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January 20, 2014 Article

Phase I Standard Gets a Facelift

The update aims to return reliability and continuity to real estate transactions

by Samantha Corson and Kyle Johnson

Parties on both sides of a real estate transaction depend on the Standards and Practices for All Appropriate Inquiries in conducting Phase I Environmental Site Assessments for preacquisition due diligence that allow a party to assert the innocent purchaser, bona fide prospective purchaser, and contiguous property owner defenses to CERCLA liability.  However, the underlying standard, ASTM International’s E1527-05 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process,” has been applied differently in practice, leading to wide dissimilarities in the manner in which environmental consultants conducting Phase I assessments identified certain conditions, such as vapor intrusion and historical contamination. As a result, the intended standardization and reliability of the Phase I inquiry and the protections that flow from it have become less dependable, undermining the standard’s purpose. For these reasons, real estate practitioners familiar with these pitfalls are optimistic and changes to ASTM’s E1527-05 standard will return that reliability and continuity that parties to real estate transactions seek.

ASTM International published E1527-05 in 2005. Shortly thereafter, it was adopted by the U.S. Environmental Protection Agency as the rule that sets forth the Standards and Practices for All Appropriate Inquiries (AAI rule) that a party must use to satisfy the requirements for conducting “all appropriate inquiries” under Section 101(35)(B) the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).  In accordance with ASTM’s general practice of updating standards every eight years, a new E1527 standard has now been finalized and issued by ASTM. The new version of E1527 revises many of the provisions that have led to confusion in the past. The Environmental Protection Agency (EPA) reportedly hopes to complete its process to reference the revised standard as compliant with AAI by the end of 2013.

Time for a Change

The revised standard makes many editorial changes but also makes several changes that will impact the content of Phase I environmental site assessments. These include revisions to certain defined terms that will change the way risk-based closures are reported and, to clarify the relevance of current regulatory criteria, includes an explicit requirement to consider vapor intrusion and an increased focus on regulatory file reviews.

Risk-Based and Historical Closures The new E1527-13 includes a revision to the definition of the term “Historical Recognized Environmental Condition” (HREC) and the introduction of a new term, “Controlled Recognized Environmental Condition.” Both changes are intended to ensure that activity and use limitations (AULs) and engineering controls are reported in a Phase I report and to clarify where regulatory requirements have changed such that a past release that was remediated should nonetheless be considered a recognized environmental condition (REC) due to a change in regulatory standards since the remediation was completed.

Changes to HREC Definition The definition of HREC has been modified to apply only to historic releases that have been remediated to unrestricted use. Under E1527-05, HREC was defined as an environmental condition that would have been considered a REC but due to remediation or other corrective action is no longer considered a REC. The new HREC definition pertains to past releases that have been addressed to the satisfaction of regulatory authorities or meeting unrestricted residential use criteria, without subjecting the property to any property use restrictions, AULs, or other engineering or institutional controls. The new definition also requires the consultant conducting the Phase I assessment (known as an “environmental professional”) to evaluate whether the past release would now be considered a REC due to, for example, changes in regulatory criteria in the applicable jurisdiction. In other words, releases that may have been adequately addressed in the past may be called RECs due to changes in the acceptable cleanup criteria for a particular contaminant.  Although some environmental professionals conducted this exercise under the prior standard, it will now be a mandatory step. This further scrutiny of past releases is more likely to be a concern in states where cleanup standards are revised on a somewhat frequent basis.

A New Defined Term: the CREC Following logically from the revised definition of HREC is the addition of a new term, the Controlled Recognized Environmental Condition (CREC), which describes environmental conditions that have been addressed to the satisfaction of a regulatory authority but where residual contamination has been allowed to remain in place subject to the implementation of property use restrictions, AULs, or other institutional or engineering controls.  Strangely, the new definition requires that the condition be identified as a CREC in the findings of the report but as a REC in the conclusions section.

The practical impact of the addition of the CREC (and the revisions to the HREC) term may be an increase in the number of conditions (RECs, HRECs, and CRECs) highlighted in a Phase I report. Although arguably conditions now characterized as CRECs should have been characterized as RECs under E1527-05, environmental professionals’ reporting of such conditions in the past was inconsistent. Under the updated standard, Phase I reports will have a renewed emphasis on AULs and other controls.  For real estate lawyers, highlighting of such controls will increase the likelihood that a new owner of property will better understand the on-going maintenance responsibilities that may come with a site that is subject to a CREC. The focus on risk-based remediation distinctions may also result in a greater emphasis in Phase I reports on the intended end-use of the property. As such, it will be important for lawyers involved in these transactions to confirm that the environmental professional conducting a Phase I report understands the key drivers for the transaction, including the parties’ respective materiality thresholds and proposed use for the site.

