A new standard for Phase I Environmental Site Assessments (Phase
I) went into effect this week. Beginning on February 13, if a Phase
I is used to establish purchaser’s performance of “all
appropriate inquiries” during its environmental diligence in
order to establish a Bona Fide Prospective Purchaser defense under
CERCLA, the Phase I must be performed pursuant to the new ASTM
E1527-21 standard (ASTM Standard). Importantly, the ASTM Standard
imposes requirements upon the real estate
purchaser to make several disclosures in
connection with the preparation of the Phase I. This Advisory is
intended to provide practical tips for satisfying this lesser-known
aspect of the “All Appropriate Inquiries” safe harbor for
a Bona Fide Prospective Purchaser defense under CERCLA.
Jump Directly to Key Practice Tips
Bona Fide Prospective Purchaser
Generally, under the federal Comprehensive Environmental
Response, Compensation, and Liability Act
(CERCLA),1 also known as Superfund, any owner
of a property can be held liable for the presence of hazardous
substances, regardless of whether the property owner caused the
release. However, CERCLA includes several defenses that limit
property owner liability despite pre-existing contamination,
including where property owners qualify as a Bona Fide Prospective
Purchaser (BFPP).2
For a prospective purchaser to qualify as a BFPP, (1) any
release of hazardous substances on the property must have occurred
prior to acquisition;3 (2) the purchaser must
not be affiliated with any potentially responsible party (PRP) for
the property through a familial, commercial, or financial
relationship; (3) the purchase must not impede the performance of a
response action or natural resource restoration; and (4) the
purchaser must meet all threshold criteria and ongoing
obligations.4 Threshold criteria include
conducting All Appropriate Inquiries (AAI) in accordance with the
U.S. Environmental Protection Agency’s All Appropriate
Inquiries Rule (AAI Rule).5 Similar
state-specific defenses to Superfund liability also include AAI
requirements with limited variation, discussed in greater detail
below.
All Appropriate Inquiries
Conducting AAI requires both the prospective purchaser and the
environmental professional to participate in the preparation of a
Phase I.6 Beginning on February 13, if a Phase
I is used to support AAI, it must be performed pursuant to the new
ASTM E1527-21 standard.7 Importantly, while the
ASTM Standards require the environmental professional to make
inquiries of the current and past property owners and occupants,
the prospective purchaser must independently provide the following
items:8
Environmental Liens/AULs. Within six
months prior to the acquisition date, the prospective purchaser
must perform a search for environmental liens and activity and use
limitations (AULs) and provide any record thereof to the
environmental professional.9 In most
jurisdictions, a title commitment or title report would be likely
to satisfy this requirement. Note the ASTM Standards do not require
an environmental professional to perform a title search in
preparing a Phase I. Instead, it is best practice for the
prospective purchaser to provide a title commitment to the
environmental professional.
Commonly Known or Reasonably Ascertainable
Information. The prospective purchase must provide
any commonly known or reasonably ascertainable information from the
local community, including, if known, past uses, past releases of
hazardous substances, and past remediation
efforts.10 This can include information derived
from the owner or occupant of a property and neighboring
properties, the local community, government officials, media
sources, and local libraries and historical
societies.11
Specialized Knowledge or Experience.
The prospective purchaser must also provide any relevant
specialized knowledge regarding the likelihood of a release or
threatened release of hazardous substances at the property,
adjacent properties, or the surrounding area to the environmental
professional.12 For example, the prospective
purchaser should disclose if it generally is in the business of
purchasing and remediating contaminated
properties13 or, through its operation of a
similar business, has specialized knowledge of the chemicals and
processes used by the owner or occupant.14
Deviation From Fair Market Value. The
prospective purchaser must consider if the purchase price
reasonably reflects the fair market value of an uncontaminated
property, and if not, whether the price difference is due to the
presence or threatened release of hazardous
substances.15 An appraisal is not required. The
determination may be made through a comparison of similar
properties in the vicinity or by consulting a local real estate
expert. In practice, the EPA’s rulemaking requires the
prospective purchaser to note “significant differences in the
purchaser price and fair market value of a property … and the
reasons for any differences.”16
Obvious Contamination. After
considering all information available, the prospective purchaser
must consider the degree of obviousness of potential contamination
and the ability to detect contamination by appropriate
investigation.17 In practice, the prospective
purchaser should identify to the environmental professional any
indications of hazardous substances on, at, in, or to the
property.18
To easily satisfy the prospective purchaser’s requirement to
make AAI, the revised ASTM Standards provide a simple questionnaire
(included
below) that prospective purchasers should complete when
engaging an environmental professional and that the environmental
professional should attach to the Phase I with a note that the
consultant reviewed and relied upon the questionnaire in making its
report.
Existing Phase I
A prospective purchaser need not commission their own Phase I to
take advantage of the BFPP safe harbor. A prospective purchaser can
rely on an existing Phase I, dated within one year of the
acquisition date.19However, a prospective
purchaser must still make the independent inquiries as outlined
above. When utilizing an existing Phase I, the best practice is to
attach the ASTM Questionnaire to the environmental
professional’s reliance letter with a note that the consultant
reviewed and relied upon the questionnaire in affirming the report
in the reliance letter.
