BUILD Act- Federal Brownfield Legislation Includes Major New Liability Protections

Congress does not often pass environmental legislation, so the passage of the Brownfields Utilization, Investment, and Local Development Act (BUILD Act) is noteworthy.  While the amount of federal funds available will still be far less than needed to move the needle, there are important changes to the law that will help facilitate brownfield redevelopment.  The most notable of these changes include:

  1. Protections for Local Governments-  Local governments will no longer trigger CERCLA liability as "owners or operators" by simply taking title to property through law enforcement activity, seizures, bankruptcy, tax delinquency, or other circumstances.  The big change is that the BUILD act removed the term "involuntary" as a qualifier for local government protection from CERCLA liability if it takes ownership of contaminated property.  This allows local government to be more proactive in taking ownership of brownfield to promote redevelopment without triggering CERCLA liability.  
  2. Extends Bona Fide Purchaser Defense (BFPD) to Tenants- U.S. EPA has used enforcement discretion to extend BFPD to tenants.  The BUILD Act now formalizes that protection into the law. 
  3. More Money- The Act more than doubles funding available up to $200 million each fiscal year through 2023 and additional $50 million per year for state response program funding;
  4. Expanded Eligibility-  Certain nonprofit organizations, limited liability corporations, limited partnerships and community development entities are now eligible to receive grant funding;
  5. Increases the Funding Limit-  Max grants were raised from $200,000 to $500,000;
  6. Eligibility of Administrative Costs- up to 5% of a grant can be used for administrative costs, not including investigation or identification of site, design and performance of response action, or monitoring of a natural response;
  7. Petroleum Contaminated Site-  Sites with petroleum contamination are eligible when there is no viable responsible property;
  8. Prioritizes "Clean Energy" and Waterfront Projects-  Projects that involve clean energy or are located on the waterfront will receive more points when scoring applications thereby prioritizing these projects.

While each of the improvements have benefits, the most significant are the expanded liability protections for local governments and tenants.  Allowing cities to proactively target and acquire property without fear of CERCLA liability is a major development that will help facilitate redevelopment.

 

Rethinking Brownfield Redevelopment in Ohio - Part 1 of 4

Two weeks ago I participated in the Ohio Brownfields Conference in Columbus, Ohio.  2016 marks the twentieth (20th) anniversary of Ohio's Voluntary Action Program (VAP) which is implemented by Ohio EPA and is the primary regulatory program for cleanup of brownfields.  

To mark the anniversary, Ohio EPA encouraged presenters to reflect on the success of the VAP and other brownfield programs in Ohio.  Presenters were also encouraged to discuss ways to accelerate brownfield redevelopment in Ohio.  

Despite twenty years of the VAP as well as some of the best incentive programs in the country, Ohio has failed to get ahead of its brownfield problem.  I believe it is time to rethink some of the tools used to greatly accelerate brownfield redevelopment.  This three part series will cover the following:

  1. Review the Brownfield Problem-  Without looking at the issues created by brownfields it is impossible to properly design policies to address them.
  2. An Inventory of Ohio Brownfields-  The second post will discuss public information regarding the number of brownfields in Ohio.  
  3. Review Ohio's Progress in Tackling its Brownfield Problem-  The second post will provide an overview of Ohio's progress using tools like the VAP, Clean Ohio, JobsOhio Revitalization Program and brownfield tax incentives.
  4. New Strategy to Accelerate Brownfield Redevelopment-  The final post will provide recommendations for ways to better utilize incentives, streamline regulatory cleanup and better address public health issues.

OHIO'S BROWNFIELD PROBLEM

What causes brownfields to occur?

Two primary forces create brownfields- market forces and fear of environmental liability.  

MARKET FORCES

  • Expansion of business-  businesses looking to expand in urban areas often find the cost of expansion significantly higher to expand in onto neighboring property versus moving to a greenfield.  One study in Ohio found the cost of developing on a brownfield property four times higher then the cost of building on a greenfield. 
  • Closure/Relocation/Consolidation of Businesses-  Businesses close for a variety of reasons. One of the hardest hit sectors has been manufacturing.  When these businesses close they often can leave behind contaminated sites.  
  • Lower Tax Rates or Incentives-  Businesses can also be lured away by either lower tax rates or incentive packages.
  • Moving to a "Better Area"- Some businesses also move because of the decay of the urban areas where they are located.  

 ENVIRONMENTAL LAWS

  • Liability-  Expansive liability provisions in environmental laws also act as a strong impediment to businesses choosing to expand on a brownfield. The law with the broadest liability provisions is CERCLA (Superfund) which contains provisions that make any "owner" liable for pre-existing contamination regardless if they created the contamination.  Many other environmental laws can also create liability concerns as well (RCRA, underground storage tanks, TSCA, etc.)
  • Financing Considerations-  Banks understandably are concerned with the risk to their borrowers should they seek to redevelop a brownfield.  These concerns can translate into extensive due diligence requirements, more complicated financing or even refusal to finance certain projects.
  • Timing/Delays-  Navigating the complex environmental liability issues and addressing contamination under regulatory cleanup programs takes significant time.  Many businesses simply don't have the time to address the issues presented by a contaminated sites.

