A key federal rule was recently amended that will impact environmental due diligence in real estate transactions. Real estate developers, lenders, and others are working to adjust their approaches to conform to a new American Society for Testing and Materials ("ASTM") standard E1527-21 (the "New Standard"). ASTM finalized the New Standard in 2021, but U.S. EPA did not finalize its rule providing that the New Standard may be used to satisfy the All Appropriate Inquiries rule until a recent rulemaking, which became effective on February 13, 2023.

Like the "Old Standard" ASTM E1527-13, the New Standard serves two primary purposes. First, it provides a basis for satisfying the All Appropriate Inquiries rule, 40 CFR Part 112, under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). In turn, compliance with the All Appropriate Inquiries rule satisfies a key element to many statutory defenses against potentially significant liability under this draconian statute. Second, the standard provides a framework to evaluate the condition of a property generally, even if CERCLA defenses are not available due to fact-specific circumstances.

The New Standard introduces several important changes, including the following:

  1. Report shelf life. The Old and New Standards establish a "shelf life" for Phase I Environmental Site Assessments to ensure that the report remains relatively current. The Old and New Standards both presume the continued validity of a Phase I ESA for 180 days after preparation, or one year after preparation if certain aspects of the Phase I ESA are updated. The New Standard requires that reports indicate what date the following actions were completed: interviews with owners, operators, and occupants; reviews of federal tribal, state, and local government records; visual inspection of the subject property and adjoining properties; and the declaration by the environmental professional responsible for the assessment. Pg. 11, ¶ 4.6.2. Each of these actions, plus searches for recorded environmental cleanup liens, must be completed within 180 days prior to the date of the transaction. The New Standard clarifies that each component must be completed within this 180-day timeframe.
  2. Non-scope considerations including emerging contaminants. Both the Old and New Standards include "non-scope considerations," which are environmental issues that parties may wish to assess that are outside of the scope of the standard. Examples include lead-based paint and asbestos. The New Standard adds "emerging contaminants" to this list. Pg. 25, ¶ 13.1.5.15. Although not defined in the New Standard, emerging contaminants are substances that are still being researched to understand health effects, such as per- and polyfluroalkyl substances ("PFAS") or 1,4-dioxane. Emerging contaminants are often unregulated or regulated under only some environmental laws.
  3. Title Searches for Environmental Liens and Activity and Use Limitations. The New Standard provides significantly greater detail regarding the obligation for users to complete a search for the existence of environmental liens and activity and use limitations ("AULs"). Pg. 13, starting at ¶ 6.2. A user is the person seeking to complete the ESA and includes lenders and buyers. The New Standard states that a user may either (1) rely on title insurance documentation (i.e., preliminary title reports or title commitments) or (2) rely on title search information reports (i.e., Condition of Title, Title Abstract, AUL/Environmental Lien). As part of the title search information review, records from 1980 to present must be reviewed. Pg. 13, ¶ 6.2.2.1. This 1980 requirement is new in this version. In addition, the consultant/ environmental professional is now required to request that the user provide the results of user performed AUL and environmental lien searches, also a new requirement. Pg. 13, ¶ 6.2.3.1.
  4. Definition of recognized environmental condition ("REC"). One of the primary purposes of a Phase I ESA is to identify RECs. The wording of the REC definition has changed slightly, and the New Standard includes a clarification. Under the New Standard, a REC is "(1) the presence of hazardous substances or petroleum products in, on, or at the subject property due to a release to the environment; (2) the likely presence of hazardous substances or petroleum products in, on, or at the subject property due to a release or likely release to the environment; or (3) the presence of hazardous substances or petroleum products in, on or at the subject property under conditions that pose a material threat of a future release to the environment." Substantively, this is very similar to the Old Standard. Further, the New Standard explains that "likely" means "that which is neither certain nor provided, but can be expected or believed by a reasonable observer based on the logic and/or experience of the environmental professional, and/or available evidence..." Pg. 8, ¶ 3.2.73 and 3.2.731. That explanation was not provided in the original.
  5. Historical research requirements. In the Old Standard, environmental professionals are required to describe historic land uses in the surrounding area if this information becomes known in the study of the subject property its i ii self. There was some subjectivity about what the "surrounding area" covers. In the New Standard, this obligation remains, but there is a new requirement that obvious uses of the adjoining (i.e., contiguous) properties must be identified. Pg. 19, ¶ 8.3.9. Again, this is limited to information unearthed during research of the subject property. If standard historical resources are not reviewed for adjoining properties but they were for the subject property, the consultant must explain why in the report.
  6. Site Plan/Photos of RECs. The New Standard introduces a requirement to include a site plan showing the approximate locations of features, activities, uses, etc. and photos of features, activities, uses and conditions indicative of recognized environmental conditions. Pg. 23, ¶ 12.3. This will likely be a helpful addition for our purposes.

The Old Standard will remain an option until 2/13/24. Until then, those seeking to obtain protection will be able to comply with either the Old Standard or the New Standard. This will provide some flexibility for projects for which a Phase I ESA was completed under the Old Standard. For example, developers who completed a Phase I ESA before the EPA rule was finalized frequently did so under the Old Standard, given that the new one was not yet blessed by federal rule. Additionally, some may simply prefer the Old Standard, which is arguably less onerous in several respects.

In one sense, EPA's rule has made matters simpler. This is because although the New Standard was finalized by ASTM in 2021, until EPA's recent action, the New Standard was not incorporated into the federal rules and therefore did not clearly provide a basis for satisfying the All Appropriate Inquiries rule. Now that the rule is final, the New Standard clearly may be relied upon.

As the sunsetting period has now begun, decision makers would be well-served to ensure that their approach to environmental due diligence passes muster, both during this interim period and beyond.

Originally Published by Environmental Law

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