ASTM Issues New Environmental Real Estate Due Diligence Phase I Standards for CERCLA Bona Fide Prospective Purchaser Defense
December 21, 2021
On November 1, 2021, the American Society for Testing and Materials (ASTM) Committee on Environmental Assessment, Risk Management and Corrective Action approved a new standard for conducting real estate due diligence Phase I Environmental Assessments (Phase I). The new standard, “ASTM E1527-21 – Standard Practice for Environmental Assessments, Phase I Environmental Site Assessment Process” (E1527-21 standard), will replace the current ASTM E1527-13 standard (2013 standard) for conducting Phase Is. The United States Environmental Protection Agency (EPA) is expected to approve the new E1527-21 standard within the next year.
Once approved, the E1527-21 standard will define the requirements for Phase I reports when conducting “all appropriate inquiries” necessary to satisfy the bona fide prospective purchaser defense (BFPP) to CERCLA. The BFPP defense shields purchasers of real estate from liability for cleanup costs related to pre-existing (prior to closing) hazardous substances. As such, the ASTM E1527-21 standard will soon become the industry norm in real estate transactions. This article discusses the key changes in the new standard.
Under the federal CERCLA or Superfund law, with few exceptions, owners of contaminated property are jointly and severally liable for contamination even if they did not generate or dispose of the hazardous substances. Recognizing the chilling effect this law had on real estate transactions, in 2002 Congress amended CERCLA to provide a “bona fide prospective purchaser” defense. The BFPP defense protects purchasers from liability for pre-existing contamination on their property as long as they, among other things, make “all appropriate inquiries” into the property’s previous ownership, uses, and environmental conditions. See Federal Amendments to Superfund Law Offer Protection – Purchasers Can Shield Themselves
In November 2005, EPA issued its initial regulations that set standards for all appropriate inquiries by referencing the ASTM E1527-05 Phase I standard and authorized its use to comply with the all appropriate inquiries rule. On December 30, 2013, EPA issued a new rule, and beginning on October 6, 2015, EPA required prospective purchasers to use the 2013 standard to satisfy the BFPP defense. See Prospective Real Estate Purchasers Should Demand ASTM E 1527-13 Environmental Phase I Reports.
In accordance with EPA’s rule, since 2015, virtually all contractors conducting environmental due diligence have issued Phase Is under the 2013 standard. The new E1527-21 standard replaces the 2013 version.
Major Changes in the New ASTM E1527-21 Standard
The E1527-21 standard makes some significant changes and clarifications, which include the following:
Revised Definition of Current Recognized Environmental Conditions – Recognized Environmental Conditions (RECs) are environmental site conditions found by the consultant that often require further investigation. ASTM E1527-21 clarifies an ambiguity in the 2013 standard’s REC definition regarding the likelihood (rather than certainty) of the presence of hazardous substances at a Property. It now defines a current REC as “(1) the presence of hazardous substances or petroleum products in, on or at the subject property due to a release to the environment; (2) 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; or (3) 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.” (emphasis added). E1527-21 defines “likely” as a condition “which is neither certain nor proved, but can be expected or believed by a reasonable observer based on the logic and/or experience of the environmental professional, and/or available evidence, as stated in the report to support the opinions given.”
Revised Definition of Historical RECs – Historical recognized environmental conditions (HRECs) are environmental conditions that have been remediated to an unrestricted cleanup standard (ie., no engineered barriers or land use restrictions are required). As a practical matter, users of Phase Is often regard HRECs as past environmental problems that no longer pose any concern. Issues sometimes arise, however, because environmental standards have changed, and property that was once considered clean, may no longer meet more stringent standards. For example, 15 years ago, few, if any, government agencies addressed vapor (indoor air) intrusion. As such, a property may have a long-standing unrestricted approval designation, but under the new standards, may pose a vapor threat. To address this loophole, ASTM E1527-21 requires an evaluation under the current unrestricted cleanup standards.