What social issues and environmental issues do brownfields create?

SOCIAL ISSUES

  • Vacant Buildings-  Invite abuse, including stripping of parts, materials vandalism, arson and "midnight dumping." 
  • Unemployment-  Higher unemployment occurs when businesses leave areas and those areas become blighted
  • Urban Blight- Discourage investment and contribute to pervasive sense of poverty and hopelessness.
  • Infrastructure-  Investment shifts from urban core to suburbs.  As a result of urban sprawl, more infrastructure is needed to be maintained. 
  • Taxes- Revenue sources for cities to pay for services are reduced as jobs migrate away from urban core.

ENVIRONMENTAL ISSUES

  • Contaminated Sites-  Brownfields present public health risks from exposure to contaminants. Contamination can also migrate onto neighboring properties, discharge to surface water or create vapor intrusion issues.
  • Urban Sprawl-  Expanded development away from our urban cores results in more impacts to wetlands and streams.  Also, urban sprawl results in greater air pollution due to more vehicle miles traveled and less use of public transportation.

 

Local Governments, Land Banks and Brownfield Properties

One of the issues that has prevented local governments from being more aggressive in addressing brownfields has been liability concerns associated with existing environmental contamination.  Prior to 2009, some local governments learned the hard way that placing their name in the chain of title as an "owner" exposed the local government to liability under CERCLA (i.e. Superfund) or other environmental statutes. 

Ohio Passes Limited Environmental Liability Protection

Ohio attempted to address this gap in the law back in 2009.  Ohio Revised Code 5722.22 provides the following liability protection to County land banks:

R.C. 5722.22 Immunity of land reutilization corporation.
A county land reutilization corporation is not liable for damages , or subject to equitable remedies, for breach of a common law duty, or for violation of sections 3737.87 to 3737.891 of the Revised Code or Chapter 3704., 3734., 3745., 3746., 3750., 3751., 3752., 6101., or 6111. of the Revised Code or any rule adopted or order, permit, license, variance, or plan approval issued under any of those chapters in connection with a parcel of land acquired by the county land reutilization corporation.

This broad immunity provision appears to allow County land banks to assemble brownfield parcels without fear of exposing the entity to liability for pre-existing contamination.  However, what clearly is missing from the list of statutes in R.C. 5722.22 is a reference to CERCLA.  This is because a state cannot pass legislation that provides immunity from CERCLA, only Congress could create such an exception.   

Involuntary Acquisitions

Local governments are entitled to a liability defense if they acquire contaminated property involuntarily.  Pursuant to § 101(20)(D) of CERCLA, a unit of state or local government will not be considered an owner or operator of contaminated property (and thus is exempt from potential CERCLA liability as a PRP) if the state or local government acquired ownership or control involuntarily. This provision includes a non-exhaustive list of examples of involuntary acquisitions, including obtaining property through bankruptcy, tax delinquency, abandonment, or “other circumstances in which the government entity involuntarily acquires title by virtue of its function as sovereign."

While this provision is useful, there are times when a municipality or land bank would like to help facilitate brownfield redevelopment by proactively acquiring property.  In those circumstances, the local government will have to perform proper environmental due diligence just like any other buyer.

Municipalities and the Bona Fide Purchaser Defense

If a local government does not come into ownership of contaminated property involuntarily, it must proceed with caution in order to protect itself from liability.  In situations where a local government would like to acquire contaminated property voluntarily, it must act like a private party in order to establish CERCLA liability protection-  It must meet the requirements of EPA "All Appropriate Inquiries" (AAI) Rule in order to establish the Bona Fide Purchaser Defense (BFPD) to CERCLA.

EPA specifically identifies these steps in its CERCLA guidance document regarding local government acquisition of contaminated property:

While many abandoned properties that are of interest to land banks and redevelopment authorities are not likely to be contaminated, local governments should be aware that contamination and potential CERCLA liability may exist. A local government may increase the likelihood that the land bank or redevelopment authority is eligible for CERCLA liability protection by ensuring that the land bank or redevelopment authority conducts AAI prior to acquiring the property. Not only is AAI a critical requirement for obtaining most CERCLA landowner liability protections, but it also aids local governments in making informed property acquisition decisions. When acquiring abandoned contaminated properties, EPA encourages local governments to obtain BFPP status prior to acquisition if it is unclear whether other exemptions, affirmative defenses, or liability protections may apply. 

Under the BFPD, the local government must perform an ASTM 1527-13 compliant Phase I environmental assessment prior to taking ownership.  If potential contamination is identified, then the local government will also have to take "reasonable steps" to prevent exposures or stop ongoing releases of contamination.

