New EPA Standard Provides Guidance for Phase I Investigations

by Snell & Wilmer

In a recent rulemaking, the Environmental Protection Agency (EPA) amended its “All Appropriate Inquiries Rule” (set forth in 40 CFR Part 312) to reference in the rule ASTM Standard E1527-13. ASTM Standard E1527-13 is the recently updated version of the industry standard that is commonly used to conduct Phase I environmental investigations that are undertaken in connection with commercial real property transfers.

The “All Appropriate Inquiries Rule” is the rule that EPA promulgated to enable purchasers of potentially contaminated property to conduct an appropriate due diligence as part of their effort to maximize the potential applicability of the “innocent landowner” and other limitations on liability under CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended) — also known as the federal Superfund law.

The “innocent purchaser” limitation on liability contained in CERCLA Sections 101 and 107 allows a purchaser who, under certain circumstances, did not know and “had no reason to know” that the subject real property was contaminated to avoid CERCLA liability. However, to avoid CERCLA liability, the purchaser must be able to establish that he or she “carried out all appropriate inquiries … into the previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards and practices.”

The All Appropriate Inquiries Rule describes the tasks that must be undertaken to establish that the purchaser “had no reason to know” that the real property in question was in fact contaminated. It applies not only in the context of the “innocent landowner” defense but also in the contexts of the “bona fide prospective purchaser” and “contiguous property owner” liability protections (also provided for under CERCLA), and other contexts.

The basic components of the All Appropriate Inquiries Rule include:

  • Interviews of past and present owners of the property and other knowledgeable persons;
  • Review of historical sources of information (such as aerial photographs, fire insurance maps, chain of title documents and building department records);
  • Review of government records (such as environmental database reports and records of environmental cleanup liens);
  • Visual inspections of the property; and
  • Preparation of a report documenting this information and the conclusions reached.

The new rule does not alter these general requirements but, by incorporating the updated ASTM standard, the new rule provides additional guidance regarding the manner in which a Phase I investigation is to be undertaken. In addition, the new standard, as stated by EPA, adds an “increased level of rigor” to the Phase I investigation process, which EPA stated it “embraced” and “applauded.”

Some of the more important updates in the new standard include the following:

  • Clarification of Recognized Environmental Condition
    The new standard expands the definition of “recognized environmental condition” to require separate categorization of pollution conditions that have been “controlled” (such as through the use of institutional controls), pollution conditions that are “historical” (such as those that are the subject of “no further action” letters) and pollution conditions that are de minimis (meaning conditions that do not present a threat to human health or the environment and that would not be expected to result in an enforcement action if they became known to a governmental agency).
  • Consideration of Vapor Migration
    The migration of hazardous substances vapors from subsurface environmental conditions into occupied buildings has become a significant regulatory issue over the past few years and the new standard clarifies that this issue must be assessed, where appropriate.
  • Preference for New Standard
    Although the All Appropriate Inquiries Rule, for the time being, has retained the prior version of the E1527 standard in the rule, and although there are other methods by which the inquiry can be undertaken, EPA expressed in its most recent rulemaking a definite preference for the use of the new rule, stating:

“EPA views these enhancements and clarifications to the ASTM standard as valuable improvements and strongly encourages prospective purchasers of real property to use the updated ASTM E1527-13 standard when conducting all appropriate inquiries...”

No doubt, the updated ASTM standard will provide additional clarity, guidance and uniformity in the Phase I investigation process. Nevertheless, two additional considerations should be borne in mind. First, there is a great deal of variation in quality among environmental consulting firms that perform real property transfer environmental due diligence. Therefore, engaging a consultant that will exercise diligence and sound judgment in conducting a Phase I investigation is an important decision that must be made by the client (i.e., the potential purchaser or its lender). Second, there will be situations in which a Phase II investigation is advisable even in the absence of a finding of a “recognized environmental condition” pursuant to the ASTM Phase I standard. In such cases, the potential purchaser (or its lender) may wish to rely upon the judgment and recommendations of its environmental counsel in addition to, or in conjunction with, its environmental consultant.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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