Parties considering ASTM E1527-13 should evaluate the suitability of this standard from transactional and liability protection perspectives.

On August 15, 2013, the United States Environmental Protection Agency (EPA) issued a direct final rule adopting ASTM E1527-13 as a standard that parties may use to satisfy “all appropriate inquiry” obligations. Along with other requirements, “all appropriate inquiry” (or AAI) must be satisfied to qualify for certain landowner liability protections under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). EPA’s somewhat surprising decision to adopt E1527-13 as an alternative (not as a replacement for) ASTM E1527-05, means that parties will need to choose which standard to use for individual matters. Although ASTM E1527-13 largely tracks ASTM E1527-05, and presents few major differences, parties should consider whether those differences will have an impact in the context of their specific matter, regardless of whether the assessment is conducted for transactional diligence or liability protection purposes.

New Standard Refines REC Designations and Requires More Information

EPA’s docket for release of the direct final rule includes a copy of the revised ASTM E1527 standard.1 Based on this supporting document, and EPA’s summary of the changes from ASTM E1527-05,2 there will be three notable differences in Phase I reports performed under the new standard.

  • Risk-Based Closures: ASTM E1527-13 adds a new defined term, “Controlled Recognized Environmental Condition” (CREC), for hazardous substance releases that have been partially addressed through remediation, but where some contamination remains in place under certain risk-based restrictions or conditions (e.g., engineering or institutional controls). As a corollary, the definition of a Historical Recognized Environmental Condition (HREC) has been revised to limit applicability to situations where past contamination has been addressed to unrestricted residential standards. The CREC and HREC definitions will likely increase the number of Recognized Environmental Conditions (REC) identified in Phase I reports.
  • Express Requirement to Consider Vapor Intrusion: ASTM E1527-13 clarifies that the definition of “migrate” includes releases that migrate in the subsurface as vapor. Because ASTM E1527-05 excludes consideration of indoor air quality concerns, vapor intrusion risks typically have not been discussed in Phase I assessments. However, under ASTM E1527-13, consultants preparing Phase Is will need to assess possible indoor air quality impacts from vapor intrusion pathways if there is subsurface soil or groundwater contamination at or near the subject site. Phase I readers should expect to see vapor intrusion issues identified much more frequently in ASTM E1527-13 reports than in ASTM E1527-05 reports, since consultants may no longer use the “indoor air quality” exception to exclude vapor intrusion from the scope of the Phase I assessment.
  • HRECs Evaluated Against Current Regulatory Criteria: The new definition of HREC also requires a determination of whether a past release that would otherwise be identified as a HREC should, in fact, be designated as a REC under current standards. A release that was fully investigated and remediated — and may be subject to a no further action letter, or have been designated as a HREC under prior assessments — may need to be designated as a current REC if more stringent regulatory criteria or thresholds are now in effect. Phase I readers should expect to see issues previously treated as resolved in prior Phase I reports now identified as current RECs because federal and state regulatory requirements, including reporting and cleanup standards, may have been updated since the prior ASTM E1527-05 report for the property was prepared.

Significant Impacts on Environmental Due Diligence Unlikely

Overall, the new standard is unlikely to alter actual practices for conducting transactional environmental due diligence in any significant way. Rather, the new standard primarily reconfigures the presentation of information. In particular, ASTM E1527-13 highlights certain matters likely to be of interest to buyers and lenders due to the potential for the incurrence of future costs, such as ongoing operation and monitoring obligations and potential vapor intrusion issues. Ultimately, given that many Phase I assessments are performed in connection with a planned or anticipated transaction, the thoroughness and significance of the assessment will largely be driven by the materiality standard and specific issues presented by the deal. Phase I readers will still need to evaluate the significance of each REC (or CREC or HREC) identified in the Phase I and determine the impact those issues may have on the proposed transaction, including the deal’s structure and indemnities.

As noted above, EPA has left open the possibility of using the ASTM E1527-05 standard as a functional equivalent of the new E1527-13 standard to satisfy AAI requirements, going as far as noting “no legally significant differences between the regulatory requirements and the two ASTM E1527 standards.”3 Despite EPA’s statement of functional equivalence, parties engaging in environmental diligence may have different views about which standard is more appropriate in a particular transaction. For example, lenders and buy-side parties may push for requiring Phase I reports under the new standard because it may lead to inclusion of more potential concerns and more clearly identify information, particularly some issues (e.g., vapor intrusion) that may represent significant future costs. Conversely, borrowers and sell-side parties may prefer using the older standard. Finally, consulting firms may prefer to use the new standard to avoid potential professional liability claims if the differences between the two standards result in a matter of transactional significance post-closing. In light of these potential issues, we anticipate that most parties will eventually gravitate toward the new standard, to avoid transactional or legal uncertainty.

