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| WINTER 2001 |
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| Inside: |
• Reliance on Existing Environmental Assessments
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Reliance on Existing Environmental Assessments in Property Transactions
By Dr. Don PinchinThe concerns of financial institutions in the last few years over potential environmental financial liabilities has made Phase 1 assessments mandatory in most commercial and industrial real estate transactions. Therefore, much (if not most) of this type of property has had Phase I and even Phase II Environmental Site Assessments (ESA) performed on them. (Phase I ESA refers to a record search and site investigation to identify areas of potential environmental liability with no sampling or testing. Phase II ESA refers to the next step which includes intrusive testing, sampling and analysis to conclusively identify if a problem exists and assist in quantifying the extent of the problem).
In many transactions, the purchaser and their real estate and legal advisors will be provided with a previous Phase I report which the vendor may wish to utilize and not incur the additional cost of re-doing the Phase I ESA. While this may appear reasonable, it is extremely important that the existing ESA be carefully evaluated and professionally reviewed prior to relying on it. The experience of Pinchin Environmental in providing these reviews for a major national financial institution has provided insight into the use of the existing assessments, which may be of value for those involved in property sale or purchase.
TECHNICAL QUALITY OF EXISTING REPORTS
Firstly, it is important to realize that there is a CSA standard for Phase I assessments (CSA standard Z768-94).This standard was not published until April 1994. Many of the existing Phase I reports may pre-date its publication and may not contain essential information.
Secondly, and this may surprise many real estate specialists, there is no independent body which actually reviews the quality of reports, compliance with the CSA standard or completeness of the Phase I work. Therefore, even if a Phase I report states that it was done "in compliance with", "in general compliance with" or "to provide the information required by" CSA Standard Z768-94, there is no guarantee that this has in fact been followed. Our review of numerous Phase I reports indicates frequent obvious and significant omissions.
Of more concern to non-professionals evaluating reports, are subtle or minor deficiencies which may also be significant. For example, many firms utilize the Insurance Advisory Organization (IAO) plans held in public libraries to obtain historical information concerning the property. This is a copyright infringement and frequently the plans held by public libraries are incomplete. Reports held in libraries never include the written inspection reports, which should accompany the plans. If this becomes an issue in litigation, it is questionable whether a Phase I report which relies on copyright material, would be admissible.
Phase II investigations are even more variable in quality as there is no universally accepted standard format or document.
A properly performed Phase II assessment report may require not only engineers but also chemists, hydrogeologists, and geologists to reach appropriate conclusions. The reports are very site specific and often require interpretation skills not actually available to the firm which performed the Phase II work.
LEGAL AND INSURANCE CONSIDERATIONS
The use of disclaimers or statements of limitations is almost universal in ESA reports today. These generally limit the use of the report to a specific purpose or state that only specifically named parties may rely on the report. Other limitations may include a time limitation so that the report is not relied on if changes to the site or tenant occur over time. These limitations have been rightly incorporated to limit the liability of the firm who produced the report. It is obviously unreasonable to expect a firm which received fees of the order of one to two thousand dollars to be perpetually "on the hook" for the report. The validity of this type of disclaimer or limitation of liability has been upheld by a relatively recent court case in Ontario, which involved a property sale.
Even if there is no disclaimer on the report, the nature of the firm performing the Environmental Site Assessment should be considered before relying on the report. Many firms are extremely small, often one person sole practitioners who may or may not be insured. Once again, since engineers, geoscientists, hydrogeologists, chemists and technologists may perform this work (particularly Phase I assessment), there is no uniform professional licensing, vigilance or insurance. Membership in bodies such as the Professional Engineers or the Associated Environmental Site Assessors of Canada (AESAC) may provide some protection and insurance, but this should be confirmed. Unless a firm has the financial ability or insurance to stand behind a report, reliance on the report may be ill advised.
POSSIBLE SOLUTIONS TO THE DILEMMA
The most fool-proof and most expensive way to ensure that the environmental work on a site is adequate for transfer and mortgaging purposes is to re-do the Phase I and/or Phase II work from scratch using a properly qualified and insured firm. However, because of the cost, and because in many cases the environmental reports are perfectly acceptable, there are other more economical ways to reduce liability but still ensure that the mortgage and the property transfer will not fail on an environmental issue.
One method is to ensure the vendor provides all environmental reports pertaining to the property and have them reviewed by a competent firm to determine if they meet the appropriate standards of care. The cost of a review of a Phase I or Phase II report with a covering letter is rarely more than a few hundred dollars. In the event the report is found adequate but contains a disclaimer regarding its use, the original firm who performed the ESA should be approached to extend reliance to the purchaser and/or the mortgagor.
This is usually available but may require an inexpensive confirmatory visit to the site. If the firm will not extend this reliance, a re-assessment by a second firm may be in order. The experience of Pinchin Environmental is that most Phase I ESA's are acceptable and can be relied on with a small amount of additional work or comment from the original firm. If however, the report is found to be significantly deficient (as we find in 10 —15% of the Phase I's reviewed), much more proactive measures must be taken. This usually would involve redoing the Phase I, or if it is a Phase II, would require re-sampling and testing. Our experience is that if the original report is so inadequate as to be rejected by a peer or professional review there may be significant problems or liability related to the property.
Obviously, the time limitations involved in a property sale and/or mortgage situation are frequently stringent. It is important if your practice involves industrial, commercial or residential transactions where a Phase I or Phase II ESA will be needed, that you are prepared in advance. We recommend talking to a firm with a local presence to establish a rapport so the cost of a review and a time frame is agreed in advance. For your own protection and to ensure that the mortgagor is satisfied with the report, one should ensure the consulting firm undertaking the review meets certain minimum standards. These include:
- experience in Phase I and Phase II Environmental Site Assessments
- good reputation and track record (greater than 5 years) in this area of work
- adequate financial background and insurance (including pollution coverage)
- current listing or acceptance by the financial institution who will be advancing the mortgage (most have some type of list or will accept a limited range of firms).
- sufficient staff to be able to promptly review and (if necessary) undertake to redo the Phase I or Phase II work.
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