Although on an up-front dollar basis, Phase I Environmental Site Assessments are relatively inexpensive, the liability consequences of an error in performing or interpreting one can be extreme; perhaps running to six or seven figures in remediation costs.
Practitioners working on mergers and acquisitions, real estate transactions, borrowing and lending are generally aware by now that as of Jan. 1, new standards for Phase I Environmental Site Assessments (Phase 1 ESAs) became effective. No matter the size of the deal, a practitioner who reviews a Phase 1 ESA should have a copy of the full ASTM standard, should have read it, and should understand not only what the updated standard includes, but also what it excludes.
Remember why Phase 1 ESAs are conducted in the first place. Phase 1 ESA should be thought of as prima facie evidence in an affirmative defense to future claims asserting environmental liability against a party that did not cause or contribute to contamination. In 1980, the Comprehensive and Environmental Response, Compensation and Liability Act, better known as CERCLA or Superfund, was enacted. Superfund made property owners and operators along with those who participated in management of a property or facility strictly liable for environmental cleanup.
In 1986, Superfund was amended to include the “innocent landowner defense,” giving prospective property owners the potential to obtain liability protection from pre-existing contamination, so long as satisfactory environmental due diligence was performed prior to acquisition, although exactly what type of due diligence would be sufficient was undefined.
This regulatory gap was filled in 1993, when the American Society for Testing and Materials International (ASTM) released ASTM Standard Practice E-1527 for Phase I Environmental Site Assessments. This was adopted as the standard steps to be followed to satisfy the requirements of the innocent landowner defense.
Finally, the Small Business Liability Relief and Brownfield Revitalization Act was enacted in 2002. Better known as the “Brownfields Law,” it added the so-called “bona fide prospective purchaser defense” and the “contiguous property owner defense.” Importantly, the Brownfields Law required EPA to provide a definition of the “all appropriate inquiries” one asserting a defense was required to undertake. The EPA did so and released new All Appropriate Inquiries (AAI) rules in November 2005. ASTM conformed its protocol to the EPA’s AAI rules and, from 2005 forward, ASTM E-1527-05 was deemed to be AAI-compliant.
Today, the reason for performing an AAI-compliant pre-acquisition environmental analysis is to be able to raise an affirmative defense in the future, in the event EPA or another entity asserts that a property owner is liable under CERCLA. The evidence that the affirmative defense applies is found in the analysis and results of the Phase 1 ESA. A mistake in the ESA may not be revealed until later litigation arises.
As of the end of 2013, ASTM updated the key definitions included in E1527 for Recognized Environmental Condition (REC) and Historical Recognized Environmental Condition (HREC), while also creating a definition for Controlled REC (CREC).
The de minimis condition definition was pulled out of the REC definition and is now separately defined. The issue of vapor mitigation was also addressed, with vapor now being explicitly included in the areas for consideration during the ESA. Vapor mitigation has commonly been reviewed and reported on by environmental professionals performing ESAs, but the old standard was not clear on whether vapor mitigation must be included in the report. This update provides clarity on this issue. Thus, REC, HREC, CREC and vapor migration are all definitional terms the practitioner needs to thoroughly understand.
As important as understanding what ASTM 1527-13 covers, a lawyer must understand what it excludes. Section 13 of the ASTM Standard provides an extensive list of subjects that a Phase I report does not address. For example, PCBs in building materials, asbestos, wetlands, mold and lead-based paint are some examples of issues not covered in Phase 1 ESA. The prospective property owner and its counsel must understand everything that will not be addressed by the Phase I ESA, and make a determination whether additional steps need to be taken to ensure no liability traps are lurking.
Although the 2013 ESA updates do not include wholesale changes from the prior version, the smaller, subtler changes can impact the responsibilities of the purchasing landowner and its counsel, as well as the liability protection afforded by performing an ESA.
Individuals, organizations, or their representatives involved in the purchase or sale of commercial property should fully understand the changes to the ESA and be sure that the Phase 1 report adheres to the new standards.