A New Focus on Vapor Intrusion

Perhaps the most significant change to the E1527 standard is the introduction of language throughout the standard to clarify that vapor migration should be considered in the Phase I report. Vapor intrusion was not specifically addressed under E1527-05, except that “indoor air quality” was expressly identified as a “non-scope consideration” that did not need to be considered or addressed in the report. This language likely was intended to acknowledge that many indoor air quality issues are outside the scope of CERCLA liability. For example, CERCLA liability typically does not attach to conditions caused by naturally occurring substances such as radon or mold and does not apply to the presence of asbestos-containing building materials at a building on a site. Similarly, workplace exposure and OSHA-type issues are not appropriately considered in the context of determining compliance with all appropriate inquiries. Finally, the exclusion of indoor air quality issues may have been an implicit acknowledgement that ASTM has a separate standard that relates to “vapor encroachment screening,” described in ASTM E2600-10, that is intended to provide a practical guide for vapor screening. Nevertheless, courts and commentators generally agree that CERCLA’s emphasis on releases of hazardous substances is not limited to hazardous substances in solid and liquid forms.  Thus, the potential for vapor intrusion caused by a release of hazardous substances should be evaluated by all environmental professionals conducting Phase I assessments.  Unfortunately, the express identification of “indoor air quality” as a non-scope consideration in E1527-05 was misleading in that it implied that vapor intrusion issues did not need to be investigated to satisfy the CERCLA AAI Rule. In practice, many environmental professionals skipped this step.

The revised E1527-13 standard includes language explaining that vapor should be part of the Phase I environmental assessment. Section 2.1 of the revised rule states that vapor migration should not be considered differently than groundwater migration and references ASTM’s E2600-10 as the preferred methodology for assessing vapor issues. Other portions of the revised standard now also reference vapor, including the definition of AULs. Lastly, the reference to indoor air quality, which was previously listed as a non-scope consideration, now includes language that clarifies that only indoor air quality issues unrelated to releases of hazardous substances or petroleum products are non-scope items. Now that the scope of the standard has been clarified to expressly include vapor intrusion issues caused by releases of hazardous substances, we can expect that Phase I reports will identify potential vapor intrusion issues more frequently than was typical under the old ASTM E1527-05 standard.

Regulatory Agency File Review The third significant change in the ASTM E1527 standard relates to the environmental professional’s need to conduct agency file review. A new provision of the E1527 standard, Section 8.2.2, states that if the subject property or an adjoining property are identified in a government records search (i.e., an EDR database search), then the environmental professional, at his or her discretion, should review the pertinent regulatory files or records associated with that listing. If such a review is deemed unwarranted, the environmental professional must expressly justify the decision not to conduct the search. File reviews can be beneficial in giving further color about certain listings that would otherwise be incomplete. For example, further detail on a historical release that may simply be identified as “closed” on a database listing but a file review can reveal additional important details about the regulatory status of a release and whether AULs or other controls are in place. The likely impact of these edits will be an increased use of file reviews, potentially raising the cost to complete and lengthening the time needed to finalize the Phase I report.

Negative Comments Result in Delays to the AAI Rule

The updates to the ASTM E1527 standard should go a long way toward minimizing some of the inconsistencies in the ways that environmental professionals conduct Phase I environmental site assessments (most significantly in the treatment of risk-based closures and vapor intrusion). However, EPA’s adoption of the standard as an amendment to the AAI rule has been delayed due to feedback EPA received during the public comment process.

EPA initially published the proposed amendments to the AAI rule to reference the updated ASTM E1527-13 standard as a “direct final rule” under the assumption that the revisions were mostly editorial in nature and that there was unlikely to be any negative comments (see 78 Fed. Reg. 49690 (Aug. 15, 2013)). Under the original timeframe, the direct final rule was expected to take effect in November 2013. However, the EPA received a number of negative comments to the direct final rule and has therefore withdrawn it. The comments received are being treated as having been submitted in response to a parallel proposed rule (78 Fed. Reg. 49714 (Aug. 15, 2013)).

The negative comments primarily focused on the preamble to the AAI rule rather than the direct final rule itself. Specifically, the negative comments keyed in on the EPA’s recognition in the preamble that “there are no legally significant differences” between the ASTM E1527-05 and ASTM E1527-13 standards and, as such, any party conducting all appropriate inquiries may choose to use either standard. As the E1527-13 standard is likely to be more costly than the older standard, commenters suggested that allowing both standards would “create chaos and confusion in the marketplace” and a two-tier diligence market with “cost-sensitive” users applying the E1527-05 standard.

In response, other commenters noted that the two-tier marketplace is a “phantom threat” and that a two-tier marketplace has not emerged with other ASTM standards, including in 2005 when the E1527-05 standard replaced the 2000 standard. Such commentators have concluded that the E1527-05 standard will simply retire from common practice once the E1527-13 standard is published and the latter would become the industry standard.  Moreover, the reference to the older standard ensures that properties that were assessed over the past eight years under E1527-05 remain compliant with the AAI rule.

As noted, the negative comments focus on the preamble to the AAI rule. Consequently, while the EPA must withdraw the direct final rule and address the comments, the content of the rule is unlikely to be changed. As of November 6, 2013, the revised standard has been published by ASTM and simply awaits EPA publication of the amendment, which references the new standard as compliant with all appropriate inquiries.

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