On December 15, 2022, the United States Environmental Protection Agency (EPA) published its final rule, 87 Fed. Reg. 76578, which formally updates the standard to satisfy “all appropriate inquiries” under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The result is the effective adoption of ASTM E1527-21 as the new Phase I Environmental Site Assessment standard. ASTM E1527-21, went into effect on February 13, 2023, and significantly revises a number of the prior provisions under ASTM E1527-13, and also clarifies a number of key terms and requirements.
The new ASTM Standard is intended to provide additional information (and the basis for defenses to certain CERCLA-type liabilities) for prospective purchasers by revealing additional conditions not previously considered relevant to due diligence or the CERCLA defenses. However, there are significant additional consequences we anticipate will stem from key definitional changes to “Recognized Environmental Condition” (REC), “Controlled Recognized Environmental Condition” (CREC), and “Historical Recognized Environmental Condition” (HREC), which are updated to reduce misclassifications of known or likely hazardous material and petroleum product releases affecting subject properties. Overall, these definitional changes should create consistency amongst consultants, including as to how environmental conditions are recognized; however, they will also bring added expense to stakeholders. For example, the updated standard also adds new definitions for the terms “likely,” which is intended to clarify the likely presence or likely release of a hazardous substance. Although this change is expected to result in greater consistency, the changes to the definitions of REC and Business Environmental Risks (BERs) are also expected to result in consultants identifying more RECs and BERS than would have been identified under the old standard.
Other significant changes include:
- A requirement for enhanced research into the history of the subject property and adjoining properties, as well as enhanced site reconnaissance requirements;
- Clarification as to the meaning of the terms “Property Use Limitation” and “Significant Data Gap”; and
- Clarification that the 180-day shelf life of the Phase I does not commence as of the date of the report, but rather when the various components of the Phase I report are completed, including (i) interviews with owners, operators and occupants, (ii) searches for lines, (iii) searches for government records, (iv) visual inspections by the consultant, and (v) consultant’s certifications; and
- Guidance regarding how to address emerging contaminants, such as per- and polyfluoroalkyl substances (PFAS), as a non-scope consideration. This addition may ultimately provide an important driver for parties seeking to determine whether to evaluate PFAs.
In addition to the forgoing, and notwithstanding the definitional changes, the new standard clarifies that a requirement for Phase II testing is not mandated as a result of findings. Nonetheless, many market participants (including lenders, institutional purchasers/investors and others) will often still require such testing be performed in a variety of circumstances, increasing the likelihood that such additional testing will not only add to the costs of environmental due diligence, but also to the ultimate consequences thereof.
Also, particularly in states which require disclosure of known contamination discovered during due diligence, the combination of the expanded ASTM Standard and these disclosure requirements will force properties into cleanups that otherwise would not have been required but for the real estate transaction. This could be true even where the contamination was caused in the far-distant past by some unknown party or long-ago owner/operator, or where the contamination is from an unrelated nearby property. This consequence of forcing more properties into cleanup affects not only purchasers, but also sellers, as the parties, due to necessity, will negotiate responsibility for due diligence costs, cleanup costs, and the administrative costs of negotiating “NFAs” and “NFRs” with state agencies.
The new ASTM 1527-21 standard brings with it both the possibility of consistency and the potential for increased due diligence costs. Only time will tell how well the new objectives and guidance are received by practitioners and stakeholders alike.