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Probate & Property

Nov/Dec 2023

Environmental Diligence in the Era of PFAS: The Pitfalls of Simply Ordering the Phase I

COLEMAN JAMES YOUNGER

Summary

  • BFPP status will not protect a new property owner from toxic tort liability if the plaintiff can meet the applicable elements of proof.
  • The easiest way to demonstrate compliance is to obtain a Phase I ESA from a consulting firm that certifies that the ESA complies with the current EPA-approved Phase I ASTM Standard.
  • An ASTM-compliant Phase I investigation should be routinely performed at properties with a history of manufacturing because it will allow the client to qualify as a BFPP under CERCLA.
Environmental Diligence in the Era of PFAS: The Pitfalls of Simply Ordering the Phase I
Kittisak Kaewchalun via Getty Images

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A Phase I environmental site assessment (ESA) serves two primary purposes:

  • Due diligence—by identifying contamination issues relative to the acquisition, leasing, and financing of real property in real estate, corporate, and lending transactions; and
  • Liability relief—by allowing purchasers and tenants of real property to qualify as bona fide prospective purchasers (BFPPs), who will not be liable under federal and state Superfund-type laws for preexisting contamination, provided that going forward, they comply with applicable due care–type requirements for maintaining BFPP status.

In some circumstances, buyers, tenants, lenders, and insurers may be satisfied with a more limited “desktop review” of information derived from public and proprietary databases (and, in some cases, a call with the target’s management), in lieu of a Phase I ESA. For example, lenders and insurers may accept a desktop review for an acquisition of a business that does not generate wastes of potential concern, and which is located at a leased commercial property at which vapor intrusion into the buildings is unlikely.

For those who wish to qualify as a BFPP under the federal Superfund law—i.e., the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §§ 9601 et seq., and analogous state laws, purchasers and tenants must comply with the All Appropriate Inquiry (AAI) regulatory standards adopted by the EPA. The easiest way to demonstrate compliance is to obtain a Phase I ESA from a consulting firm that certifies that the ESA complies with the current EPA-approved Phase I ASTM Standard.

The US Environmental Protection Agency (EPA) is required to promulgate an updated Phase I ESA every eight years. EPA relies on ASTM’s panel of environmental experts to develop the proposed revised standard. The current Phase I standard—i.e., the American Society for Testing and Materials (ASTM) International E1527-21, “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process”—has been in effect since February 13, 2023. Upon EPA’s publication of the final rule in the Federal Register, ASTM E1527-21 became the current legal standard for performing Phase I environmental assessments.

What Is Different in ASTM E1527-21

The current ASTM E1527-21 standard contains multiple changes from the current standard. Most of the changes clarify issues and questions that arose during the life of the ASTM E1527-13 standard. These types of changes include:

  • clearer definitions, including Recognized Environmental Condition (REC), Controlled Environmental Condition (CREC), and Historic Environmental Condition (HREC);
  • clarification of what is a significant data gap; and
  • clarification of when a Phase I ESA report expires.

The more expansive changes in ASTM E1527-21 include:

  • emphasis of the need to evaluate the potential for vapor intrusion, including the potential for impacts caused by historical uses of adjacent and nearby properties; and
  • the requirement for the consultant, referred to as the environmental professional (EP), to perform a more thorough review of information sources than the prior E1527-13 standard. For example:
  • the old E1527-13 standard required the EP to review additional sources such as property tax records or building department records if the subject property is used for industrial or manufacturing purposes, provided that these records are readily available and relevant to the assessment; but
  • the new E1527-21 standard extends these requirements to retail properties. This means that EPs are required to take a closer look at the history of retail properties and, thus, potentially identify more issues.

What Is Not within the Scope of a Phase I ESA

Although the ASTM E1527-21 standard does identify and acknowledge new non-scope considerations, such as emerging contaminants, all non-scope considerations are exactly that—not encompassed within the scope of a Phase I ESA. When a party “orders the Phase I,” it should be aware that the environmental consulting firm will not include any other issues unless the ordering party expands the scope of the engagement to include each specific non-scope item that may be relevant to its due diligence of the property.

Emerging Contaminants

Arguably, the most significant clarification in the E1527-21 standard is that until a contaminant is listed as a hazardous substance under CERCLA, it is not within the scope of the standard and, as such, is not required to be discussed in a Phase I ESA report. This excludes emerging contaminants such as per- and polyfluoroalkyl substances (PFAS). The current exclusion of PFAS from the scope of the ASTM Phase I ESA standard is extremely important because PFAS are increasingly the subject of litigation under various toxic tort and environmental theories.

PFAS are a large class of thousands of synthetic chemicals that have been used since at least the 1950s in a wide variety of consumer products, including food packaging, carpeting, and nonstick cookware. They have also been widely used in the manufacturing of chemicals such as firefighting foam. PFAS are known as “forever chemicals” because they are extremely stable and persistent in the environment and in the human body, meaning they do not break down and can accumulate over time.

Because some PFAS are linked to negative effects on human health, the presence of PFAS in drinking water supplies has become a particular focus of environmental concern. All PFAS contain carbon-fluorine bonds, which are one of the strongest chemical bonds in organic chemistry. This means that they resist degradation in the environment. Most PFAS are also mobile when released into the environment, which means they may migrate a significant distance away from the source of their release, contaminating groundwater, surface water, and soil. Remediation of PFAS in the environment is technically difficult and, consequently, expensive.

PFAS litigation is arguably “the new asbestos” for the plaintiff’s bar. For example, on June 22, 2003, 3M agreed to pay up to $12.5 billion to settle lawsuits by communities around the country. The plaintiffs alleged that the company’s PFAS-containing products contaminated their drinking water. More than 20 state attorneys general have sued manufacturers to seek penalties and injunctive relief for investigation and remediation of PFAS contamination in their states.

