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More Appropriate Inquiries

| Amy P. Wang Amy P. Wang

A new standard practice for Phase I Environmental Site Assessments was adopted by the Environmental Protection Agency on December 30, 2013, adding more refined reporting requirements for parties seeking protection from environmental liability in land transactions.

In August 2013, the Environmental Protection Agency ("EPA") issued – and then retracted – a  rule adopting a new standard published by the American Society for Testing Materials ("ASTM") for parties purchasing real estate to be eligible for certain landowner liability protections under the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). 

On December 30, 2013, the EPA finally accepted the new standard, ASTM E1527-13, as an alternative to – not a replacement of – ASTM E1527-05 that first established the standards for the "all appropriate inquiries," or "AAI," rule ("AAI Rule") seven years ago.  AAI is the process of having an environmental professional evaluate the condition of real estate to assess potential cleanup liability for any contamination prior to purchase.  So what does it all mean?

How Did We Get Here?

CERCLA imposes strict cleanup liability on owners of property contaminated by hazardous substances; however, protection from such liability is available.  In 1986, Congress created "innocent purchaser" defenses to CERCLA liability for parties acquiring contaminated property:

  • By inheritance or bequest; or,
  • Who did not know, and had no reason to know, the property was contaminated prior to purchase.  

In 2002, Congress amended CERCLA again through the Small Business Liability Relief and Brownfields Revitalization Act, providing additional defenses for:

  • Property owners whose land is contaminated by a release from contiguous property owned by another; and, 
  • Bona fide prospective purchasers ("BFPPs") who buy or lease property with knowledge of the contamination by virtue of the identification of recognized environmental conditions mentioned later in this article.  

In order for innocent purchasers, contiguous property owners, and BFPPs to benefit from the liability protections, they must satisfy requirements for conducting the AAI investigation.  In 2005, EPA published the AAI Rule which officially recognized the then-current version of ASTM E1527's "Standard Practice for Environmental Site Assessments:  Phase I Environmental Site Assessment Process," which had been published originally to provide guidance for conducting AAI to satisfy the innocent purchaser defense.

What Is A "Phase I"?

A Phase I Environmental Site Assessment Report ("Phase I") that satisfies the AAI Rule must include:

  • Interviews with persons familiar with the property, preferably the current owner; 
  • Analysis of historical information regarding the use of the property; 
  • Searches for environmental cleanup liens; 
  • Review of waste disposal and underground storage tank records; 
  • Review of hazardous waste records; 
  • A visual inspection of the property and adjoining properties; 
  • A discussion of the presence of any recognized environmental conditions at the property; and, 
  • An analysis of the ability to detect suspected contamination by appropriate follow-up investigation.  

Since cleanup costs can frequently exceed the value of the contaminated property, a Phase I that meets the AAI standard is often required by lenders and investors in commercial real estate transactions to meet due diligence requirements. 

"5" vs. "13" - Which Way To Go?  

It is anticipated that the updates for a Phase I meeting the ASTM E1527-13 standard will satisfy the requirements for liability protection under CERCLA, but the 2013 standard does not yet replace the 2005 standard.  Rather, it clarifies and, in some instances, changes the old standard regarding the scope of a Phase I.  The following refinements are highlights of improvements to the quality of a Phase I offered by EPA's acceptance of the 2013 standard as meeting the AAI Rule:

  • RECs, HRECs, and CRECs

- A revised definition of Recognized Environmental Condition ("REC") aligns with the AAI goal of identifying conditions indicative of a release, or threatened release, of hazardous substances.  An REC is "the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property (1) due to a release to the environment; (2) under conditions indicative of a release to the environment; or, (3) under conditions that pose a material threat of future release."

- A significantly updated definition of an Historical Recognized Environmental Condition ("HREC"), clarifying that an HREC is an REC that has been cleaned up – referred to as "remediated" – to unrestricted residential use levels.  In the 2013 standard, HREC describes only: 

[A] past release of any hazardous substances or petroleum products that has occurred in connection with the property and has been addressed to the satisfaction of the applicable regulatory authority or meeting unrestricted residential use criteria established by a regulatory authority, without subjecting the property to any required controls. 

- A new definition in the form of Controlled Recognized Environmental Condition ("CREC").  In the 2013 AAI Rule, CREC applies to known past releases of hazardous substances that are not fully remediated, but have received risk-based regulatory closure with contaminants allowed to remain in place under certain conditions such as institutional controls, land use restrictions, or restrictive covenants.  

  • Agency File Review

- The environmental professional ("EP") conducting the investigation must review file records of the various Divisions of the North Carolina Department of Environment and Natural Resources ("DENR") as part of the Phase I, not as part of a subsequent limited site assessment.  Guidance is available within the 2013 standard that provides a framework for verifying agency information obtained from key environmental release databases to satisfy the AAI Rule. 

  • Vapor Intrusion

- The definition of the term "migrate" now includes releases that migrate in the subsurface of the property or soils through vapor pathways from other contaminated properties.  The EP conducting the Phase I must consider the risk of contaminants to indoor air quality.  Such vapor migration will be considered an REC.

Overall, the EPA's acceptance of the 2013 standard to satisfy the AAI Rule is not likely to significantly impact environmental due diligence immediately.  A Phase I environmental study still is not an exhaustive environmental investigation of the property; it will not identify wetlands, asbestos, or compliance issues.  However, conducting a Phase I using the 2013 standard should entitle a BFPP to CERCLA liability protections that otherwise might arise because of conditions on neighboring properties.  It can provide clarification and additional guidance for determining whether or not an REC is present at a property or whether there are conditions indicative of a release of hazardous substances.  The definitions of HREC and CREC likely will increase the number of RECs reported in a Phase I, and since EPs need to consider possible indoor air quality impacts from vapor intrusion pathways, use of the 2013 standard likely will be more costly.  

Since the 2005 and 2013 standards are relatively comparable and currently satisfy the AAI Rule for the avoidance of liability for environmental contamination, it will be important for purchasers to evaluate the suitability of using the 2013 standard from transactional and liability protection perspectives.  The context of the matter, the intended use of the property, and whether a lender is involved should guide the choice of standard.  While utilizing either standard currently is valid for satisfying the AAI Rule, the EPA did state in its December rule that it intends to propose yet another new rule in the future to remove references to the 2005 ASTM standard.  Therefore, using and developing familiarity with the 2013 standard is well-advised.


For proper due diligence in identifying RECs on the property, buyers should carefully choose whether conducting a Phase I under the more comprehensive ASTM E1527-13 standard is appropriate or desirable under the deal-specific circumstances of the real estate transaction while the EPA continues to accept both standards as meeting the AAI Rule.  Discussing the new ASTM standard with counsel will help to ensure as much protection from cleanup liability as possible.

© 2016 Ward and Smith, P.A. For further information regarding the issues described above, please contact Amy P. Wang.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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