Real Estate Due Diligence Update

A Phase I Environmental Site Assessment (“Phase I ESA”) is a basic, but critical, step in the due diligence of any acquisition or long-term lease of real property.  A primary reason for conducting the Phase I ESA is to satisfy one of the requirements of the “innocent landowner”, “contiguous property owner” or “bona fide prospective purchaser” defenses to a landowner’s or tenant’s liability under the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. 9601) (commonly known as “CERCLA”).  In 2006, The U.S. EPA promulgated the All Appropriate Inquiry Final Rule (40 CFR 312)(“AAI Rule”) which sets forth the specific regulatory requirements for conducting inquiries into the previous ownership, uses and environmental conditions of a property to permit a landowner or tenant to take advantage of the CERCLA liability protections, and included the ability to satisfy such inquiries by completing a Phase I ESA in accordance with the ASTM industry standard, which was, at that time, the ASTM E1527-05 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process”.  On November 6, 2013, ASTM issued an update to the Phase I ESA standard, the E1527-13, which superseded the 2005 version.

The current E1527-13 includes clarifications and additional guidance for determining if there are recognized environmental conditions at a property or conditions indicative of releases or threatened releases of hazardous substances.  Several factors that were optional non-scope considerations under the old E1527-05 standard are now required under the current E1527-13 standard.  It newly defines the “Controlled Recognized Environmental Condition” (or “CREC”), which under E1527-05 would have been discussed in the context of a “Recognized Environmental Condition” (“REC”) or a Historical Recognized Environmental Condition” (“HREC”).  It newly defines migration, which includes contaminants in vapor form – which often were not assessed under the E1527-05 standard.  It also modifies the definition of HREC to assess whether a historical release of a contaminant was addressed to the satisfaction of the regulating authority at the time the Phase I ESA is prepared (current standards, not those in effect at the time of the mitigation or any regulatory order).  The significance of this change is exposed by examining the Florida Department of Environmental Protection’s Cleanup Target Level (“CTL”) for various contaminants which were set in 1999 as part of Ch. 62-777, F.A.C., and then updated in 2005.  A contaminated site which was remediated under the 1999 CTLs to levels which required no further remediation may not meet the 2005 CTLs.  A few examples of this are Cyanide and Arsenic which both have CTLs now that are significantly lower than they were in 1999.  The practical result of this is that a current Phase I ESA could reveal an HREC (and potentially a REC) that would not have been reported as such under the E1527-05 standard.

Since last November, several Federal agency rules and guidance documents have been updated to apply this updated standard.  Of greatest significance to those involved in real estate transactions is that the AAI Rule was amended effective December 30, 2013 to adopt the ASTM E1527-13 standard in place of the E1527-05.  Most recently, the U.S. Department of Housing and Urban Development issued a notice on April 16, 2014 that, effective May 16, 2014, the E1527-13 standard was adopted in place of all references to the older E1527-05 in all of its guidance documents, which impacts HUD/FHA programs, FHA-insured mortgagees, funding recipients and contractors.

Be sure your environmental consultant is using the ASTM E1527-05 standard for any Phase I ESA to avail yourself of the CERLA limitations of liability.  Phase I ESAs may be more time consuming and costly compared to those under the old standard since a greater volume of records may have to be researched.  The new standard may result in additional HREC and REC hits which could impact financing and insurance terms and ultimately whether to proceed with a transaction.  If you use Phase I ESAs in your normal due diligence process, I urge you to discuss the new standard with your environmental consultants to ensure your transaction is appropriately structured to accommodate for the time and cost of obtaining the assessment.  The new standard has been in place for several months now, so most consultants should have enough experience with it to provide accurate guidance.