EPA issued a PFAS Strategic Roadmap on October 18, 2021. EPA stated that the Roadmap is intended to set timelines by which EPA plans to take specific actions and commits to new policies to “safeguard public health, protect the environment, and hold polluters accountable.” In September 2022, EPA proposed to designate two PFAS—perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), and their salts and structural isomers—as hazardous substances under CERCLA.

It will likely take some time, however, before EPA issues a final rule to designate PFOA or PFOS as CERCLA hazardous substances. In April 2023, EPA issued an Advance Notice of Proposed Rulemaking asking the public for input regarding potential future hazardous substance designations of other PFAS under CERCLA. EPA has also proposed a National Primary Drinking Water Regulation for six PFAS, including PFOA, PFOS, perflorononanoic acid (PFNA), hexafluoropropylene oxide dimer acid (HFPO-DA, commonly known as GenX Chemicals), perfluorohexane sulfonic acid (PFHxS), and perfluorobutane sulfonic acid (PFBS).

As EPA moves forward with its own PFAS Roadmap, many states have also enacted their own regulations regarding PFAS in drinking water and consumer products or are in the process of considering such regulations. Although EPA’s web page listing state resources does not include all states and does not list specific state laws or regulations, it may be a useful starting point for access to fact sheets and general descriptions of efforts in covered states: U.S. State Resources about PFAS, EPA (updated May 30, 2023).

Scoping Deal-Specific Environmental Due Diligence

What do the complexity and the ongoing evolution of regulatory standards mean for attorneys advising their clients on the scope of environmental diligence? Depending on the transactions, clients may intend to acquire a fee interest, a security interest, or a long-term ground lease or may take title via an inheritance.

Current and Former Manufacturing Properties

An ASTM-compliant Phase I investigation should be routinely performed at properties with a history of manufacturing because it will allow the client to qualify as a BFPP under CERCLA. BFPP status will not protect a new property owner from toxic tort liability if the plaintiff can meet the applicable common law elements of proof: (i) the existence of a legal duty, such as preventing continued discharge of PFAS into a public water supply or plaintiff’s private drinking water wells; (ii) a breach of the duty, such as failure to investigate or remediate; (iii) the plaintiff’s actual injury; and (iv) that the defendant’s breach was the proximate cause of the injury. Thus, in order to rule out migration of PFAS contamination from a property, PFAS should also be addressed at these facilities as an add-on to the Phase I report, or as a separate task addressed in a stand-alone report. Also note that the presence of PFAS contamination will likely make a property less marketable, especially as public awareness of PFAS concerns increases over time. The same analysis applies to other Phase I non-scope items, such as when the date of construction of one or more buildings on the property indicates the potential for asbestos-containing building materials.

What If the Client Is Acquiring a Business?

If the client is purchasing stock of a business that will continue to operate in its current form, the environmental due diligence inquiry should also focus on the business’s potential PFAS and potential risks not covered by a standard Phase I ESA. Foreseeable liability risks may exist in certain situations. For example, regarding PFAS, such risks may exist if a client purchases or inherits a business that is, or reasonably might be alleged to be, introducing PFAS-containing materials or wastes into the environment or into products that would, in each case, (i) be expected to cause human exposure or (ii) exceed any applicable regulatory limits. To assess the risk of possible future personal liability in these scenarios, counsel should inquire whether the client or its employees intend to be directly and personally involved in the environmental management of the business. Although imposition of personal liability is rare, it is prudent to advise clients to avoid any appearance that an individual manager knowingly authorized the discharge or use of CERCLA hazardous substances, PFAS, or any other potentially harmful materials in a manner that would be expected to cause personal injuries or other damages.

Are Lenders Becoming More Likely to Evaluate Potential PFAS Liabilities Associated with Their Collateral?

As awareness of PFAS liabilities increases, lenders’ concerns regarding the potential risks of lending to borrowers who may have potential liabilities associated with PFAS will likewise increase. Lenders’ counsel should be proactive in working with their clients to evaluate whether loan applicants may have PFAS liability risks during the loan—i.e., past or current releases of PFAS or introduction of PFAS into consumer products. As in asbestos litigation, a party that has been previously sued by the plaintiffs’ bar or regulatory authorities tends to have a higher risk of being named as a defendant in future lawsuits.

Will Environmental Insurance Protect Against Future Liabilities Related to PFAS?

The short answer is no, except in rare cases Pollution Legal Liability (PLL) coverage may be a useful tool to address many other types of potential liabilities associated with alleged property damage and personal injury resulting from other types of contamination. For several years, however, almost all PLL insurers have been expressly excluding coverage for PFAS-related liabilities.

Key Takeaways

It is critical for attorneys and their clients to evaluate whether a standard Phase I ESA provides a sufficient, or even appropriate, scope of environmental diligence. The exclusion of PFAS and other non-scope considerations, including asbestos, lead, radon, and wetlands, and including the safety of the workplace environment, is just one reason not to simply “order the Phase I” in connection with buying, leasing, or financing a property or business with potential environmental concerns.

Whether to add non-scope considerations to the Phase I ESA will continue to be a business decision on a case-by-case basis. At some properties, environmental and worker safety compliance assessments may be more likely to identify issues of concern than the Phase I ESA. Addressing emerging contaminants such as PFAS will depend on business goals, lender requirements, and whether the property is located in a state that already regulates PFAS as hazardous substances. Attorneys should anticipate future marketability concerns associated with non-scope matters, including the impact of the proposed federal regulation of at least some PFAS as CERCLA hazardous substances and as substances subject to National Primary Drinking Water Regulations.

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