County Land Banks Focus on Residential Property

Despite the environmental liability risks, some cities have been aggressive in attempting to manage brownfield properties.  Municipal land banks, such as the City of Cleveland Industrial-Commercial Land bank, have assembled and even cleaned up some brownfield sites. 

As discussed above, pursuant to R.C. 5722.22, County land banks have greater immunity from environmental liability pursuant to state statutes or common law.  Despite these protections, County land banks have been less proactive when it comes to brownfield properties.

Right now, County land banks are much more focused on addressing vacant residential properties. A current review of property held by the Cuyahoga Land Bank shows a long list of residential properties:

With the foreclosure crisis, its logical that County land banks would be focused on the residential property issue.  

However, the reason the Ohio General Assembly inserted the environmental immunity provisions contained in R.C. 5722.22 was to encourage land banks to address brownfield properties.  

County land banks that perform a limited amount of due diligence in advance of taking ownership (i.e. BFPD), coupled with the state immunity provision in R.C. 5722.22, can be powerful allies in addressing brownfield properties.  We need to see more examples of County land banks working collaboratively to facilitate cleanup and redevelopment of these properties.

EPA No Longer Recognizes Old ASTM Standard for Phase Is

U.S. EPA has published in the Federal Register its action that removes the old Phase I standard (1527-05) from the "All Appropriate Inquiries" Rule (AAI).  Until this action, AAI recognized both the old standard and the new standard- ASTM 1527-13.  

The major differences between the old and new ASTM Phase I standard include:

  • Key legal definitions associated with contamination
  • Enhanced requirements for agency file reviews
  • As discussed below, new language highlighting the need to assess the potential for vapor intrusion

EPA delayed the effective date of the rule until October 6, 2015 to allow the continued use of 1527-05 until that date.  Going forward, any Phase I report issued after the effective date of the rule which is based on ASTM 1527-05 will no longer be deemed sufficient for meeting establishing the Bona Fide Purchaser Defense to CERCLA (BFPD).  The BFPD provides new owners and tenants of property a defense to liability under CERCLA if it completes due diligence in accordance with EPA's AAI Rule.

EPA action was not a surprise.  Perhaps the most interesting aspect of EPA action is the comment in the preamble related to vapor intrusion:

"The scope of the AAI Rule and the ASTM E1527–05 standard always included the
requirement to identify all indications of releases
and threatened releases of hazardous substances, or ‘‘recognized environmental conditions (RECs),’’ including indications of vapor migration or vapor releases. With the updates included in the 2013 version of the ASTM E1527 standard, ASTM modified the definition of migration to specifically include vapor migration and remove any confusion regarding the need to identify all RECs, or all indications of releases or threatened releases of hazardous substances, when conducting an AAI investigation." (emphasis added)

While EPA may believe it has always been known the vapor intrusion needed to be assessed, that certainly was not the case among consultants.  Many prepared Phase I reports that did not mention in anyway vapor intrusion.  I have read such reports in the past.

This issue is whether this type of statement from EPA provides grounds for professional negligence claims against environmental consultants who did not perform a vapor intrusion evaluation under an old Phase I which followed ASTM 1527-05.  

The most likely scenario would be someone who purchased a building and learned later that a vapor intrusion/migration issue existed on the property.  They obtained a Phase I environmental assessment prior to purchase, however, the Phase I did not review the potential for vapor intrusion.

As discussed in a prior post, a recent survey indicates that barely half of the Phase I reports being performed using the new ASTM 1527-13 standard analyze for vapor intrusion.   

Only About 1/2 of Phase I Assessments Analyze for Vapor Migration Risks

Phase I Environmental Assessments (Phase I ESA) are the first step in the environmental due diligence process.  A Phase I ESA is a review of available information regarding a property to determine the possibility contamination may be present.  The assessment includes a review of environmental databases, file reviews, interviews with regulators/property owners and a site walkover by an environmental consultant.

To encourage more reuse of brownfields, Congress amended CERCLA to provide a liability defense to prospective purchasers of property who perform adequate due diligence pre-acquisition (i.e. the "Bona Fide Purchaser Defense" or BFPD).  In 2012, U.S. EPA made the BFPD potentially available to tenants who perform adequate environmental due diligence before signing a lease.  

U.S. EPA enacted the "All Appropriate Inquiries" (AAI) rule to specify the requisite level of due diligence necessary to establish the BFPD.  Under AAI, a purchaser/tenant must obtain an Phase I ESA prior to taking ownership or signing the lease.  The Phase I ESA must meet the standards set forth by ASTM 1527.  

There have been several versions of ASTM 1527.  Under ASTM 1527-05, consultant stated it was unclear whether the assessment must include the evaluation for potential vapor migration risk into buildings.  In order to make it clear, ASTM updated the standard, releasing 1527-13 in November of 2013.  

