When it comes to pre-acquisition environmental due diligence, a properly prepared Phase I ESA is the ounce of prevention that is worth a pound of cure. Phase I Environmental Site Assessments (“Phase I ESA”) are a routine due diligence requirement of any commercial transaction involving real estate. A Phase I ESA generally consists of four main components, including a site reconnaissance, interviews with those familiar with the property, review of site-related historic documentation and environmental databases for the subject property and surrounding areas, and preparation of a written report documenting conclusions, and any recommendations for additional investigation. The primary functions of performing a Phase I ESA are to (1) identify Recognized Environmental Conditions (“RECs”) in the form of a release, likely release or material threat of a future release of hazardous materials or petroleum products at a subject property, and (2) to establish the “innocent purchaser” and other affirmative defenses to environmental liability imposed by the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”).
Understanding the findings and conclusions of the Phase I ESA are necessary to manage and allocate environmental risk imposed by CERCLA. In the simplest terms, CERCLA liability is harsh. CERCLA liability is strict (without regard to fault), joint and several (liability for all cleanup costs, even if other parties also contributed to a release) and retroactive (liable for releases prior to enactment of CERCLA). A purchaser can become liable for a CERCLA cleanup upon acquisition of a property contaminated by hazardous materials.
Late last year, ASTM adopted a new version of the Standard Practice of Environmental Site Assessment: Phase I Environmental Site Assessment Process – ASTM E1527-21 – modifying the standard by which a Phase I ESA is prepared.
The new standard was developed to replace the ASTM E1527-13 standard adopted in 2013 and subsequently codified in CERCLA as satisfying the All Appropriate Inquiry Rule (“AAI Rule”), a prerequisite to establishing certain affirmative defenses to environmental liability under CERCLA, including the contiguous landowner and bonafide prospective purchaser defenses.
Despite ASTM’s adoption of the E1527-21 standard, the E1527-13 Phase I remains the current benchmark to satisfy the AAI rule. However, EPA is expected to issue a rulemaking to confirm that E1527-21 will also satisfy the AAI rule later this year, before ultimately phasing out the E1527-13 standard.
The update is noteworthy as it modifies the scope of historical reviews for adjoining properties, expands title search standards, revises the definitions of RECs, Controlled RECs and Historic RECs, and addresses emerging compounds like PFOA/PFAS, among several other procedural reporting and definitional clarifications.
Requesting a Phase I ESA prepared in accordance with the applicable ASTM standard should be a check-the-box item on your pre-acquisition diligence list. However, there are significant legal consequences to adopting a non-compliant Phase I ESA or failing to understand the findings and conclusions.