Best Practices for Phase I Reports
Environmental professionals generally limit their liability
under a Phase I to its cost or some other small amount. This
limitation means that there is very limited recourse for a
prospective purchaser if a Phase I contains inaccuracies or fails
to follow ASTM guidelines. As such, prospective purchasers should
take care in reviewing an environmental professional’s Phase I,
including confirming that (1) the ASTM Questionnaire has been
included in the Phase I (or reliance letter, as
applicable);20 (2) the Phase I notes any
environmental liens or AULs uncovered in a title report; and (3)
the Phase I (or reliance letter) states that the report was
prepared for the purpose of achieving BFPP status. The ASTM
Standards require an environmental professional to assume that the
purpose is to qualify for landowner liability protections, if no
other reason is given, and to state as much in the Phase
I.21
Separate State and Local Requirements in the Washington, D.C.
Metropolitan Area
The BFPP status outlined above operates as a safe harbor with
respect to the federal Superfund law. The District of Columbia,
Maryland, and Virginia incorporate and apply similar defenses from
Superfund liability under state/local law.
District of Columbia. To qualify as a
BFPP under Washington, D.C.’s Brownfields Revitalization Act, a
person (purchaser or tenant) must establish several threshold
criteria that align with federal Superfund BFPP requirements,
including that (1) the person must have acquired the facility after
June 13, 2001; (2) the disposal of hazardous substances occurred
prior to facility acquisition; (3) the person undertook at time of
acquisition all appropriate inquiry22 into the
previous ownership and use of the property; (4) the person must
exercise appropriate care regarding identified hazardous substances
by taking reasonable steps to stop any continuing release, prevent
future releases, and prevent or limit exposure; and (5) the person
is not potentially liable, or affiliated with any other person that
is potentially liable, for response costs at the
facility.23
Maryland. Maryland’s corollary to
CERCLA, the Brownfields Redevelopment Reform Act, incorporates
CERCLA defenses through its definition of a “responsible
person,” which states that “any person claiming an
exemption from liability … must establish that the person had no
reason to know, in accordance with §101(35)(B) of [CERCLA,
which directly references AAI], and that the person satisfied the
requirements of §107(b)(3)(a) of
[CERCLA].”24 The Maryland Department of
the Environment’s (MDE) August 2017 fact sheet on Inculpable
and Responsible Person Status for the state’s Voluntary Cleanup
Program clarifies that Section 101(35)(B) of CERCLA pertains to AAI
and states that “[a]ny documentation submitted to MDE in
support of the innocent purchaser defense must show that all points
of AAI and the American Society of Testing and Materials (ASTM)
were met.”
Virginia. To satisfy the BFPP defense
under Virginia’s Brownfields Restoration and Land Renewal Act,
the purchaser must (1) not have contributed to a release or
threatened release of hazardous substances, (2) have any familial,
contractual, or financial relationship with a potentially liable
entity, (3) take reasonable steps to mitigate any existing release
and prevent any threatened future release, and (4) not impede any
remediation action.25 Virginia does not require
a Phase I or any other purchaser inquiries to qualify as a BFPP. In
addition, Virginia law requires that a person seeking to apply the
innocent landowner defense demonstrate, among other requirements,
that “the person made all appropriate inquiries into the
previous uses of the facility in accordance with generally accepted
good commercial and customary standards and practices, including
those established by federal law.”26
Conclusion
Ordering a Phase I is not enough for a purchaser to satisfy the
All Appropriate Inquiries test to achieve Bona Fide Prospective
Purchaser status. The prospective purchaser must ensure the
Environmental Professional is executing the Phase I pursuant to the
new ASTM E1527-21 standards and document its own disclosures in
connection with the Phase I. For further information, please reach
out to any author of this Advisory or to your normal Arnold &
Porter contact.
ASTM E1527-21 User Questionnaire*
(1.) Environmental liens that are filed or recorded
against the subject property (40 C.F.R. §
312.25).
Did a search of land title records (or judicial records
where appropriate)27
identify any environmental liens filed or recorded against
the subject property under federal, tribal, state, or
local law?
(2.) Activity and use limitations that are in
place on the subject property or that have been filed or
recorded against the subject property.
Did a search of land title records (or judicial records
where appropriate) identify any AULs, such as
engineering controls, land use restrictions, or
institutional controls that are in place at the
subject property and/or have been filed or recorded
against the subject property under federal, tribal, state,
or local law?
(3.) Specialized knowledge or experience of the person
seeking to qualify for the LLP (40 C.F.R. §
312.28).
Do you have any specialized knowledge or experience related to
the subject property or nearby properties? For
example, are you involved in the same line of business as the
current or former occupants of the subject
property or an adjoining property so that you would
have specialized knowledge of the chemicals and processes used by
this type of business?
