In today’s world, where the intersection of business and sustainability is under more scrutiny than ever, companies face mounting pressure to ensure their operations are not only profitable but also environmentally sound. With growing public awareness of climate change and stricter regulatory standards, environmental due diligence has become a critical step in mitigating risk and fostering long-term resilience. But what exactly does it entail, and why is it more relevant now than ever?
At its core, the primary object of environmental due diligence is to identify and quantify environmental risks such as contaminated soil or groundwater and to obtain legal protection from both federal and state regulations prior to property acquisition. It can be conducted at the request of land developers, lenders, attorneys or private owners who intend to purchase or refinance a property.
In New Jersey, many projects may need to include preparation of a Preliminary Assessment (PA) Report in accordance with the New Jersey Department of Environmental Protection (NJDEP) requirements. With recent regulation revisions, including the NJDEP’s promulgation of the residential remediation standard for lead in soil, developers and owners should pay close attention as this can impact thousands of projects. Essentially, new remediation standards for lead in soil have shifted from 400 mg/kg to 200 mg/kg, effective May 6, 2024, with a 6-month phase-in period. The NJDEP estimates there are an estimated 3,000 active remediation projects in New Jersey with lead concentrations exceeding 200 mg/kg.
The role of Phase I ESAs in due diligence
Another key part of the due diligence process involves the preparation of a Phase I Environmental Site Assessment (Phase I ESA) in accordance with ASTM International’s E1527-21 requirements. A Phase I ESA is a non-invasive review and includes site reconnaissance, review of regulatory records, historical records, interviews and other related information.
The objective of the Phase I ESA is to identify Recognized Environmental Conditions (RECs) which are defined as:
- The presence of hazardous substances or petroleum products in, on, or at the subject property due to a release to the environment.
- The likely presence of hazardous substances or petroleum products in, on, or at the subject property due to a release or likely release to the environment.
- The presence of hazardous substances or petroleum products in, on, or at the subject property under conditions that pose a material threat of a future release to the environment.
While sampling and laboratory analysis are not a component of the Phase I ESA, they can be recommended based on the findings.
The Phase I ESA also provides buyers with innocent landowner defense, contiguous property owner defense, or bona fide prospective purchaser defense pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also know as Superfund). These CERCLA defenses protect property owners from liability for contamination, including: The Innocent Landowner Defense applies to those unaware of contamination after due diligence, the Contiguous Property Owner Defense applies to owners of properties adjacent to contaminated sites who did not cause or contribute to the contamination but may still be affected by it, and the Bona Fide Prospective Purchaser Defense which shields new property owners who knowingly buy contaminated property but agree to comply with specific requirements (such as taking steps to prevent exposure and cooperating with cleanup efforts).
Phase I ESAs have a shelf life of 180 days after which certain components must be updated.
New Jersey’s PA report and its protections
A New Jersey PA report is also a non-invasive review and includes similar components to the Phase I ESA as well as additional information and is conducted in accordance with the New Jersey Technical Requirements for Site Remediation (N.J.A.C. 7:26E). The objective of the PA is to identify an environmental Area of Concern (AOCs), which is defined as a location or environmental medium where a hazardous substance, waste, or pollutant is known or suspected to be present.
PAs may also include an order-of-magnitude analysis on any previously conducted remediation areas to ensure they do not contain contaminants more than 10x the current applicable New Jersey Site Remediation Standards. Like with the Phase I ESA, sampling and laboratory analysis are not a component of the PA Report process, but they can be recommended based on the findings. The PA Report provides buyers with “innocent purchaser defense” through New Jersey Spill Compensation and Control Act (Spill Act). This means that the PA, when conducted properly, offers legal protection to property buyers in New Jersey under the Spill Act and the “innocent purchaser defense” can shield buyers from liability for pre-existing contamination on the property, provided they were unaware of the contamination at the time of purchase and followed due diligence procedures.
Neither the Phase I ESA nor the PA requires that historical site data be evaluated against remedial standards that are in a grace period prior to official promulgation. However, this oversight can leave the buyer in a position where they are required to perform remediation soon after acquiring the property. An environmental consultant who is truly advocating for their client will proactively include a section in either report that discusses their findings in relation to these pending changes, helping to mitigate future risks.
Avoiding common due diligence pitfalls
Common issues with the due diligence process include incomplete Phase I ESAs/PAs that do not comply with applicable regulations, and as a result, they fail to provide the buyer the full protections they originally sought out in the first place. This is often due to insufficient time for the environmental consultant to obtain and review the necessary documentation or the selection of firms that may lack the necessary expertise and properly trained staff to effectively handle the process.
Why due diligence is essential
Environmental due diligence is not just a box to check; it’s a critical safeguard that allows prospective buyers to understand and address environmental risks before acquiring property. By ensuring compliance with state and federal regulations, it also provides a vital layer of legal protection. However, this process is only as effective as the expertise behind it. Buyers must engage a qualified environmental consultant with deep, local experience and a team of certified professionals who can deliver a thorough and reliable assessment. In an era where environmental liabilities can make or break a deal, cutting corners is a risk no buyer can afford to take.
Richard Mailhot is a Senior Project Manager at Dresdner Robin with more than 25 years of experience working within the environmental due diligence industry.
A version of this article was posted on Area Development.