Posted on December 17, 2013 by Jeff Civins
Purchasers and lessees of commercial or industrial properties know to obtain Phase I environmental site assessments to identify the presence of contamination – so-called recognized environmental conditions (RECs) – because of the very substantial liabilities these conditions may create. And their lenders generally require them. The industry standard for Phase I’s is based on EPA regulations that flesh out Superfund’s “all appropriate inquiry (AAI)” standard. In those regulations, EPA expressly approved use of a standard developed by ASTM, i.e., E1527-05. ASTM recently issued a new standard, E1527-13, that EPA initially approved in a final rule in August, but, as a result of unfavorable comment, withdrew in October. Pending the agency’s promulgation of that rule’s companion proposal, expected by the end of this year, the question is which standard purchasers and lessees should use – and which standard should their lenders require – in the meantime.
In addition to providing information pertinent to managing environmental risks associated with contamination, the performance of a Phase I that satisfies AAI also may help establish a defense for the purchaser/lessee under Superfund should contamination be found. Superfund provides three transaction-related defenses that each require AAI, the most pertinent of which is the so-called bona fide prospective purchaser defense. Congress required that EPA promulgate standards establishing AAI and it is those regulations – and the approved ASTM standard – that have become the industry standard for Phase I’s.
As EPA notes, the new ASTM standard includes a number of differences from the prior version, which arguably only makes the standard more rigorous. Among other things, the new standard distinguishes between historical RECS that have been regulatorily resolved or that allow for unrestricted residential use, which are no longer RECs, and those that though regulatorily resolved, require either institutional or engineering controls because contaminants remain in place and that are now referred to as “controlled” RECs. It also clarifies that vapor intrusion – the potential for vapors from contaminants in soils and groundwater to migrate into buildings where they may concentrate at levels that pose threats to human health – is to be considered a REC, like groundwater migration, and not excluded from consideration because it may affect indoor air quality, which itself is generally not within the scope of AAI. The fact the two standards are different creates some regulatory uncertainty.
The response to this temporary dilemma is that purchasers, lessees and lenders should be able to have their cake and eat it too by having environmental professionals indicate that they have satisfied both standards. Environmental professionals that perform Phase I’s and satisfy ASTM E1527-13 presumably will be satisfying ASTM E1527-05 as well. EPA informally has suggested that environmental professionals use the new standard and, in their reports, conclude that they have satisfied both. Presumably, the environmental professional’s certification should reference both as well.