On December 30, 2013, the U.S. EPA formally recognized a new standard (ASTM Standard E1527-13) to demonstrate compliance with the All Appropriate Inquiry (AAI) Rule when conducting Phase I environmental site assessments.  The new Standard is the first significant revision to the ASTM Phase I standard since 2005, and introduces several substantive changes to the Phase I assessment process.  The new Standard likely will have practical implications for environmental diligence conducted in support of commercial real estate transactions.

Key Changes to the Standard

There are three key substantive changes in the new Standard: 

1. Changes to the definitions of Recognized Environmental Condition (REC) and Historical Recognized Environmental Condition (HREC), and the introduction of the term Controlled Recognized Environmental Conditions (CRECs). 

2. Clarifications regarding vapor migration/intrusion assessment requirements.

3. Requirements pertaining to Regulatory Agency File Reviews.

Other minor revisions to the Standard include clarifications to the scope of user responsibilities, mandatory review of standard historical sources for industrial/manufacturing properties, and various changes to the Standard’s appendices.  These revisions are unlikely to have much of a practical impact on users. The key changes are summarized below.

REC, HREC, CRECs

The first substantive change in the new Standard is a revised definition of the terms regarding Recognized Environmental Conditions.  The new Standard simplifies the definition of a REC, to align more closely with the AAI rule, as a release, a likely release, or a material threat of a release of hazardous substances to the environment on the property. The revised Standard also modifies the definitions of “release” and “environment” to more closely track the definitions of those terms as set forth in CERCLA.  Although the definition of a REC has been simplified, its application in practice should be largely unchanged.

The definition of an HREC has been modified to apply only to historic releases, which have been remediated to the satisfaction of regulatory authorities for unrestricted use.  Thus, the new Standard limits an HREC to past releases that do not subject the property to any use restrictions, activity and use limitations (AULs), or other engineering or institutional controls.  The new definition also requires that the environmental professional evaluate whether releases that were addressed in the past may be subject to revised cleanup criteria that could require further remedial action. Although some environmental professionals routinely conducted an analysis of current regulatory cleanup standards for HRECs, and states such as New Jersey have long required it, the new Standard makes this exercise mandatory to comply with the AAI Rule for the first time.

Following logically from the revised definition of an HREC is the new category of releases called a CREC. This term is newly added to describe releases that have been addressed to the satisfaction of regulatory authorities, but from which residual contamination has been permitted to remain in place subject to the implementation of use restrictions, AULs or other institutional or engineering controls on the subject property.  Because a CREC is a new type of REC (whereas an HREC is a finding no longer considered an REC), the new Standard requires that the condition also be identified as a REC in the conclusions section of the Phase I report.  Under the prior standard, these types of controlled, known conditions were often characterized as HRECs, since regulatory closure had been achieved.  It remains to be seen how lenders, insurers, etc., will respond to the CREC characterization.  For all intents and purposes, these conditions are now considered RECs, and may have a practical impact on transactions in the form of financial holdbacks or escrow demands, insurance coverage exclusions or limitations, or requests for sale price or lease concessions.

Vapor Migration

The second key change in the new Standard is the introduction of language throughout the Standard to clarify that the potential for vapor migration must be considered in the Phase I report.  Section 2.1 of the new Standard provides that vapor migration should not be considered differently than groundwater migration, and references the existing vapor intrusion assessment standard (ASTM E 2600-10) as the preferred methodology for assessing potential vapor concerns.  The new Standard clarifies that only indoor air quality issues unrelated to releases of hazardous substances or petroleum products are non-scope items.  Thus, vapor migration related to releases of hazardous materials must be considered as part of the Phase I assessment, and can no longer be considered a “voluntary” next-step item.  The practical impact of this change, however, is not likely to be significant.  In our practice, where subsurface contamination is present in the vicinity of a populated building, vapor intrusion is automatically considered a concern and is further addressed in the Phase I report.  The new Standard simply clarifies that the assessment of vapor concerns is indeed a requirement.

Agency File Reviews

The third key change in the new Standard relates to the requirement to conduct agency file reviews.  The new Standard requires that if the subject property or an adjoining property is identified in a government records search, then the environmental professional, at his discretion, should review the pertinent regulatory files or records associated with that listing.  If the environmental professional is of the opinion that an agency file review is not warranted, he or she must justify such opinion in the Phase I report. 

The practical impacts of the file review requirement are likely to be on timing and cost.  Agency file reviews can often take several weeks (or months, in some jurisdictions), and could add additional unforeseen costs to the Phase I assessment process.  It would behoove clients to understand at the outset of a Phase I assessment what the impact of the file review requirement will be on cost and timing, and to ensure that the consultant contract provides adequate protections for prior approval of related costs. Practically speaking, given the relatively tight due diligence timeframes in most real estate purchase agreements, file reviews in many situations may be untenable.  This could result in tremendous pressure on purchasers, their environmental professionals and attorneys to explain away the need to do a file review, rather than upset the timeline of a pending transaction. Moreover, the file review requirement could dramatically increase the probability that a Phase I assessment is not truly complete at the time of closing. 

As noted, none of the changes discussed above are likely to have a significant impact on the way Phase I reports are prepared.  However, it will take time to sort out the practical impacts of the new Standard on due diligence periods in commercial real estate transactions and the manner in which parties to such transactions handle and address Phase I findings.  It would be best to take a conservative approach to Phase I reports, at least in the near term, especially with respect to timing and working with environmental professionals to properly characterize environmental conditions.

Finally, it should be noted that the existing ASTM standard is still recognized as being compliant with the All Appropriate Inquires Rule.  However, in the Final Rule, EPA notes that the revised Standard is an improvement over the prior standard and will result in greater clarity for prospective purchasers.  Therefore, EPA recommends that environmental professionals and prospective purchasers use the revised Standard.  EPA further comments that it intends to publish a proposed rulemaking to remove the reference to the prior standard in the All Appropriate Inquiries Rule “in the near future.”  Given the foregoing, we believe it is prudent to use the new Standard for all Phase I assessments going forward.