One of the most significant changes was the addition of specific language requiring the Phase I ESA to assess vapor migration risk.  In December 2013, U.S. EPA incorporated ASTM 1527-13 into AAI. Since December of last year virtually all Phase Is purport to satisfy ASTM 1527-13.

What is Vapor Intrusion?

Vapor migration occurs when soil and groundwater contamination can volatilize and migrate up through soil into buildings over or near the contamination.  Volatile Organic Compounds (VOCs) and Semi-VOCs are the most likely to cause vapor migration issues.  

Common sources of contamination that can cause vapor migration issues are gas stations, dry cleaners or other industrial sites (especially those that utilized solvents).  

Prospective purchasers or tenants of buildings with vapor migration risk can face issues regarding exposure of occupants to air deemed unsafe.  

ASTM revised the Phase I ESA to mandate an assessment of vapor migration risks due to the increased knowledge regarding the risk presented.

Survey Indicates a Large Portion of Phase Is Still Don't Evaluate Vapor Intrusion Risks

Environmental Data Resource, Inc. (EDR) surveyed over 100 environmental consultants who regularly perform Phase I ESAs.  Of those surveyed, only 55% indicated that they began to review vapor intrusion risks as part of their Phase I ESA when ASTM 1527-13 was finalized in November 2013.  

EDR stated that the survey results show the review of vapor migration risk has become "industry practice."  The number of consultants reviewing vapor migration risks had dramatically increased since it was adopted in November 2013.  However, nearly 1/2 of all Phase I ESA don't evaluate the risk.

With the amendment of AAI to reference ASTM 1527-13, every Phase I ESA should be reviewed to make sure vapor migration risk was evaluated by the consultant.

What is the Appropriate Methodology for Evaluating Vapor Migration?

With the dramatic risk in the number of consultants evaluating vapor migration risk, the issue has pivoted from whether to perform the analysis to the proper methodology for evaluating the risk.  In 2010, ASTM 2600 was published which provided a screening method for vapor migration risk. However, many deem ASTM 2600 too rigorous.

The EDR survey found that only 27% of respondents screened for vapor migration using ASTM E2600- the only industry recognized standard for screening brownfield sites for potential vapor migration.  Of those responding, 44% said they just review the data compiled by the Phase I to determine if further research is needed.

From a legal perspective, it is important to remember that the BFPD is a defense.  Meaning, a party who asserts the defense must demonstrate they met the requirements of the AAI.  Properly documenting what was done to evaluate vapor intrusion could be a critical issue in establishing the BFPD.  Therefore, Phase I ESA should be reviewed carefully to determine whether there is adequate documentation included in the report.

As a Buyer Can I or Should I Rely on an Old Phase I?

In real estate transactions it is not uncommon for the seller to provide the buyer a copy of prior a Phase I environmental assessment.  The seller either ordered a Phase I in anticipation of the transaction or one may exist from a prior transaction involving the same property.  Should the buyer be satisfied with this prior Phase I?

Purpose of the Phase I from the Seller's Perspective

In terms of records and site review, a Phase I environmental assessment essentially involves the following steps:

  • A review of environmental databases- records of known or potentially contaminated sites in the vicinity of the property, landfills, and other disposal sites, and underground storage tank records (for both leaking and registered USTs) 
  • A review of local regulatory files-  these could include the state EPA, local fire department or health department.
  • Aerial photos and sanborn maps- to review the history of the use of the property
  • Interviews- with a site contact or  someone with knowledge of the property
  • Site walkover by the consultant-  the consultant is looking for signs of potential releases of contamination (ex: distressed vegetation or oil stains)
  • No sampling- A phase I will not involve any actual soil or groundwater sampling even if issues are identified

If the seller has a Phase I, they may have ordered a Phase I to determine whether there are any environmental concerns that can be quickly ascertained.  However, keep in mind the seller and buyer's goals are not exactly in line with regard to environmental due diligence.

First, seller is not concerned with establishing any liability defenses because they aren't entitled to them if they perform a Phase I after already owning the property.  Second, if the Phase I identifies a potential issue, many sellers will stop their inquiry- they aren't interested in taking on the costs of addressing any issues that may be identified.

Buyer's Perspective- Establish the Bona Fide Purchaser Defense

CERCLA liability applies to "owners" and "operators."  Therefore, as the buyer, once you take ownership of the property you can be liable for any historical contamination that may exist, even if you had nothing to do with that contamination.  

In 2002, Congress passed the Small Business Liability Relief and Brownfields Revitalization Act (known as the "Brownfields Act").  The Act amended CERCLA to provide greater incentives for buyers to purchases and re-utilize brownfield properties.  The amendments established the Bona Fide Purchaser Defense (BFPD).  

Under the BFPD, a Buyer can establish a defense to liability under CERCLA if it performs due diligence prior to purchase in accordance with EPA standards.  A property does not need to be abandoned or vacant to be eligible for the BFPD, facilities still operating can qualify.

