Effective December 30, 2013, the U.S. Environmental Protection Agency (“USEPA”) has amended the “all appropriate inquiries” rule to give parties the temporary option of using either the revised ASTM International (“ASTM”) Standard for Phase Is known as E1527-13, or the prior ASTM Phase I standard known as E1527-05, to satisfy the “all appropriate inquiries” requirement under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). 78 Fed. Reg. 79,319 (Dec. 30, 2013). The “all appropriate inquiries” rule identifies the diligence steps that potential purchasers must perform to satisfy one of several requirements to qualify for protection from CERCLA remedial liability as a “bona fide prospective purchaser,” “contiguous property owner” or “innocent landowner”.
In the near future, USEPA intends to further amend the “all appropriate inquiries” rule to remove the reference to E1527-05 as an adequate diligence standard. USEPA recommends that prospective purchasers, and the environmental professionals (“EPs”) they retain to perform Phase Is, use the revised standard.
SIGNIFICANT DIFFERENCES BETWEEN E1527-13 AND E1527-05
ASTM issued E1527-13 in November 2013. USEPA describes E1527-13 as “similar to the ASTM E1527-05 standard in format, process, and areas of coverage.” 78 Fed. Reg. at 79,321. Nonetheless, differences exist between the revised standard and the prior one. Key differences are:
Recognized Environmental Condition (“REC”) and Release: The goal of a Phase I under either ASTM standard is to identify whether a REC exists on the target property. In essence, a REC is evidence of actual or likely contamination. E1527-13 expressly incorporates CERCLA’s definition of “release”. E1527-13 thus focuses more on whether there is a “release” of hazardous substances or petroleum than on the “presence” of hazardous substances or petroleum.
Historical Recognized Environmental Condition (“HREC”): E1527-13 has revised the definition of HREC to clarify that an HREC is contamination that has been addressed in a manner meeting unrestricted use criteria established by a regulatory authority without imposition of institutional or engineering controls.
Controlled Recognized Environmental Condition (“CREC”): E1527-13 includes the new term CREC. This is contamination that has been addressed to the satisfaction of the regulatory authority but contamination remains in place. The contamination is subject to the implementation of institutional or engineering controls, such as a deed restriction limiting property use to non-residential. E1527-13 does not require an EP to evaluate or confirm the effectiveness of an institutional or engineering control. This new definition, and the revised definition of HREC, should alleviate confusion about how to classify contamination being managed by an institutional or engineering control. Under E1527-05, some EPs have categorized such contamination as a REC, while others have classified it as an HREC.
Vapor Intrusion: E1527-13, like the prior standard, directs EPs to consider the impact of the migration of petroleum and hazardous substance on the property. E1527-13, however, uses a new definition of “migrate/migration” that expressly includes vapor migration. The new definition is expected to result in more Phase Is evaluating the risk of vapor intrusion. E1527-13, though, does not specify how consultants should evaluate the significance of the risk that contaminated vapor will impact indoor air quality. Vapor intrusion is a concern of USEPA and many state regulatory agencies, including in California and New York.
Records Review: E1527-13 imposes additional record review requirements. If the EP identifies the property or an adjoining site on a government environmental database, it must review relevant agency files to assess whether such identification indicates a REC, HREC or CREC. If the EP does not think such review is warranted, it must explain the basis for that opinion in the Phase I report. As an alternative to reviewing agency files, the EP may review information from an alternative source, such as on-site records. The Phase I report should include a summary of such information and the EP’s opinion on whether the information is sufficient to allow the EP to determine whether a REC, HREC or CREC exists.
User’s Responsibilities: E1527-13 emphasizes that the “all appropriate inquiries” rule requires a prospective purchaser, also known as the “user” of a Phase I report, to review or obtain certain information about the property and provide it to the EP performing the Phase I. As a result, E1527-13 mandates the provision by the user to the EP of information discussed in E1527-05 as being useful to the EP in identifying RECs. Key types of such information are: (1) user’s actual knowledge of any environmental liens or activity and use limitations (“AULs”) filed against the property and the results of a search for such liens and AULs; (2) specialized knowledge or experience of the user relevant to identification of RECs and commonly known or reasonably ascertainable information within the community available to the user and relevant to such identification; and (3) if applicable, reason for a significantly lower purchase price. If the user does not provide this information to the EP, the EP should evaluate whether such data gaps are significant and impact its ability to identify RECs.
PRACTICAL STEPS TO TAKE
Update Agreements with EPs: Parties that routinely acquire properties and have master contracts with EPs will want to consider updating them to specify use of E1527-13. While USEPA currently allows users the option of following the prior standard to satisfy “all appropriate inquiries”, that option is expected to sunset soon. Lenders and others who routinely have Phase Is performed to satisfy diligence requirements, but who do not acquire title to real estate in connection with those transactions, may also want to have their consultants follow the updated ASTM Phase I standard so the “state-of-the-art” standard is used.
Compare Future Phase I Reports to Revised Standard: Parties that seek to qualify for a landowner defense to CERCLA liability should consider comparing Phase I reports they receive to the requirements of E1527-13 as a check on whether the reports meet the revised standard. While EPs who agree to comply with such a standard are responsible for doing so, there may be a learning curve for issuing reports that meet the revised standard.
Considerations for Transactions with Existing Phase I Reports: Parties buying or selling properties with existing Phase I reports can consider a new Phase I under E1527-13, or an update to incorporate the new elements of E1527-13, particularly if the existing Phase I report is more than a year old or there has been a material change at the property or in the surrounding area.
If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work.
Our Environmental Practice consists of approximately 40 lawyers who concentrate on environmental and natural resources law. Established over 35 years ago, our group is now one of the largest environmental practices in the United States, with extensive experience in all aspects of environmental and natural resources law. The depth and range of our practice and the frequency with which we address cutting-edge issues enable us to advise clients quickly and cost-effectively. For further information on our Environmental Practice, please contact: David T. Buente (+1.202.736.8111, firstname.lastname@example.org), Robert M. Olian (+1.312.853.7208, email@example.com) or Judith M. Praitis (+1.213.896.6637, firstname.lastname@example.org).
An internationally-recognized leader in commercial real estate, Sidley’s global Real Estate practice team represents lenders, investors, owners and developers in a wide range of real estate transactions and litigation throughout the U.S., the UK, continental Europe and Asia. In addition to our transactional lawyers, our team includes real estate litigators, trial lawyers and bankruptcy lawyers well-versed in the complexities of real estate transaction structures and experienced in the successful defense, prosecution and resolution of disputes in the courts and through alternative dispute resolution.
Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.