When a party buys or leases real estate, they may become liable for the cleanup of pre-existing environmental contamination, even if the new property owner/tenant did not release the contaminants. That liability exists under the Federal Comprehensive Environmental Response, Compensation and Liability Act, also known as the Superfund law. Most states also have similar laws which make the current property owner/operator a responsible party for site contamination. Likewise, lenders are also keenly concerned with the environmental quality of real property used as collateral for their loan transactions.
To provide some protection for new property owners, the Federal Superfund law contains an Innocent Purchaser Defense to property owner liability. If the purchaser conducted “all appropriate inquiry” (“AAI”) into the environmental conditions of the property, that property owner will have a defense to liability if it is later discovered that the property is in fact contaminated.
The AAI requirements are generally met where a buyer has undertaken a “Phase I Environmental Site Assessment.” That term generally refers to an environmental site assessment prepared in accordance with the American Society for Testing and Materials (“ASTM”) Standard E1527-05 – “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.” The US EPA’s regulations explicitly approve of the use of ASTM E1527-05 as an allowable method for performing AAI.
The ASTM E1527-05 standard became effective in 2005. ASTM is in the process of finalizing its revised Phase I Standard, E1527-13. The new Standard is expected to be released shortly. As part of the revision process, ASTM submitted the new Phase I standard to US EPA for confirmation/approval that the new E1527-13 standard continues to satisfy the requirements for AAI. On August 15, 2013, the US EPA did just that when it approved the current use of E1527-13 as an additional option for meeting the AAI requirements. US EPA is amending its regulations accordingly, but expects no adverse public comments to its approval of the new ASTM standard.
It is worth noting that the US EPA did not replace the older standard with the new standard. Instead, US EPA indicated that either the 2005 or 2013 ASTM Phase I standard will satisfy the AAI requirements.
The three key changes to the new standard relate to: (a) the identification and analysis of the potential pathways for contamination in soil and groundwater to give off vapors which can migrate into buildings and impact indoor air quality; (b) refined definitions of Recognized Environmental Conditions (“REC”), including the addition of a new term, the “controlled REC” or “CREC”, which is a REC that has been investigated and is already subject to controls and restrictions; and (c) clarification of when an environmental consultant is required to conduct a review of a governmental agency’s files.
Since both the old standard and the new standard will satisfy AAI, which standard should a prospective purchaser or lender require? At this point, since US EPA has approved both standards, there is no simple answer to this question. While it is still too early to tell, we can assume that there may be a slight increased cost for a Phase I under the new ASTM standard. However, the new standard is presumed to have been drafted to correct perceived limitations and issues identified through eight years of experience with Phase I assessments under the old standard. As such, we would expect a more comprehensive analysis of potential issues under the new ASTM standard. At this time, the choice of which standard to apply will need to be determined on case-by-case basis depending upon the needs of the parties in that transaction.