Real estate attorneys generally know the importance of obtaining a current Phase I Environmental Site Assessment (“Phase I”) as part of a real estate acquisition for a client. Doing so allows the buyer to limit the risk of acquiring a contaminated site that may interfere with development AND qualify for Federal and State statutory defenses to liability for contamination. But how many real estate attorneys review a Phase I to determine if it covers all of the property in question? More important, how many understand how the Federal All Appropriate Inquiry (“AAI”) rule or ASTM1 E1527 (the standards governing the preparation and content of a Phase I) fit into the big picture? How many attorneys review a Phase I to assess consistency with those standards versus simply skim the executive summary to see if the consultant identified any RECs (Recognized Environmental Conditions) and, finding no RECs, tell the client (or the broker) that the property is “clean” and move on? If you are one of the real estate attorneys that just focus on RECs in a Phase I, you may be making a serious mistake that harms your client.
Why is that? Well, consider this example. A client was interested in purchasing an investment property that was developed with a new fueling station on it. Because the development was a new build on previously unused property, the Phase I that was provided to the client did not identify any RECs.
However, the Phase I did not cover all the property that was part of the deal – significantly a small corner parcel which was one of the parcels being sold was the location of a closed leaking underground storage tank (“LUST”) site with residual contamination and deed restrictions limiting certain uses.
Luckily, that was identified by the environmental attorney that reviewed the report and the former LUST parcel was carved out of the deal.
Relatively speaking, that was an easy omission to catch. There are other potential pitfalls for real estate attorneys. Reviewing a Phase I to determine whether it is consistent with AAI rule or ASTM standard is much more difficult for the “dabbling” real estate attorney. Consider the recent ruling by the 7th Circuit in Von Duprin LLC v. Major Holdings LLC, No. 20‐1711 & 20‐1793 (2021). In that case, Von Duprin was a potentially responsible party for contamination involving a number of different properties. After performing significant remediation, Von Duprin relied on CERCLA Section 107(a) to recover its costs from other property owners, including Major Holdings which did not cause any of the contamination.
Major Holdings asserted that it was covered by CERCLA’s bona fide prospective purchaser (“BFPP”) defense. The district court, however, determined that Major Holdings could not rely on that defense (for at least two of the properties) because Major did not satisfy the “all appropriate inquiry” requirement of the defense. The Court of Appeals upheld the lower court’s BFPP ruling finding that the Phase I did not include certain attestations about the environmental consultant’s qualifications which were required by the Federal All Appropriate Inquiry (“AAI”) rule. A client’s defense to liability was lost because the consultant forgot a simple ministerial act when finalizing the Phase I – and the attorney didn’t catch it.
While the Von Duprin case deals with the Federal AAI rule in place in 2007, the current AAI rule incorporates ASTM E1527‐13. The 2013 ASTM standard sets forth the criteria that consultants (or environmental professionals per ASTM) must follow to prepare a Phase I that is compliant with AAI. The standard is detailed and identifies what records must be reviewed, how the site reconnaissance must be performed, who must be interviewed, and how the report must be signed, as well as other criteria.
In November, 2021, ASTM updated its standard which is now E1527‐21 and the EPA is in the process of adopting that as part of its AAI rule. The new ASTM standard differs from the 2013 version in several key respects:
- A formal definition has been given to Significant Data Gap which is a data gap that affects the ability of the environmental professional (or consultant) to identify a If a SDG is identified, the consultant must comment in the Conclusions section as to how the SDG impacts the EP’s ability to identify a REC.
- The Phase I must provide the dates when the specific components of the Phase I were performed (interviews, lien search, review of government records, and visual inspection).
- To meet the requirements of the Federal AAI rule, Users (the person or entity relying on the Phase I) must perform a search for environmental liens and activity use limitations (“AULs”). Users can do this using a title commitment or a title search of documents recorded between 1980 and (Note this search is not the responsibility of the consultant but consultants will do it for an extra fee. If the User does not do this itself or direct the consultant to do this, consultants will frequently note in Phase Is that the User did not provide any title commitment or title search.)