(4.) Relationship of the purchase price to the fair
market value of the subject property if it were not
contaminated (40 C.F.R. § 312.29).
Does the purchase price being paid for this subject
property reasonably reflect the fair market value of the
property? If you conclude that there is a difference, have
you considered whether the lower purchase price is because
contamination is known or believed to be present at the subject
property?
(5.) Commonly known or reasonably ascertainable
information about the subject property (40 C.F.R. §
312.30).
Are you aware of commonly known or reasonably
ascertainable information about the subject property
that would help the environmental professional to identify
conditions indicative of releases or threatened releases?
For example:
(a.) Do you know the past uses of the subject
property?
(b.) Do you know of specific chemicals that are present or once
were present at the subject property?
(c.) Do you know of spills or other chemical releases that have
taken place at the subject property?
(d.) Do you know of any environmental cleanups that have taken
place at the subject property?
(6.) The degree of obviousness of the presence or likely
presence of contamination at the subject property, and the
ability to detect the contamination by appropriate investigation
(40 C.F.R. § 312.31).
Based on your knowledge and experience related to the
subject property, are there any obvious
indicators that point to the presence or likely presence of
releases at the subject property?
Footnotes
1. 42 U.S.C. 9601 et seq.
2. See 42 U.S.C.A. § 9607(r). In addition
to the BFPP defense, CERCLA includes an innocent landowner defense
and a contiguous property owner defense. These three defenses share
several threshold criteria, including performance of AAI and recent
updates to the AAI Rule’s requirements.
3. The BFPP exemption only applies to properties acquired
after January 11, 2002.
4. Continuing obligations include exercising appropriate
care with respect to hazardous substances found at the property by
taking “reasonable steps” to stop any continuing release
and to prevent any threatened future release. 42 U.S.C.A. §
9607(q).
5. See 42 U.S.C.A. § 9601(40).
6. AAI is required for (1) entities and individuals
purchasing property for non-residential use who may, after
purchasing a property, seek protection from CERCLA liability for
releases or threatened releases of hazardous substances and (2) any
party who receives a Brownfields grant awarded under CERCLA Section
104(k)(2)(B) and uses the grant to conduct site characterization or
assessment activities.
7. See Standards and Practices for All
Appropriate Inquiries, 87 FR 76578-01. Note: ASTM International
Standard E2247–16 entitled “Standard Practice for
Environmental Site Assessments: Phase I Environmental Site
Assessment Process for Forestland or Rural Property” may also
be used for AAI. February 13, 2024 marks the close of the one-year
sunset period for use of ASTM’s E1527-13 standard practice
following the effective date of the amended AAI Rule, which was
amended on December 15, 2022 and went into effect on February 13,
2023.
8. See 40 C.F.R. § 312.22.
9. See 40 C.F.R. § 312.25.
10. See 40 C.F.R. § 312.30.
11. See Standards and Practices for All
Appropriate Inquiries, 70 FR 66070-01.
12. See 40 C.F.R. § 312.28.
13. See Standards and Practices for All
Appropriate Inquiries, 70 FR 66070-01.
14. See Standard Practice for Environmental Site
Assessments: Phase I Environmental Site Assessment Process ASTM
E1527-21 Appendix X3.
15. See 40 C.F.R. § 312.29.
16. See Standards and Practices for All
Appropriate Inquiries, 70 FR 66070-01.
17. See 40 C.F.R. § 312.31.
18. See Standards and Practices for All
Appropriate Inquiries, 70 FR 66070-01.
19. See 40 C.F.R. § 312.20(d).
20. The ASTM Standards require an environmental
profession to report in the Phase I if a prospective purchaser did
not provide this information. See Standard Practice for
Environmental Site Assessments: Phase I Environmental Site
Assessment Process ASTM E1527-21 §12.3.
21. See Standard Practice for Environmental Site
Assessments: Phase I Environmental Site Assessment Process ASTM
E1527-21 §6.8.
22. The D.C. corollary to the federal Superfund law does
not define AAI or explicitly reference the AAI Rule. However, September 2022 Frequently Asked Question
guidance, issued by the D.C. Department of Energy and
Environment, defines AAI through reference to the federal Superfund
law and EPA’s AAI Rule.
23. See D.C. Code Ann. § 8-631.02 (full
list of threshold criteria from (1A)(A)-(J)).
24. Md. Code, Environment § 7-201; see 42 U.S.C.
§ 9607(b)(3)(a) (defendant “exercised due care with
respect to the hazardous substance concerned, taking into
consideration the characteristics of such hazardous substance, in
light of all relevant facts and circumstances”).
25. See Va. Code §
10.1-1234(B).
26. See Va. Code §
10.1-1234(C).
27. NOTE 1 — In certain jurisdictions, federal,
tribal, state, or local statutes or regulations specify that
environmental liens and AULs be filed in judicial
records rather than in land title records. In such cases
judicial records shall be searched for environmental liens
and AULs.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.