September 30, 2015

Buyers Must Soon Comply With New Environmental Due Diligence Standard

Purchasers of commercial real estate must meet a new standard to qualify for liability protection under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and analogous state laws. Since December 30, 2013, the Environmental Protection Agency (EPA) had given buyers the option of either using the old standard ASTM — E1527-05 — or switching to ASTM International’s E1527-13 ‘‘Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.’’ Beginning October 6, 2015, purchasers must comply with the new Phase I standard.

Buyers need to know three changes under the new standard:

  1. RECs, CRECs and HRECs: Previously, contamination that was remediated to the satisfaction of EPA or a state agency was considered a “Historical Recognized Environmental Condition” (HREC). Under the new standard, remediation sites in which the agency has allowed contamination to remain in place subject to engineering or institutional controls are now called “Controlled Recognized Environmental Conditions” (CRECs). Second, the definition of HREC has been clarified that sites that have previously obtained No Further Action (NFA) letters could be considered “Recognized Environmental Conditions” (RECs) if regulatory criteria have changed.

  2. Vapor Migration: Going forward, all buyers must evaluate the potential for vapor migration from soil or groundwater contamination. In fact, vapor migration from a neighboring property could be considered an independent REC unless it can be ruled out by the consultant.

  3. Additional File Review: The new standard also has more rigorous file review requirements. First, it is now mandatory for buyers to search for environmental liens and activity use limitations recorded against the property, a service which is typically excluded from consultants’ scopes of services. Second, consultants must review relevant agency files when the property or adjacent properties are identified in a regulatory database absent a written justification for the contrary.

In the two years since the new Phase I standard was announced, the costs for Phase I reports that have incorporated these new requirements have ticked upward. Meanwhile, some sellers have been caught by surprise when a buyer’s consultant reaches a different conclusion for an historical environmental issue identified in a prior Phase I report. This could cause hurdles to closing the deal. Thus Phase I reports should be prepared well in advance and scrutinized closely for compliance with the new standard while consultants iron out any wrinkles during this transitional period.

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