
Any time there is an official record describing a financial responsibility or limitation attached to a property originating from something relating to the environment or toxicity, that was to be categorized as an environmental lien. Many of these would not be found in the land records office where deeds and liens are filed. They can sometimes be located in records from professional licensing divisions, wildlife agencies, and even law enforcement records.
The ownership history provision of the ASTM standard is also problematic. It could be interpreted in requiring an official chain of title report back to 1940. However on a typical commercial property a “chain of title” report as performed by a certified title abstractor could cost $1000′s. In many cases the same information can be discovered using other methods. We find that less than 30% of Phase 1′s which need an environmental liens search end up needing the chain of title. Most of the this 30% are associated with projects being performed by government agencies or larger corporations where budget is less of an issue which is probably not a coincidence.
We have yet to see a case where innocent owner liability has been challenged due to not meeting the full ASTM standards. Most EE firms we speak with agree that doing as much searching as possible is the best answer. Since the standard itself is ambiguous and is often interpreted in various ways, it is better to do some searching in each area of the requirements rather than to ignore one aspect (such as chain of title) altogether.
Phase 1 ESA providers are in the difficult position of matching project budgets with the reality of the search scope. The most skilled firms have discovered excellent methods for reasonably meeting both.