This post is not meant to be an exhaustive discussion of the requirements for establishing the BFPD. However, three key points to keep in mind from the buyers perspective with regard to prior Phase I reports:

  1. The Phase I must be performed within 180 days of purchase.  If a Phase I was performed within the last year, then a Phase I update can be performed. A Phase I more than one year old cannot be used to establish the BFPD;
  2. The buyer must be able to "rely" on the Phase I.  This means if the buyer wants to utilize the Seller's Phase I it must obtain either be identified in the Phase I update as a party that can rely on the Phase I or it must obtain a reliance letter from the consultant who performed the Phase I; and
  3. The buyer must make sure that the Phase I meets all the required elements set forth under EPA recognized standard for Phase Is- ASTM 1527-13 and EPA's "All Appropriate Inquiries" Rule (AAI).  (See discussion in prior post on the new ASTM standard).

Item 3 is of particular importance to the buyer.  I have reviewed plenty of Phase I reports that did not contain the required elements of the ASTM or AAI rule.  An inadequate Phase I will not allow the buyer to establish the BFPD.  

Therefore, it is of critical importance the buyer review any prior Phase I reports to ensure they are up-to-date, can be relied on and meet the required elements.  

Buyer May Want a Closer Look

If the seller's Phase I is "clean"- does not identified any "Recognized Environmental Conditions" (i.e. no indications of a release of contamination), then seller will be reluctant to allow any greater scrutiny of the property.  However, buyer should make sure the Phase I was adequate and no red flags are contained in the report.  

If the Phase I report does identify RECs, did the seller perform any additional investigation?  While AAI technically does not require sampling, it may be very difficult, if not impossible, to establish the BFPD without sampling to determine if a release did occur.  

If contamination is identified, then the buyer still can establish the BFPD if it takes "reasonable steps" to stop releases and prevent exposure to that contamination.  Under the BFPD, the buyer is not expected to perform the same level of cleanup as a liable party under CERCLA.

Beyond liability defenses, as the potential owner of the property, it is generally prudent to avoid taking on major headaches.  Therefore, buyers want to make sure sufficient due diligence was performed.  It is definitely in the buyer's interest to ensure they have a thorough understanding of the condition of the property.

For example, the BFPD is only a liability defense to CERCLA.  If other environmental regulatory obligations exist, such as underground storage tanks, the BFPD will not provide liability protection to those requirements.

Sellers may resist any questioning of the adequacy of a prior Phase I.  If the prior Phase I identified issues, seller may also be reluctant to allow further investigation.  However, as the buyer, you face liability exposure under CERCLA and potentially other environmental laws once you take ownership.

In conclusion, if a prior Phase I report exists, it it very important the buyer thoroughly review the report and take the necessary steps to protect themselves.  

EPA Takes Action to Recognize ASTM 1527-13 as the "Appropriate" Phase I Standard

On December 30th, the  Federal Environmental Protection Agency (EPA) finally took action trying to address the confusion it caused when it previously issued a final rule recognizing both ASTM 1527-05 and 1527-13 as appropriate standards for conducting Phase I assessment.  A proper Phase I assessment is a requirement  for establishing the Bona Fide Purchaser Defense under CERCLA.  (See prior post).  

On the second to last day of the year, EPA published a final rule in the Federal Register (78 FR 79319) recognizing the new ASTM E1527-13 phase I standard practice as an approved method for complying with the All Appropriate Inquires (AAI) rule.  EPA also provided new language in the preamble as well as a separate guidance document addressing comments EPA received.

Background on Prior EPA Actions

On August 15, 2013, EPA issued a direct final rule which recognized both E1527-05 and E1527-13 as appropriate standards for conducting environmental due diligence in accordance with the AAI. EPA received negative comments regarding its decision to continue to recognize both standards. Many felt it caused unnecessary confusion.  In response to comments, on October 29, 2013, EPA withdrew the final rule.  

As a result of EPA's action, there was a two month period where the most up-to-date standard, E1527-13, was not recognized by EPA as satisfying AAI.  This caused some attorneys and buyer/sellers of real estate  to request consultants to meet both standards.

With the December 30th action, EPA officially recognizes E1527-13 and also indicates it will soon issue a proposed rule removing AAI's reference to E1527-05.  

Vapor Intrusion Remains the Big Issue

 The biggest differences between E1527-13 and E1527-05 include:

  • Revised definitions of RECs, HRECs CRECs
  • Greater emphasis on reviews of regulatory files
  • Vapor intrusion

(See prior post discussing differences in greater detail)

It is the last bullet point that has caused the greatest confusion and controversy.  Some provided comments to EPA expressing their view that under the prior E1527-05 standard consultants did not have to evaluate vapor intrusion.   Those commentators view E1527-13 as establishing that requirement for the first time.

