Eisenbach & Ruhnke - Due Diligence

2.0 Due Diligence

Due Diligence is a study of the property and it’s history to determine the likelihood of environmental degradation of the property. Information obtained through the study can help parties decide whether to complete the property transaction, what the property is worth, and which party shall bear the liability for remediation, if necessary.

Properly completed due diligence can also qualify a purchaser for the innocent landowner defense, and control liability in the event of the future discovery of contamination on the property.

If due diligence is ever to be used to support the innocent landowner defense, it may include a Phase I ESA, Phase II SI, and a Phase III RI/FS.

The extent and scope of the due diligence process is based on the presence, or absence of contamination, the level of study required to determine the extent of contamination, and the willingness of the parties involved to continue their involvement.

Once a study is complete and the condition of the property is determined, the three following scenarios may apply:

Uncontaminated Property (“Clean”): The innocent landowner defense claims that a property owner performed all appropriate inquiry to determine whether the property had been contaminated; under this category the property was found not to be contaminated.

Contaminated Property (a): If a property is found to be contaminated, the parties may develop an agreement defining that the transfer shall be completed after the seller completes the remediation of the property. Even after acquisition of the property the purchaser may still claim the innocent landowner defense, based on the belief that the contamination was adequately remediated and that an uncontaminated “clean” property was purchased.

Contaminated Property (b): If a purchaser knowingly buys contaminated property without remediation, the purchaser then takes on the responsibility for the environmental condition of the property and financial liability for remediation. In this case the purchaser is not qualified for the innocent landowner defense.

Four key elements must be understood about due diligence and its impacts:

¨The ASTM Standard;
¨The scope of environmental assessments in due diligence;
¨Strict, joint, several, and retroactive liability;
¨CERCLA, implications for various parties

Only two of these elements will be discussed in the remainder of this course they are the ASTM Standard, and the scope of environmental assessments in due diligence. The last two elements are beyond the scope of this course.

2.1 ASTM Standard

Due diligence can assist parties in avoiding liability, if properly performed. No government regulations exists to define the requirements of the process so the American Society for Testing and Materials (ASTM) has developed a standard for due diligence. This standard includes three separate titles:

¨E1527-00 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.

¨E1528-00 Standard Practice for Environmental Site Assessments: Transaction Screen Process.

¨E1903-00 Standard Guide for Environmental Site Assessments: Phase II Environmental Site Assessment Process.

The ASTM standard is accepted by the industry as the minimum requirements for performing due diligence. The remainder of this course shall present the requirements included in these standards for performing a TSA, Phase I ESA, Phase II SI, and Phase III RI/FS.