- The Phase I must include a Findings and Opinions The Findings section should “identify those features, activities, uses, and condition that….may indicate the presence or likely presence of hazardous substances or petroleum products at the subject property.” The Opinions section must include the consultant’s opinions and rationale regarding how the findings have impacted the subject property, including the consultant’s rationale for concluding whether, or not, a finding is a REC (or CREC2, HREC3 or de minimis).
- The consultant should also provide an opinion in the Additional Investigation section regarding whether any testing should be performed to detect the presence of hazardous substances or
In addition to the above, another layer of complexity has been added by the inclusion of a clarification in Appendix X6.10 of the ASTM standard relating to “emerging contaminants” such as PFAS4. The standard states that PFAS are not part of the 2021 standard because PFAS compounds are not technically identified as CERCLA hazardous substances. However, the 2021 ASTM standard notes that some PFAS may be considered hazardous substances under State law and when they are identified as hazardous substances under CERCLA, they must be evaluated as part of a Phase I.
This is very important because Michigan has published Part 201 cleanup criteria for certain PFAS compounds5. As a result, those compounds are hazardous substances for Part 201 purposes.
The Federal government isn’t far behind. The White House and EPA recently took a large step toward classifying certain PFAS compounds as CERCLA hazardous substances. In a June 15, 2022, press release6, the White House announced that the EPA will be issuing a proposed rulemaking establishing PFOA and PFOS as CERCLA hazardous substances. On the same day, the EPA announced substantially lower lifetime health advisory limits (“HALs”) for 4 PFAS compounds: PFOA 0.004 ppt, PFOS 0.02 ppt, PFBS 2000 ppt, and 10 ppt for HFPO). The EPA also announced that it will propose a national PFAS drinking water regulation in the fall of 2022.
As you can see, even though the EPA has not identified any PFAS compounds as CERCLA hazardous substances that doesn’t mean it’s irrelevant with regard to current Phase I assessments. To the contrary, in a relatively short time period (possibly within the viability period of existing Phase Is), PFOA and PFOS will be CERCLA hazardous substances; and other compounds will follow thereafter. So attorneys need to be considering not only whether to have Phase Is performed in accordance with ASTM E1527‐21, but also whether to include an assessment of the site for PFAS related RECs. This is especially the case for sites in Michigan where the PFAS compounds noted above are already relevant to Part 201 liability defenses, including baseline environmental assessments.
As the Von Duprin case makes clear, dabbling in Phase I reviews is a minefield for real estate attorneys. Don’t review your client’s Phase I just for the RECs. Have an environmental attorney review your client’s Phase I to: determine if PFAS compounds should have been considered AND to make sure it complies with the AAI or ASTM requirements. Otherwise, your client could lose a Federal or State statutory defense or exemption to liability for pre‐existing contamination.
1 The American Society for Testing and Materials has established a written standard regarding the preparation of Phase Is. For the past 8 years, that standard has been ASTM E1527‐13.
2 Controlled REC – a REC that has ben addressed to the satisfaction of the regulatory authority with hazardous substances left in place.
3 Historical REC – a REC that has been addressed to the satisfaction of the regulatory authority and meeting unrestricted use criteria.
4 PFAS is an acronym for per and polyfluoroalkyl substances ‐ a large group of fluorinated compounds that are extremely stable, ubiquitous and believed to adversely impact human health.
5 Perfluorobutane sulfonic acid (PFBS), perfluorohexane sulfonic acid (PFHxS), perfluorohexanoic acid (PFHxA), perfluorononanoic acid (PFNA), perfluoroocatanoic acid (PFOA), hexafluoropropylene oxide dimer acid (HFPO‐DA), and perfluorooctane sulfonic acid (PFOS). Michigan also has established
6 https://www.whitehouse.gov/briefing‐room/statemsents‐releases/2022/06/15/fact‐sheet‐biden‐harris‐administration‐ combatting‐pfas‐pollution‐to‐safeguard‐clean‐drinking‐water‐for‐all‐americans/