Because the courts have interpreted the 1980 Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9601 et seq., as a strict liability statute holding owners in the chain of title liable for environmental damage and remediation, Congress passed amendments in 1986 that included the “bona fide prospective purchaser” (BFPP) defense to allow redevelopment of impacted property without fear of being included in CERCLA’s huge net. This defense to a CERLCA claim is meant to protect purchasers from liability due to pre-existing contamination on the property being purchased as long as they make “all appropriate inquiries” (AAI) into the property’s previous uses, ownership, and environmental conditions. To maintain the defense following acquisition, the purchaser also must comply with statutorily prescribed “continuing obligations” such as complying with activity and use limitations (e.g., no groundwater use) recorded against the property.

The EPA’s accepted standard for AAI previously was ASTM International’s (ASTM)  E1527-13 entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.” This standard was updated by ASTM in November 2021 (E1527-21), which was subsequently approved by the EPA as satisfying the requirements of All Appropriate Inquiries in a final rule on Dec. 15, 2022 (87 FR 76578).

A Phase I investigation is important to assess if current or historical property uses have impacted, or may impact, the soil or groundwater beneath the property such that there may be an impact or threat of an impact to the environment and/or human health. Most lenders require a Phase I for many loans, but more importantly, a lack of a Phase I report could put a purchaser at potential financial risk.

A Phase I report typically includes the following:

• A site visit;
• A review of federal, state, tribal, and local regulatory environmental databases;
• A review of historical records including historical aerial photographs, fire insurance maps (Sanborn maps), historical city directories, and historical topographic maps;
• A review of state and local agency records relating to the property;
• Interviews with current and past property owners, operators, occupants, or others familiar with the property;
• Review of title or judicial records for environmental liens and activity.

The report will highlight Recognized Environmental Conditions (RECs), which are environmental site conditions found by the consultant that often require further investigation.

The EPA’s Dec. 15, 2022, rule provided for a transition period during which a consultant could perform a Phase I investigation under either the E1527-13 or E1527-21 standards. However, as of Feb. 13, 2024, the Phase I investigation must conform with E1527-21. The new E1527-21 standard makes the following important changes:

• It redefines a 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.”
• It 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.”
• It redefines historical RECs (HRECs) which are environmental conditions that have been remediated to an unrestricted cleanup standard (e.g., no engineered barriers or land use restrictions are required). This change is meant to reduce confusion over HREC because environmental standards change, and property that was once considered clean, may no longer meet these more stringent standards. ASTM E1527-21 now specifically calls out for an evaluation under the current unrestricted cleanup standards.
• The standard now requires that 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.

It is therefore important to make sure that whichever consultant is used, that they are aware of this updated standard. Further, in the retention of a consultant, it may be wise to include wording such as “the work will be done in accordance with ASTM E1527-21.” Also, if there are Phase I reports in progress, the consultant should be asked to conform the report to this new standard which may involve further work on their part. However, a Phase I report that does not meet these new criteria could prevent the purchaser from qualifying for BFFP liability protection.

This update is an attempt to clarify open questions that have arisen over the years about a Phase I report, and overall, it seems as though it does. Of course, the standard needs to be applied in the real world over a period of time to determine if it really does what it intended to do.