Environmental Law: Revised Standards Impact Environmental Due Diligence
Parties to real estate transactions are familiar with obtaining Phase I Site Assessment Reports to assess environmental conditions and associated risks. However, there are new developments stemming from a revised technical standard combined with the U.S. Environmental Protection's (EPA) proposed rule amending its All Appropriate Inquiry Rule. These changes are leading sellers, buyers and lenders to re-examine their due diligence check lists and protocols for Phase I Reports because of potential uncertainties, confusion, and additional costs and time. This article discusses the revised ASTM standard, the status of the U.S. EPA rulemaking and possible implications for transactional parties.
All Appropriate Inquiry (AAI) is a specific process of evaluating a property's environmental conditions. A party must demonstrate that it has satisfied the AAI requirements to avail itself to certain defenses to liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), including exemptions for a bona fide prospective purchasers or an innocent landowners. A party that complies with the previous Phase I report standard (ASTM E1527-05) published by the American Society of Testing and Materials (ASTM) could satisfy the AAI requirement. The ASTM circulated a new Phase I standard in 2013 (ASTM E1527-13) which revised and superseded their 2005 standard.
On August 15, 2013, the EPA proposed a direct final rule which allowed the use of either the 2005 or the 2013 revised ASTM standard to satisfy AAI. The proposed rule was to be effective on November 13, 2013, if no adverse public comments were received during the comment period. However, the EPA received many comments objecting to the proposed rule.
The majority of the objections raised the issue that allowing parties to choose either the 2005 or the 2013 ASTM standard to satisfy AAI would cause problems. There could be disputes as to which version is the "industry standard" in deal negotiation. Also, giving a party of the option of selecting either standard could result in significant variation of the quality of reports which qualify for AAI. One comment from a commercial redevelopment stakeholder noted concern because "establishing a dual standard for meeting the requirements of All Appropriate Inquiries will lead to market confusion and create expensive and time consuming litigation that will delay cleanups and redevelopment."
The EPA's acceptance of both the 2005 and the 2013 ASTM standard is creating a split in opinions in the environmental community. Further, this split poses even more uncertainty for sellers, buyers, and lenders with regard to what is the "industry standard" and/or best practices for due diligence, deal evaluation and allocation of risk relating to contaminated real property.
Although the EPA is in the process of withdrawing the direct final rule, this setback is not expected to cause a significant delay in terms of the timing for promulgating a final rule. On August 15, 2013, the EPA simultaneously published a proposed rule identical to the proposed direct final rule because it anticipated some negative comments. The EPA is now expected follow usual rule-making process by addressing the public comments received and then publishing a subsequent final rule. For business decision-makers, this means potential uncertainty, additional costs and time for due diconverligence and deal negotiation until resolution of the final rule. In the meantime the question arises as to which standard does a party use when it contracts to have a Phase I Report done? 2005? 2013? For the time being, the 2005 satisfies the AAI standard. Whether it makes sense to do some additional work, such as several of the new items required in the 2013 standard, is a business decision at this point and ASTM E1527-13 is not "officially" an option to satisfy AAI until the rule becomes effective.
Changes To ASTM Standard
A Phase I Environmental Site Assessment is a report prepared by environmental consultants which identifies potential or existing environmental conditions at a subject property by reviewing historical information relating to the property and prior reports. Phase I reports which meet the ASTM requirements are intended to provide uniformity and an "industry standard" for the regulated community. One purpose of a Phase I report is to help parties involved in real estate transactions evaluate risk and plan and allocate. It can also satisfy the requirements for the "All Appropriate Inquiry" for a purchaser of contaminated real estate depending on how the Phase I Report is done.
ASTM E 1527-13 incorporates several changes, some of which are new items and others present clarification of items in the 2005 standard. Below are highlights of certain key revisions: