Every eight years, standards for environmental Phase I reports are updated – and, typically, made more detailed and stringent. The standards were most recently updated in 2021, and the updated version was approved by the U.S. Environmental Protection Agency (“EPA”) for use beginning in February 2023.
BACKGROUND
Prospective buyers of real property, particularly commercial and industrial properties, routinely commission environmental consultants to prepare Phase I Environmental Site Assessments (“Phase I ESA”) in order to educate themselves about potential environmental conditions they might face as owners, and often to satisfy a condition for qualifying for landowner liability protections available under the Comprehensive Environmental Response, Compensation & Liability Act of 1980 (“CERCLA,” commonly known as the “Superfund” statute). Of particular importance to prospective buyers – and, since 2018, prospective tenants – is the opportunity to qualify as “bona fide prospective purchasers” (“BFPPs”), who may be exempt, notwithstanding their pre-purchase or pre-lease knowledge of the contamination, from the strict, joint and several cleanup cost liability that usually attaches to all current “owners” and “operators” of real property contaminated with “hazardous substances.” Prospective lenders and environmental insurers also rely on Phase I ESAs to guide lending and underwriting decisions that can frequently be critical to the successful closing of a purchase and sale of real property.
CERCLA provides that a prospective buyer’s or tenant’s pre-purchase or pre-lease environmental investigation must meet a standard called “all appropriate inquiries” (“AAI,” for short) in order to qualify it for landowner liability protection. EPA adopted a regulation establishing the elements of AAI in 2005, and also specified that a pre- purchase environmental assessment that met the more detailed requirements of the then-current 2005 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process,” developed and published by the American Society for Testing and Materials (“ASTM”), would satisfy the AAI requirement. Since then, the ASTM standard has twice been updated and approved by EPA, first in 2013, and, most recently, in 2021. EPA’s approval of the 2021 version of the standard, designated ASTM Standard E1527-21, became effective on February 13, 2023. EPA also provided for a one-year phase- out period for the 2013 version, ASTM Standard E1527-13, which will expire on February 13, 2024. Thus, until that date, environmental consultants and their clients will be able to satisfy AAI by complying with either the 2013 or the 2021 version. Prospective purchasers and tenants – and their lenders and environmental insurers, among others – may nevertheless demand that their environmental consultants begin complying with the latest version long before E1527-13 expires.
KEY CHANGES IN E1527-21
The changes wrought by the 2021 version are not as extensive as the changes to the 2005 version that ASTM adopted in 2013, but some of them are significant.
Definition of “Recognized Environmental Conditions”
One change that has garnered attention goes to the core objective of an ASTM- compliant Phase I ESA – identifying “recognized environmental conditions,” or “RECs” – which are now defined as follows:
- 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; or
- The presence of hazardous substances of petroleum products in, on or at the subject property under conditions that pose a material threat of a future release to the environment.
In practice, environmental professionals and those who rely on their Phase I ESAs may well treat this definition as a non-substantive clarification of the 2013 definition, and, according to EPA, the concepts and ramifications of the definition have not changed. Nevertheless, the language changes could be read to grant greater deference to the judgment of the environmental professional with respect to the second prong – a REC based on the “likely presence” of hazardous substances or petroleum at the subject property due to a “likely release.” The concept of a “likely release” is new, and appears in place of the 2013 version’s requirement that the “presence or likely presence” of hazardous substances be based on the arguably more objective criterion of “conditions indicative of a release to the environment.” Any change to the definition of “REC” that vests environmental professionals with greater discretion than they previously had is likely to make REC findings more subjective, and hence less predictable. Because a prospective buyer’s or tenant’s knowledge or reason to know of contamination at the subject property is not a disqualifying factor for BFPP status, the change to the REC definition is unlikely to affect its ability to invoke that defense. Rather, the change is more likely to affect the terms and success of the prospective transaction itself. REC findings can, and often do, prompt buyers to insist on renegotiating the purchase price or other purchase contract provisions, cause lenders to withdraw loan commitments or impose unfavorable loan terms, and induce insurers to insert undesirable exclusions in their quotations of environmental coverage. When greater discretion is given to environmental consultants to characterize a condition – or decline to characterize it – as a REC, it is entirely possible that, in close cases, consultants could find themselves under increased pressure to exercise their judgment in a particular way depending on the needs of their clients.
