Introduction
Significant differences between standards
Practical steps


Introduction

Effective from December 30 2013, the US Environmental Protection Agency (EPA) has amended the 'all appropriate inquiries' rule to give parties the temporary option of using either the revised American Society for Testing and Materials (ASTM) International standard for Phase Is known as E1527-13 or the prior ASTM Phase I standard known as E1527-05 to satisfy the 'all appropriate inquiries' requirement under the Comprehensive Environmental Response, Compensation and Liability Act.(1) The 'all appropriate inquiries' rule identifies the diligence steps that potential purchasers must perform to satisfy one of several requirements to qualify for protection from remedial liability under the act as a "bona fide prospective purchaser", "contiguous property owner" or "innocent landowner".

In the near future, the EPA intends to further amend the 'all appropriate inquiries' rule to remove the reference to E1527-05 as an adequate diligence standard. The EPA recommends that prospective purchasers, and the environmental professionals they retain to perform Phase Is, use the revised standard.


Significant differences between standards

The ASTM issued E1527-13 in November 2013. The EPA describes E1527-13 as "similar to the ASTM E1527-05 standard in format, process, and areas of coverage".(2) Nonetheless, differences exist between the standards as follows:

  • Recognised environmental condition and release – the goal of a Phase I under either ASTM standard is to identify whether a recognised environmental condition exists on the target property. In essence, a recognised environmental condition is evidence of actual or likely contamination. E1527-13 expressly incorporates the Comprehensive Environmental Response, Compensation and Liability Act's definition of 'release'. E1527-13 thus focuses more on whether there is a release of hazardous substances or petroleum than on the 'presence' of hazardous substances or petroleum.
  • Historical recognised environmental condition – E1527-13 has revised the definition of 'historical recognised environmental condition' to clarify that it is contamination that has been addressed in a manner meeting unrestricted use criteria established by a regulatory authority without imposition of institutional or engineering controls.
  • Controlled recognised environmental condition – this is contamination that has been addressed to the satisfaction of the regulatory authority, but contamination nonetheless remains in place. The contamination is subject to the implementation of institutional or engineering controls, such as a deed restriction limiting property use to non-residential. E1527-13 does not require an environmental professional to evaluate or confirm the effectiveness of an institutional or engineering control. This new definition, and the revised definition of 'historical recognised environmental condition', should alleviate confusion about how to classify contamination being managed by an institutional or engineering control. Under E1527-05, some environmental professionals have categorised such contamination as a recognised environmental condition, while others have classified it as a historical recognised environmental condition.
  • Vapour intrusion – E1527-13, like the prior standard, directs environmental professionals to consider the impact of the migration of petroleum and hazardous substance on the property. However, E1527-13 uses a new definition of 'migrate/migration' that expressly includes vapour migration. The new definition is expected to result in more Phase Is evaluating the risk of vapour intrusion. E1527-13, however, does not specify how consultants should evaluate the significance of the risk that contaminated vapour will affect indoor air quality. Vapour intrusion is a concern of the EPA and many state regulatory agencies, including those in California and New York.
  • Records review – E1527-13 imposes additional record review requirements. If the environmental professional identifies the property or an adjoining site on a government environmental database, it must review relevant agency files to assess whether such identification indicates a recognised environmental condition, historical recognised environmental condition or controlled recognised environmental condition. If the environmental professional does not think such review is warranted, he or she must explain the basis for that opinion in the Phase I report. As an alternative to reviewing agency files, the professional may review information from an alternative source, such as on-site records. The Phase I report should include a summary of such information and the professional's opinion on whether the information is sufficient to allow him or her to determine whether a recognised environmental condition, historical recognised environmental condition or controlled recognised environmental condition exists.
  • User's responsibilities – E1527-13 emphasises that the 'all appropriate inquiries' rule requires a prospective purchaser, also known as the 'user' of a Phase I report, to review or obtain certain information about the property and provide it to the environmental professional performing the Phase I report. As a result, E1527-13 mandates the provision by the user to the professional of information discussed in E1527-05 as being useful to him or her in identifying recognised environmental conditions. Key types of such information include:
    • the user's actual knowledge of any environmental liens or activity and use limitations filed against the property and the results of a search for such liens and activity and use limitations;
    • specialised knowledge or experience of the user relevant to identification of recognised environmental conditions and commonly known or reasonably ascertainable information within the community available to the user and relevant to such identification; and
    • if applicable, the reason for a significantly lower purchase price. If the user does not provide this information to the environmental professionals that should evaluate whether such data gaps are significant and affect its ability to identify recognised environmental conditions.

Practical steps

Potential purchasers should take the following practical steps in light of the new standards:

  • Update agreements with environmental professionals – parties that routinely acquire properties and have master contracts with environmental professionals will want to consider updating them to specify use of E1527-13. While the EPA currently allows users the option of following the prior standard to satisfy all appropriate inquiries, that option is expected to end soon. Lenders and others that routinely have the Phase Is performed to satisfy diligence requirements, but do not acquire title to real estate in connection with those transactions, may also want to have their consultants follow the updated ASTM Phase I standard so the state-of-the-art standard is used.
  • Compare future Phase I reports to revised standard – parties that seek to qualify for a landowner defence to Comprehensive Environmental Response, Compensation and Liability Act liability should consider comparing Phase I reports they receive to the requirements of E1527-13 as a check on whether the reports meet the revised standard. While environmental professionals who agree to comply with such a standard are responsible for doing so, there may be a learning curve for issuing reports that meet the revised standard.
  • Considerations for transactions with existing Phase I reports – parties buying or selling properties with existing Phase I reports can consider a new Phase I under E1527-13 or an update to incorporate the new elements of E1527-13, particularly if the existing Phase I report is more than a year old or there has been a material change at the property or in the surrounding area.

For further information on this topic please Judith Praitis at Sidley Austin LLP's Los Angeles office by telephone (+1 213 896 6000), fax (+1 213 896 6600) or email (jpraitis@sidley.com). Alternatively, contact Laura Leonard at Sidley Austin's Chicago office by telephone (+1 312 853 7000), fax (+1 312 853 7036) or email (lleonard@sidley.com). The Sidley website can be accessed at www.sidley.com.

Endnotes

(1) 78 Fed Reg 79,319 (December 30, 2013).

(2) 78 Fed Reg at 79,321.