However, EPA makes clear in the preamble to the December 30th action that the language in E1527-13 pertaining to vapor intrusion is only an enhancement of the requirements under the old standard.  EPA specifically states that E1527-05 "already calls for identification of potential vapor releases or vapor migration."

EPA comments create issues for environmental consultants who did not include evaluation of vapor intrusion as part of Phase I assessments under E1527-05.  Failure to do so could be grounds to assert the consultant committed malpractice.  

In situations where no such evaluation was performed under an old Phase I, and the building later proved to have vapor intrusion issues, consultants face heightened liability exposure.

EPA action should provide greater clarity to the due diligence community.  

 

 

 

Which Phase I Standard Should Consultant's Use Right Now?

Over the weekend, there was a good blog post on Schnapf LLC Blog discussing which Phase I standard lawyers and consultants should use for at least the rest of 2013.  Due to an unanticipated reversal by U.S. EPA, there is a gap right now between the current ASTM standard and EPA's recognized standard for Phase I's for compliance with the "All Appropriate Inquiries" Standard (AAI).

On November 6th, ASTM officially recognized E1527-13 as the new standard for conducting Phase I environmental assessments.  As a practical matter, this means ASTM E1527-13 represents current best practice in the industry.  

However, as discussed in a prior post, U.S. EPA reversed course and withdrew a direct final rule that would have recognized both E1527-13 and E1527-05 as meeting AAI.  As a result, the only standard EPA currently recognizes as satisfying AAI is E1527-05.

The post discussed the quandary caused by the current gap between sanctioned standard and the most up-to-date standard: 

So what is a consultant to do for transactions requiring a phase 1 prior to EPA formally recognizing E1527-13? On the one hand, by publishing E1527-13, ASTM is essentially saying that the new version now represents good commercial practice. Thus, a consultant failing to use the most current version of E1527 could expose a consultant to professional negligence claim if, for example, the consultants fails to identify a REC because it did not do a file review or fails to evaluate the soil gas pathway. This would seem to tip the decision towards using E1527-13.

However, E1527-13 is not yet recognized as an acceptable method of satisfying AAI. Thus, if the purpose of the phase 1 is to comply with AAI, a consultant stating that its phase 1 complies with AAI could be subject to breach of contract or claims of misrepresentation since only E1527-05 is currently recognized in the AAI rule.

The biggest differences between the two standards is the more defined requirements pertaining to file reviews and analysis of the vapor intrusion pathway.  It is pretty clear the E1527-13 requires additional work.  Arguably, a Phase I that meets E1527-13 should also be consistent with E1527-05.

For an attorney, you will want the consultant preparing the Phase I report to state it meets the current EPA recognized standard- E1527-05.  Without such a reference it is possible your client hasn't satisfied AAI.  

A consultant will want to comply with the standard recognized in the industry as the best practice- E1527-13. Otherwise, one may argue the consultant isn't utilizing current best practice.

It may be best to discuss the issue with your consultant and see if they are comfortable stating in the report that the Phase I meets both standards.  That may be the best alternative until EPA officially sanctions E1527-13. 

 

U.S. EPA Alters Plan on New ASTM Standard for Due Diligence

As discussed in a prior post, U.S. EPA had issued a direct final rule approving the use of the new ASTM Standard E 1527-13 "Standard Practice for Environmental Site Assessments:  Phase I Environmental Site Assessment Process."  The final rule was set to take effect on November 13, 2013.

If the rule had gone into effect, it would have allowed use of either ASTM Standard E 1527-13 or the old ASTM Standard E 1527-05 to comply with due diligence requirements associated with the "All Appropriate Inquiries Rule," (AAI), a necessary step to establishing certain affirmative defenses to CERCLA liability.  However, just prior to the September 16, 2013 comment deadline, adverse comments were filed by some influential practitioners.  

Concerns were expressed with regard to the practical effect of EPA's proposal to allow either ASTM standard to be followed.  E 1527-13  is believed to be more costly than the old standard because it enhances the requirement for environmental professionals to perform agency file reviews as part of the Phase I process.  It also contains more definitive language requiring evaluation of potential vapor intrusion migration pathways. In addition, each ASTM standard uses different definitions. Adverse comments expressed concern that the use of the different definitions will lead to confusion or inconsistent practices in the due diligence community by allowing two different standards to satisfy AAI.

It is still unclear what U.S. EPA will do in response.   The Agency issued a proposed rule at the same time as the final rule.  The proposed rule contains the same option to utilize either ASTM standard.  It is possible EPA could sunset E1527-05 when it finalizes the proposed rule.  Or it could address the adverse comments in the final preamble to the rule.

Right now there is no clear direction from U.S. EPA with regards to this critical aspect of due diligence. 

UPDATE:  On October 29th, U.S. EPA did officially withdraw the direct final rule.  Currently, E1527-05 remains the only officially sanctioned guidance to meet the "All Appropriate Inquiry Rule."

