New ASTM Standard Recognized by U.S. EPA for Phase I Reports
For transactions in 2023 and going forward, parties who purchase property will want to be aware of an update applicable to Phase I reports. By final rule issued on December 15, 2022, the U.S. Environmental Protection Agency (EPA) recognized an updated standard for preparing Phase I reports it considers compliant with “all appropriate inquiries” under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), 42 U.S.C. § 9601, et seq.[1] Effective February 13, 2023, Phase I reports should use the new ASTM E1527-21 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.” The prior standard, ASTM E1527-13, has a sunset period of one year from publication of the final rule.
The term “all appropriate inquiries” or AAI stems from the Small Business Liability Relief and Brownfields Revitalization Act (“Brownfields Amendments”) passed in 2002 which sought to limit the liability of prospective purchasers under CERCLA’s strict liability scheme. The Brownfields Amendments required EPA to promulgate regulations to establish standards for conducting AAI. The AAI Rule is codified in the Code of Federal Regulations (CFR) at 40 CFR Part 312. The final rule will amend the Standards and Practices for AAI to incorporate the new ASTM standard.
Prior to the Brownfields Amendments, if a party purchased property it did not know was contaminated, it could nonetheless be liable for cleanup of contamination from prior or neighboring owners. The AAI requirements apply to innocent landowners, contiguous property owners or bona fide prospective purchasers (“BFPP”).[2]
By conducting AAI before acquiring a property, prospective buyers can claim protections from CERCLA liability. Performing AAI means looking into the previous ownership and uses of the property prior to acquisition to evaluate if there are releases or threatened releases of hazardous substances at or near the target property. For example, a Phase I report can uncover that a property was a dry cleaner or former gas station in the past. Similarly, by reviewing records with environmental agencies or in compiled databases, an environmental professional may uncover that leaking underground storage tanks have contaminated groundwater below the target property. Considering that environmental contamination is costly and can take a long time to clean up, finding contamination before acquiring a property allows the prospective buyer to assess whether a property is a good investment.
AAI requires that the Phase I report be conducted within one year prior to acquisition and certain parts of the AAI investigation must be completed or updated within 180 days prior to acquisition.[3] A related type of report, a Phase II report, is typically prepared if the Phase I report identifies recognized environmental conditions (“RECs”) that the environmental professional recommends should be further investigated. As a result of a Phase II investigation, the prospective purchaser may be able to resolve the RECs (i.e., find that soil or groundwater is clean) or may find that a property is in fact contaminated. In turn, a prospective purchaser may decide against purchasing a property.
For your next real estate or commercial transaction, ensure your environmental consultant is using the updated ASTM Standard. If you have questions or comments, Bozana Lundberg can be reached at blundberg@kmklaw.com or 513.579.6509.
[1] See Standards and Practices for All Appropriate Inquiries, 87 Fed. Reg. 76578 (Dec. 15, 2022) (to be codified at 40 C.F.R. Part 312).
[2] See CERCLA §§ 107(r) and 101(40). Section 101(40) of CERCLA was amended in 2018 to allow parties with leasehold interests to qualify for BFPP liability protection. See CERCLA § 101(40)(A)(ii).
[3] See 40 C.F.R. § 312.20(a) and (b).
