On March 14, 2022, the U.S. Environmental Protection Agency (“EPA”) published (1) a direct final rule and (2) a proposed rule that would update the standard that consultants follow to ensure Phase I reports satisfy the All Appropriate Inquiry standard (“AAI”).
To qualify for certain defenses under the Comprehensive Environmental Response, Compensation, and Liability (“CERCLA”) Act as a buyer of real estate, buyers must either comply with the AAI rule requirements or conform to the standards set forth by the American Society for Testing and Material (“ASTM”) applicable to Phase I reports. Failure to do so exposes buyers of property to liability for pre-existing contamination at the subject property, as CERCLA is a strict liability statute.
Most consultants certify that Phase Is comply with the applicable ASTM standard to satisfy AAI requirements, which is ASTM 1527. ASTM routinely updates the ASTM 1527 standard. In November 2021, ASTM approved a revised standard for conducting Phase Is in the United States, ASTM E 1527-21. This replaced ASTM E 1527-13. Because the AAI rule incorporates the ASTM 1527 standard by reference, the revision triggered the need for EPA to update its regulations to the newest standard, which must occur via a rulemaking.
EPA published both a direct final rule and proposed rule to update the AAI rule by adding conformance to ASTM 1527-21 as a way to satisfy AAI. EPA does not propose to delete reference to the old standard, ASTM 1527-13. So, companies could require consultants comply with either ASTM 1527-13 or -21 under EPA’s proposed rule. This is due largely to EPA’s determination that ASTM 1527-13 and -21 are similar. While this approach may change based on comments received under the ongoing public comment period, this is EPA’s current approach.
For now, the larger question is one of strategy: which standard should parties choose, ASTM 1527-13 or ASTM 1527-21?
The answer may be deal-specific, but to begin the analysis, one must understand the difference between the two standards. ASTM E 1527-21 contains several noteworthy changes, including:
- Clarifying treatment of emerging contaminants, like per- and polyfluoroalkyl substances (“PFAS”), as a non-scope issue.
- Until PFAS substances are included under the definition of CERCLA Hazardous Substances, PFAS issues will not be discussed as Recognized Environmental conditions (“RECs”). In the interim, expect increased discussion of PFAS issues as non-scope issues, especially if the Phase I is prepared to satisfy requirements of a state program where PFAS is a regulated substance or where a lender requires diligence to address PFAS.
- Once PFOA and PFOS (two of the most common PFAS chemicals) are included in the definition of a Hazardous Substance under CERCLA through a forthcoming rulemaking by the EPA, treatment of PFAS in a Phase I will not be consistent. PFOA or PFOS contamination would constitute RECs, unlike contamination by other PFAS chemicals.
- Changing how to conduct historical records searches, including additional focus on adjoining properties, and title searches.
- Changing the definition of REC, Controlled Recognized Environmental Condition (“CREC”), and Historical Recognized Environmental Condition (“HREC”). These changes require inclusion of additional information and discussion in Phase Is.
- Defining “Property Use Limitation” and “Significant Data Gap.”
- Adding additional report components (e.g., now must include a site plan).
- Including a new flowchart to guide determination of RECs, CRECs, and HRECs.
In sum, the changes under ASTM 1527-21 represent a more conservative Phase I review of what will be a slightly broader scope of hazardous substances, which could result in additional conditions flagged as RECs, longer report preparation timeframes, and more detailed Phase Is, increasing diligence costs and potentially delaying deal timing.
Assuming that the rule is finalized and consultants could satisfy either standard, deal teams should consider which standard best suits their needs. For example:
- Buyers on an aggressive timeline and with more risk tolerance may prefer meeting ASTM 1527-13. On the other hand, buyers may want reports prepared to meet ASTM 1527-21 to obtain the more detailed report required by the standard.
- Sellers performing a Phase I may benefit from a Phase I prepared in compliance with 1527-13 to limit due diligence timing and cost.
- If there is a lender or insurer involved, parties must be cognizant of specific underwriting and loan approval requirements. Such requirements may evolve over the next few months as the rule is finalized, and insurers may change their requirements at their discretion (including requiring compliance with one standard but not the other).
Finally, another point to consider is whether a party requires the Phase I to satisfy something other than AAI, like a state law on environmental liability limitations for new owners. Phase Is prepared to satisfy state requirements in addition to AAI may need to comply with ASTM 1527-21 before the AAI regulations require it, depending on the state law and guidance from the regulatory agency. For example, some states like Michigan and Kansas implement programs where purchasers of contaminated property can limit their liability for environmental issues at a property if they satisfy certain legal and regulatory requirements. These requirements generally include the preparation of Phase I. Buyers should take note that the state agencies are free to issue their own guidance on which standard the Phase Is should meet for the state program.
EPA’s rules include a 30-day public comment window open until April 13, 2022. If EPA receives adverse comment, it will withdraw the direct final rule and proceed with the proposed rulemaking. This will delay official adoption of the ASTM 1527-21 to the AAI rule for some time, as EPA would need to address the adverse comments and publish a final rule with a new effective date. If no adverse comment is received, the direct final rule will go into effect on May 13, 2022. At that point, all Phase Is could comply with ASTM 1527-13 or ASTM 1527-21. If history is any indication, EPA received adverse comment during the previous update from ASTM 1527-05 to ASTM 1527-13 where it also proposed compliance with either standard as satisfying AAI. However, the changes between -13 and -21 compared to -05 and -13 are much less significant.
Reed Smith continues track these updates as they develop, and expects more updates from EPA and its efforts to adopt the revised standard. Should you have any questions, please contact Jennifer A. Smokelin or Casey J. Snyder of Reed Smith’s EHS team.