Are All Phase I's the Same?

The title of this blog post may make many in the environmental consulting and legal business laugh.  "Of course not..." most would certainly reply.  With Phase I's governed by two ASTM guidance documents and the EPA "All Appropriate Inquiries" Rule (AAI), how can there be such variations?

The answer is that a Phase I environmental assessment requires professional judgment.  Not all consultants will look at the same site conditions the same way.  As an example, take a look at the website in which environmental consultants debate various technical issues associated with due diligence. Read the debate over how to handle "dirty floors" or "old dry cleaners" when performing a Phase I. 

In both instances, the consultants couldn't come to total agreement as to whether these particular situations should be identified in the report as "Recognized Environmental Conditions" (RECs).  Of course, the REC determination is critical because it impacts the process for securing liability protection under U.S. EPA's Innocent Landowner or Bona Fide Purchaser Defenses.

Changed Definition of a REC

As discussed in a prior post, U.S. EPA published a rule that allows entities to utilize either ASTM E1527-05 or E1527-13 guidance in performing Phase I consistent with the AAI Rule. My prior post reviewed some of the key difference between the two standards.

In considering how professional judgment impacts Phase I reports, examine the proposed changes to the definition of REC.  The changes were intended to "clarify" the definition and promote greater consistency among environmental professionals in writing Phase I reports.

The old definition (E1527-05) defined REC as:

"The presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, past release, or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into ground, groundwater, or surface water of the property.  The term includes hazardous substance or petroleum products even under conditions in compliance with laws."

Comments received during preparation of the revised ASTM standard- E1527-13 were that the definition of REC was confusing or ambiguous.  The changes made to the definition were intended to add clarity.  

The revised definition of REC in E1527-13 is as follows:

"The presence or likely presence of any hazardous substances or petroleum products in, on, or at a property 1) due to any release to the environment; 2) under conditions indicative of a release to the environment; or 3) under conditions that pose a material threat of a future release to the environment."

Let's take a closer look at some of the differences between the two definitions:

  • "Into structures on the property" versus "environment"-  I'm sure consultants could debate how these terms should be interpreted.  It appears that by removing the "into the structures" language relative to release means that there must be some indication contamination made it into either the soil, groundwater, surface water or indoor air.
    • For example:  simply having staining on a concrete floor may not be enough to conclude there was a release to the "environment." There should be evidence of drains or cracks that could serve as a conduit for contamination.  Of course, as evidenced by my link above, not everyone may agree. 
  • "Ground, groundwater or surface water" versus "environment"-  Some had debated under the old REC definition whether a Phase I included evaluation of releases to indoor air through vapor intrusion.  Most thought the old definition includes indoor air, the new definition and other changes in E1527-13 make clear the indoor air through vapor intrusion is to be considered.

Keep in mind, lawyers don't write the Phase I report.  They can provide comments or advise their client relative to the conclusions.  It is the consultant who exercises the professional judgment which includes the findings detailed in the Phase I report.

Be Comfortable with the Consultant Selected 

Regardless of changes in E1527-13 which were intended to promote greater consistency, there will still be big differences in how consultants write their Phase I reports.  You simply can't remove professional judgment when such vague terms are utilized.  

Why should you care?  The exercise of professional judgment could result in major difference in whether potential liabilities are investigated.  Or, such a difference could result in more expensive due diligence when a consultant is very conservative in how they view a site.  

Prior to engaging a consultant to perform a Phase I, it is advisable to go beyond just written proposals.  It would be prudent to interview the consultant to learn about their philosophy in performing Phase I's.  As the customer, you should be comfortable with that philosophy because it impacts your exposure and bottom line.

When performing such an interview, make sure you talk to the consultant who will actually be performing the Phase I, not just anyone in the company.  There can be wide disparities even among consultants in the same firm.

U.S. EPA Endorses New Phase I Standard

ASTM 1527-05 was the first ASTM standard recognized by U.S. EPA as meeting the requirements of the "All Important Inquiries Rule." (AAI)   AAI sets forth the standards and practices necessary for fulfilling the requirements to obtain liability protection (i.e. bona fide purchaser defense) under CERCLA section 101(35)(B).  Most Phase I proposals reference 1527-05.  

ASTM standards have a five year shelf life and a three year grace period.  After the eight year period, the standard can sunset or be renewed.  In preparation for the eight year period coming to an end on 1527-05, an updated version of the standard has been developed- ASTM 1527-13.  On August 15, 2013, U.S. EPA officially recognized the updated version of the ASTM standard for conducting Phase I environmental assessments as satisfying AAI.   

What are the Major Differences Under the New ASTM Standard?

