Properly prepared Phase I Environmental Site Assessments (ESA) are the best preventative measure for environmental due diligence. Phase I Environmental Site Assessments (“Phase I ESA”) are a routine due diligence requirement of any commercial transaction involving real estate. A Phase I ESA typically consists of four main components. They include a site survey, interviews with people who are familiar with the property, review and analysis of historical documentation and environmental databases, and the preparation of a written report that documents the conclusions and any recommendations for further investigation. The primary functions of performing a Phase I ESA are to (1) identify Recognized Environmental Conditions (“RECs”) in the form of a release, likely release or material threat of a future release of hazardous materials or petroleum products at a subject property, and (2) to establish the “innocent purchaser” and other affirmative defenses to environmental liability imposed by the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”).
To manage and allocate environmental risks imposed by CERCLA, it is essential to understand the Phase I ESA findings and conclusions. CERCLA liability is simple. CERCLA liability is harsh (without regard for fault), strict (liability without regard to fault), joint-and-several (liability to all cleanup costs regardless of whether other parties contributed to a release) as well as retroactive (liable to releases prior to the enactment CERCLA). A purchaser can become responsible for a CERCLA cleanup after the acquisition of a property that has been contaminated by hazardous substances.
Late last year, ASTM adopted a new version of the Standard Practice of Environmental Site Assessment: Phase I Environmental Site Assessment Process – ASTM E1527-21 – modifying the standard by which a Phase I ESA is prepared.
The new standard was developed to replace the ASTM E1527-13 standard adopted in 2013 and subsequently codified in CERCLA as satisfying the All Appropriate Inquiry Rule (“AAI Rule”), a prerequisite to establishing certain affirmative defenses to environmental liability under CERCLA, including the contiguous landowner and bonafide prospective purchaser defenses.
Despite ASTM’s adoption of the E1527-21 standard, the E1527-13 Phase I remains the current benchmark to satisfy the AAI rule. EPA is expected later this year to issue a rulemaking that confirms that E1527-21 will meet the AAI rules.
The update is notable as it modifies historical reviews for adjoining properties and expands title searching standards. It revises the definitions RECs (Controlled RECs and Historical RECs) and addresses emerging compounds like PFOA/PFAS. There are also several other procedural reporting and clarifications.
It should be a checked-the-box item on any pre-acquisition diligence list to request a Phase I ESA that has been prepared in accordance the applicable ASTM standard. There are serious legal consequences for adopting a noncompliant Phase I ESA, or failing to understand its findings and conclusions.
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