Further Clarifications of What Constitutes RECs – As conditions constituting RECs are often matters of hot dispute between purchasers, sellers, and their respective environmental consultants, ASTM E1527-21 provides Appendix X4, which clarifies the definitions of the different kinds of RECs. RECs can be classified as current, historical (HREC), and controlled, which are conditions that do not require further remediation as long as certain restrictions, such as engineered barriers or commercial/industrial land use restrictions, remain in place (CRECs). Appendix X4 provides examples of what constitutes a REC, HREC, and CREC, and contains a flow chart that consultants can use to make the determinations.
Enhanced Review of Standard Historical Sources – ASTM E1527-21 requires, at a minimum, that the environmental consultant must review the following historical sources at, and adjacent to, the subject property: (a) historical aerial photographs, (b) historical city directories, (c) historical topographic maps, and (d) historical fire insurance (Sanborn) maps. If such sources are not reviewed, E1527-21 requires the consultant to explain why it could not perform this work. The 2013 standard allows review of these four sources at the consultant’s discretion, which can miss historic industrial operations that pose environmental threats. Similarly, E1527-21 emphasizes the importance of a more comprehensive review of the actual operations at historical sources. For instance, consultants often discount threats from “retail” property, when, in fact, retail property may include dry cleaners or other small industrial operations, which often cause environmental problems.
Emerging Contaminants – In the past few years, there has been increased focus on the dangers of newly identified contaminants, including “forever chemicals” such as perfluoroalkyl and polyfluoroalkyl compounds (PFAS). Though EPA has announced its intention to regulate these chemicals as hazardous substances under CERCLA, the agency does not expect to make such designation until the summer of 2023. See PFAS Strategic Roadmap: EPA’s Commitments to Action 2021—2024 at 17. In recognition of the facts that: (a) a major focus of Phase Is is protecting against CERCLA liability, and (b) PFAS are currently not, but soon will be, regulated as hazardous substances under CERCLA, the new E1527-21 standard provides a compromise. It states that until PFAS are classified as hazardous substances, they need not be addressed within the scope of an E1527-21 Phase I, but can be addressed as a “non-scope consideration,” (such as with asbestos) and should be addressed if the user requests such evaluation. As a practical matter, given that: (a) some states already regulate PFAS, (b) EPA will soon be classifying PFAS as hazardous substances, and (c) there is increased awareness that PFAS pose a major environmental risk, it is likely that most E1527-21 Phase Is will address the threat of PFAS, at least in a summary fashion.
Clarification of Other Common 2013 Phase I Questions – ASTM E1527-21 also clarifies several issues in Phase I reports that have caused confusion among environmental consultants and their clients. These clarifications include the following: (1) the new standard directs consultants to identify the property at issue in the Phase I as the “subject property;” (2) the new standard requires the inclusion of photographs and maps; (3) the new standard clarifies that, in order to satisfy the BFFP, the Phase I must be prepared within 180 days of closing of the real estate transaction, or within one year, but only if the following five components are updated within 180 days of the closing: interviews, searches for environmental liens, review of government records, a site visit, and the environmental professional declaration. ASTM E1527-21 requires the Phase I to identify the date of each of these components, and sets the start of the one-year/6-month time frame from the date that the first of these tasks are performed. Furthermore, E1527-21 requires the consultant to determine whether or not its inability to locate certain required information has interfered with the consultant’s assessment of whether there are RECs at the subject property (defined as a “significant data gap”).
The new E1527-21 standard provides prospective purchasers of real estate with a clearer picture of environmental conditions. Nonetheless, EPA has not yet issued regulations approving the E1527-21 standard. As such, the 2013 standard must be followed to satisfy the BFFP defense. While a Phase I under E1537-21 arguably will also satisfy the 2013 standard, until EPA adopts the E1527-21 standard, we recommend clients request Phase I reports which explicitly state that they are performed under the 2013 standard. We also suggest, in order to provide the most comprehensive Phase I analysis, that clients request consultants to provide a separate addendum to the Phase I, which addresses the new E1527-21 requirements, as necessary, including emerging contaminants.