Historical Research
ASTM Standard E1527-21 substantially overhauls the requirements for historical research into past uses of the subject property. The new standard identifies eight categories of “standard historical resources” and prioritizes four categories that the environmental professional must review if they are “reasonably ascertainable” and likely to be useful: aerial photographs, fire insurance maps (e.g., Sanborn maps), local street directories, and historical topographical maps. If any of these four categories of resources is not reviewed, the reasons why must be explained in the report. If other standard historical resources will aid in identifying specific past uses of the subject property – rather than broad categories of use, such as “industrial” or “retail” – then these resources must be reviewed if they are likely to be useful in this regard. If the four required standard historical sources also provide information regarding “obvious” past uses of adjoining properties, they must be reviewed for purposes of evaluating those uses in order to assess the possibility that use or migration of hazardous substances or petroleum products at the adjoining property has impacted the subject property. If they are not reviewed for this purpose, the report must explain why. Other standard historical sources (e.g., property tax files, zoning records and land use records) should also be reviewed for information regarding the risk of migration from adjoining properties if, in the judgment of the environmental professional, they are likely to be useful and reasonably reviewable in light of considerations of time and cost. Historical resources identified in prior assessments can be used so long as copies were included in the prior assessments and the environmental professional determines that they help to meet the objectives of the Phase I ESA. The historical resources relied upon in a Phase I ESA must be organized and cited in a manner that enables others to recreate the research in the future.
These provisions are substantially more detailed and comprehensive than the parallel provisions in the 2013 version of the standard, and compliance with them may increase both the time and the cost required to complete a compliant Phase I ESA. These factors should be taken into account when planning the timeline and budget for a transaction that requires a Phase I ESA.
Elements of the Phase I ESA report
The report of a Phase I ESA must specify the dates on which the environmental professional conducted interviews, the required review of government records, and the site reconnaissance, and provided the declaration of his or her qualifications, in order to ensure that, regardless of the date the report is issued, those tasks were performed within 180 days of the transaction that the Phase I ESA supports. The report must include a site plan showing the approximate location of features, activities, uses and conditions on the subject property, in addition to photos of features and conditions indicative of RECs. It must also contain detailed findings that identify the features or conditions that indicate the presence or likely presence of hazardous substances or petroleum products at the property, and opinions, with supporting rationale, of the environmental professional whether the features or conditions qualify as RECs, “conditional RECs” “CRECs”, “historical RECs,” or “de minimis conditions.” Significant data gaps must be identified, and the report must discuss how the missing information affects the environmental professional’s ability to identify conditions indicative of releases of hazardous substances or petroleum products, and whether additional information would assist in determining whether a REC or CREC exists.
“Non-Scope Considerations”
The list of “non-scope considerations” – i.e., environmental issues that a Phase I ESA need not address but that the parties may wish to include in the report – has been expanded to include discussion of substances not yet defined as CERCLA “hazardous substances.” Prominent among these are per- and polyfluoroakyl substances (“PFAS”), two of which (known as PFOS and PFOA) are expected to be considered for designation as “hazardous substances” later this year. Once these compounds are designated as “hazardous substances,” Phase I ESAs must consider them, just as they consider any other hazardous substance of petroleum product, in order to comply with the 2021 standard. Even before this designation is finalized, prospective purchasers, lenders and insurers may well ask their environmental consultants to address PFAS compounds as part of their work on a Phase I ESA. Considering the regularity with which environmental insurers are automatically inserting PFAS exclusions in their policies, users of Phase I ESAs may have little to lose by assessing the likelihood of the presence of PFAS releases at the subject property, and something to gain – for example, the withdrawal of a coverage exclusion – if the conclusion of the report is that there is little or no risk of such a release.
CONCLUSIONS
The 2021 modifications to the ASTM standard were not radical, but, predictably, the modifications imposed a few more detailed requirements – and hence a few more ways to fail to comply – than the earlier version. The new version of the standard is likely to result in increased costs and longer lead times for completion of compliant Phase I ESAs. Particularly when the Phase I ESA is relied upon to set up a landowner liability protection under CERCLA (or to meet some other statutory requirement, such as qualification for an agreement with a state environmental agency under the California Land Re-use and Revitalization Act), a careful review of a Phase I ESA in draft form be conducted by experienced environmental professionals or attorneys, in order to ensure that the detailed requirements of the new standard are met.
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