Written by Conor Horton, Project Manager in BBJ Group’s Real Estate and Transaction Services Practice
Most buyers of commercial real estate know they face environmental risk, and they also know a Phase I Environmental Site Assessment (ESA) will help them clarify that risk. Many also are aware that obtaining a Phase I ESA is necessary to complete “All Appropriate Inquiries” (AAI), which can give them access to liability defenses under the federal Superfund law.
ASTM International (ASTM) E 1527 has been the standard for completing Phase I ESAs since 1993. Revisions to ASTM E 1527 occurred in 1994, 1997, 2000, 2005, and 2013. Currently, ASTM E 1527 is being updated with published revisions expected in 2021.
What is an All Appropriate Inquiry?
AAI is the process of evaluating a property’s environmental condition and assessing potential liabilities for contamination. AAI, derived from CERCLA (“Superfund”) and established in the Federal Register (40 CFR Part 312), allows a party to obtain protections from potential liability as a bona fide prospective purchaser, innocent land owner, or contiguous property owner. The primary means to satisfy AAI is through completion of a Phase I ESA conducted in accordance with ASTM E1527-13.
Unknown to many, a Phase I ESA by itself may not satisfy AAI or adequately assess the Phase I user’s (e.g., a prospective purchaser) potential risk. Effective due diligence, including AAI, requires a team effort by the user of the Phase I ESA and its environmental consultant to confidently assess and manage the full range of risks.
Why Buyers and Environmental Consultants Need to Work Together
By design, successful completion of AAI requires participation by both the user of the Phase I ESA and its consultant. For example, AAI requires the user to review title records for environmental liens, which the Phase I consultant can do for the buyer – if requested, but is not expressly required under AAI. Even a technically complete Phase I ESA may therefore not entirely satisfy AAI.
Also, even where AAI is complete, the CERCLA liability protections may not offer sufficient risk protection for a prospective purchaser of a property or business. For example, depending on the history of the property and how it will be used after purchase, the prospective purchaser could face regulatory compliance issues at the State and federal level, liability under OSHA and hazardous waste laws, and even third-party tort claims from tenants and neighbors of the property. This spectrum of potential risks can also be assessed during the AAI process to ensure that liabilities are defined with practical methods for resolution before the closing of an acquisition.
When consultant and buyer work together to clearly scope and manage these risks, the buyer can proceed to purchase with well-founded confidence.
Proposed Changes to ASTM E 1527 on the Horizon?
Currently, ASTM E 1527 is undergoing a comprehensive review process by ASTM’s Phase I ESA Task Group, consisting of consultants, lenders, attorneys, and others. Publication of the revisions is expected in late 2021, and while no concrete information has been released, there are a handful changes the new standard are likely to address.
- Clarifications to the HREC and CREC definitions;
- More robust research for adjoining properties;
- References to non-scope considerations such as emerging contaminants (i.e., PFAS); and,
- Requirements for who can conduct an environmental site visit.
These proposed revisions are far from a drastic change and more of a sign of the evolving world of environmental diligence, designed to create the most thorough environmental due diligence for everyone involved. We will provide updates regarding the anticipated changes to ASTM E 1527 as they emerge.