As activity on the real estate transactional front appears to be gaining momentum in 2014. Those engaging in related transactions should be aware of some recent changes to the environmental due diligence process and the requirements of meeting the federal All Appropriate Inquiries (AAI) rule under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). In particular, on December 30, 2013, the U.S. Environmental Protection Agency (EPA) published a final rule in the Federal Register approving the new ASTM E1527-13 Phase I Environmental Site Assessment standard as meeting the requirements of the AAI Rule at 40 C.F.R. pt. 312. 78 Fed. Reg. 79,319 (Dec. 30, 2013).
Curiously, EPA did not remove the existing reference to the prior E1527-05 standard. In fact, EPA specifically provided that “today’s rule does not require that any party use this standard.” Rather, the new rule, at least for an interim period, provides an additional method to achieve AAI without altering the existing requirements or otherwise mandating new requirements. Consequently, until future rulemaking, either standard will be accepted as satisfying AAI. EPA confirmed that the future rulemaking likely would eliminate the ability to utilize ASTM E1527-05 to satisfy the AAI rule.
By way of background, a party claiming a defense to CERCLA liability as a bona fide prospective purchaser, contiguous property owner, or innocent landowner must establish that it meets the conditions of the applicable CERCLA landowner liability protection. In order to qualify for one of these defenses, a party must conduct AAI prior to acquiring the property. Parties cannot avail of these landowner liability protections if they perform AAI following purchase of the subject property. Thus, AAI is vital to establish landowner liability defenses under CERCLA.
Although known for its strict liability scheme, CERCLA provides defenses for current property owners who might acquire contaminated property but are not otherwise responsible for the contamination and do not impede any required remediation. The common thread necessary to avail of these defenses is AAI, namely, a demonstration that prior to acquiring the property the landowner undertook reasonable inquiries to determine whether the property had existing contamination.
In its final rule, EPA recommends use of the updated 2013 standard as being more rigorous in identifying potential and threatened releases of hazardous substances at commercial and industrial properties. In evaluating future property purchases, prospective buyers must be aware of the amended standard and are strongly encouraged to conform to its requirements in the conduct of required due diligence activities.
EPA’s final rulemaking provides that parties seeking liability relief pursuant to CERCLA’s liability protections and recipients of Brownfields grants for conducting site assessments will have met the AAI standards and practices set forth in the Brownfields amendments to CERCLA and 40 C.F.R. pt. 312 provided they follow the procedures adopted in ASTM E1527-13 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.”
ASTM revised the definition of “historical recognized environmental condition” (HREC) to clarify that the scope and application of a HREC is limited only to those past releases that have been addressed sufficiently to allow unrestricted use of the property. The amended definition of HREC requires that the past release of any hazardous substances or petroleum products that occurred in connection with the subject property be addressed to the satisfaction of the applicable regulatory authority or otherwise meet unrestricted use criteria established by the regulatory authority without subjecting the property to any engineering or institutional controls or activity and use limitations. If the environmental professional considers a past release to be a recognized environmental condition at the time of the Phase I, it must be included in the conclusions section of the report as a recognized environmental condition and not a HREC.
ASTM’s new standard also includes a new term, “controlled recognized environmental condition” (CREC), which refers to a past release that the applicable regulatory authority deems to have been satisfactorily addressed as evidenced by a no further action letter or otherwise by meeting approved risk-based criteria while subject to the implementation of land-use controls. For example, the new standard observes that if a leaking underground storage tank is remediated to a commercial use standard but does not otherwise meet unrestricted residential remedial guidelines, it would be considered a CREC, not a HREC.
One other significant revision to the former standard that could potentially add expense and time is the clarification of regulatory file and records review requirements. Under the new standard, an environmental professional must review regulatory files if the subject property or any adjoining property is identified on one or more standard environmental records sources. In its final rule adopting the new ASTM standard, EPA observed that these types of inquiries generally would enhance the quality of Phase I reports and the level of confidence that users or prospective property owners will enjoy. Although the new standard maintains the environmental professional’s discretion to decline a review of regulatory records, it nevertheless imposes other requirements on the professional to explain in the report why its decision not to review is warranted. Further, if the environmental professional reviews records, it must include a summary of the information obtained and state its opinion on the sufficiency of the information to evaluate the environmental conditions of the property.
Clearly, the timing and expense of Phase I reports conducted under the new standard will be impacted by factors including the responsiveness of a regulatory agency to record requests and the amount of material to be reviewed in those records. Consequently, those involved in real estate transactions would be wise to contemplate longer due diligence inspection periods to allow sufficient time to complete the reviews. Additionally, those parties should consider the possibility of increased due diligence costs related, at least in part, to potentially larger-scale records review. In addition to these changes, perhaps the most significant amendment to the 2013 standard is a requirement that a vapor intrusion pathway must be considered. More particularly, the definition of “migrate” under the new standard now includes releases that migrate in the subsurface as vapor. Environmental professionals are required to assess possible indoor air-quality impacts from vapor intrusion pathways if there is subsurface soil or groundwater contamination at or near the property.
EPA noted that the prior ASTM standard already required the identification of potential vapor releases or vapor migration at a property to the extent that they might be indicative of a release or threatened release of hazardous substances. EPA further observed that some commenters to the rule raised concerns that potential vapor releases are often not considered or sometimes overlooked in the AAI process. EPA stated “vapor migration has always been a relevant potential source of release or threatened release that, depending on site-specific conditions, may warrant identification when conducting all appropriate inquiries.”
The agency noted that the new ASTM standard defined migration to include surface and subsurface vapors and stated its anticipation that future AAI would contemplate all conditions indicative of releases and threatened releases of hazardous substances and that the revised standard and final rule would help reduce confusion on conducting thorough AAI. The new standard provides greater clarity with respect to vapor intrusion and vapor migration, making it clear that subsurface vapor migration pathways must be evaluated in order to qualify as having conducted AAI. In this regard, although not officially adopted by EPA, ASTM E2600-10 Standard Guide for Vapor Encroachment Screening on Property Involved in Real Estate Transactions provides one acceptable guideline for assessing vapor intrusion. Again, however, neither the new standard nor EPA requires that vapor migration be evaluated solely pursuant to this standard.
In summary, parties engaged in real estate transactions should be mindful to the changes to the federal AAI rule and corresponding ASTM standard. Although both the current and former standard may be used until new final rulemaking occurs removing the reference to the ASTM E1527-05 standard, it seems prudent to be aware of the changes to the standard and to be sensitive to the possibility of longer time frames and higher diligence costs. Finally, compliance with AAI is not of itself sufficient to guarantee protection from liability. Landowners also must meet “continuing obligations” following the purchase of certain impacted properties to ensure that any restrictions are maintained and that reasonable steps are taken to prevent future releases of hazardous substances.