Although ASTM E1527-13 may eventually become the market standard, buyers and lenders may find the increased amount of information a burden as well as a benefit. The new standard is likely to result in the identification of more RECs (including CRECs and former HRECs), and will therefore heighten the importance for clients to provide consultants with a deal-specific materiality threshold for the Phase I. This approach will help minimize the number of minor concerns elevated to major issues, merely because they have been designated as RECs.4 Vapor intrusion issues, however, may pose a particular problem not easily addressed simply by specifying a higher materiality threshold. Consultants, particularly if they do not have specific vapor intrusion expertise, may simply label any possible vapor migration concern as a REC.

The Phase I reader will need to evaluate the likely risk profile for the particular situation including:

  • The likelihood of exposure to a sensitive receptor (e.g., daycare facility) due to vapor contamination potentially emanating from the subject property
  • The availability and cost of vapor mitigation techniques
  • The potential for triggering a regulatory obligation to report or investigate the vapor intrusion risk

The financial or reputational risk (if any) to the current or future property owner if it becomes public that the Phase I identified a possible risk to human health Even with the likely increase in the number of RECs flagged under ASTM E1527-13, parties using Phase Is for transactional diligence must still understand the consultant’s scope of work. Many relevant topics of interest to buyers and lenders, such as compliance, asbestos, or wetlands, are not part of the review required under either the old or new ASTM standard. A Phase I report, whether following ASTM E1527-05 or E1527-13, is not a comprehensive solution for all environmental diligence considerations.

Pitfalls for Parties Seeking Liability Protection

EPA’s new rule clearly leaves the door open for use of ASTM E1527-05 by parties seeking to satisfy EPA’s AAI rule,5 allowing parties to choose between the new ASTM standard or previous ASTM standards.6 EPA’s AAI rule establishes minimum standards for evaluating a property’s environmental conditions and assessing the likelihood that the property is or may be contaminated. A party’s inquiry must meet these standards to be eligible for landowner liability protection under CERCLA (although the three landowner liability defenses — bona fide prospective purchaser (BFPP), contiguous property owner, and innocent landowner — also have other requirements).7 Under EPA’s AAI rule, these requirements are satisfied by an assessment and report8 that meets the identified criteria, which in turn are satisfied if the inquiry meets one of the designated standards, namely ASTM E1527-05, ASTM E1527-08,9 and now, ASTM E1527-13.

Although parties still have a choice of standard, they should carefully consider the implications of using the older standard if, in the future, a party may need to assert a landowner liability defense under CERCLA. EPA’s statement — that “no legally significant differences” exist between the two standards and the regulatory requirements — raises questions of retroactive liability for parties relying on an ASTM E1527-05 Phase I to satisfy EPA’s AAI rule. Simply put, how courts will interpret EPA’s statement of functional equivalency remains unclear. Conceivably, for example, a court could find that Phase Is conducted over the past eight years using ASTM E1527-05 should have had the same scope as ASTM E1527-13 in appropriate circumstances, even if that was not industry practice or clear from the standard itself — which could negate the availability of the relevant defense.10 Although as a practical matter, conducting a Phase I (under either standard) by itself has seldom sufficed to prove a CERCLA defense under reported precedents, whether this uncertainty is a material risk in a particular transaction will depend upon the specific facts and circumstances presented by the evaluated property and the likelihood that EPA or a state agency will require the landowner to conduct further investigation and remediation.

Conclusion

While ASTM E1527-13 remains relatively close to ASTM E1527-05, parties who are choosing between the two standards should consider how they anticipate using the Phase I and whether a more stringent and more comprehensive Phase I assessment is necessary or desirable. Even if an ASTM E1527-05 report may be adequate for immediate needs, conforming to the new ASTM E1527-13 standard may be appropriate, especially if a purchaser envisions asserting one of CERCLA’s landowner liability protections in the future or will need to satisfy other parties (whether a lender, an investor, or future purchaser) that the report is accurate and complete.