It is interesting to note that the new ASTM is not being billed as really changing anything, rather it just clarifies requirements that were already part of the old standard  (ASTM 1527-05).  However, in my experience at least two "clarifications" will either change or modify practice among many environmental consultants.  Those two areas include:

  1. Vapor intrusion; and
  2. Agency file reviews

Vapor Intrusion

Some have debated whether consideration of vapor intrusion issues was part of ASTM 1527-05. Many attorneys view the definition of "release" to include vapor of contaminants.  However, some consultants took the view that ASTM 1527-05 classified "indoor air quality" issues as non-scope items. 

In my practice, I have reviewed many Phase I reports and discussed findings with a wide variety of consultants.  Many of the consultants took different views with regard to assessing vapor intrusion.

The new ASTM 1527-13 standard makes very clear that vapor intrusion issues are to be considered as part of Phase I environmental assessments.  First, the definition of "migrate/migration" was amended to specifically reference vapor.

"the movement of hazardous substances or petroleum products in any form, including for example, solid, liquid at the surface or subsurface, and vapor in the subsurface.”

The new standard also specifically states that non-scope indoor air quality issues are "unrelated to releases of hazardous substances or petroleum products into the environment." 

Finally, ASTM E2600-10, the Standard Guide for Vapor Encroachment Screening on Property Involved in Real Estate Transactions, is specifically referenced in the new standard.  It is not a requirement for a consultant to use E2600-10, rather the standard is recognized as an acceptable means of evaluating the potential for vapor intrusion.

There seems to be debate among consultants as to whether they will utilize E2600-10.  Some believe it is too onerous.  Regardless, consultants are going to have to evaluate the potential for vapor intrusion as part of Phase I assessments and include a discussion in their report. This does not mean vapor intrusion sampling is required, just that the consultant needs to consider whether site conditions dictate identifying vapor intrusion as a potential "Recognized Environmental Condition" or REC in the findings section of the Phase I report.

Agency File Reviews

The new standard adds a section on agency file reviews which basically states:

  • If the property or adjacent property is identified in governmental records search, the relevant records in the agency files should be reviewed...at the discretion of the environmental consultant;
  • If the consultant doesn't think the file review is warranted, then it must include its opinion in the final Phase I report;
  • A consultant can review information from other sources (e.g. on-site records, user provided records, local government agency records, etc.)
  • A summary of the information reviewed should be included in the report as well as an opinion as to the sufficiency of those records.

It is not always the case that regulatory files are reviewed.  Inclusion of this new guidance on file reviews will make it more common practice that such reviews take place.  

However, agency records are not always readily accessible.  Often there is a lot of time pressure on completing the Phase I report.  However, if that pressure forces the consultant to include a statement that records were not reviewed and the review was warranted, that could create a huge issue with the Phase I report. 

Conclusion

U.S. EPA still recognizes 1527-05 as consistent with the AAI rule.  However, if the new standard is deemed as simply a clarification, it begs the question as to why any proposal for a Phase I assessment would reference 1527-05 going forward and not 1527-13.  

After recognition of 1527-13 by U.S. EPA this month, vapor intrusion issues will become even a bigger part of due diligence going forward.  In addition, consultants will face increasing pressure to balance finalizing reports to meet client deadlines, with the need for comprehensive reviews of available records. 
 

A Revised ASTM Standard for Due Diligence to Be Issued

A task force assigned to review the ASTM standard for Phase I environmental assessments has completed its review of the current standard.  It has sent its recommendations to U.S. EPA who is expected to accept the recommendations. 

Any revisions to the ASTM standard for Phase I has big implications.  Phase I reports are a requirement of the "All Appropriate Inquiries" process to establish CERCLA liability defenses.  Most property transactions involve a Phase I assessment.

As reported on the Schnapf LLC blog, the revised standard will likely include the following changes:

  • definition of REC was tweaked to make it more understandable to environmental consultants;
  • A new term “Controlled REC” (CREC) was added which is intended to complement the HREC term. The latter applies to prior RECs that have been remediated to unrestricted cleanup levels while CREC applies to risk-based cleanups that have ongoing institutional or engineering controls;
  • creates a presumption that the environmental professional should perform a file review of agency records in determining the presence of a REC. If the environmental professional decides a file review is not required, it must explain why a file review was not performed;
  • the revised legal appendix clarifies scope of the CERCLA indoor air exclusion from definition of release and also discusses other CERCLA exclusions;
  • the revised legal appendix clarifies the role of that vapor intrusion in phase 1 reports (it is just like any other exposure pathway- (groundwater, air, soil). In most cases, there will be an underlying REC (contaminated groundwater or soil) that will already be a REC. However, there may be instances where there is an off-site source where there is potential for vapors to have laterally migrated through the soil gas to the subject property. In such an scenario, the potential for Vapor intrusion could be a REC. However, determining if the pathway is completed will usually beyond scope of the phase 1unless otherwise specified by the client;
  • a new Business Environmental Risk (BER) appendix describes the BERs that are commonly encountered for commercial properties and discusses factors that may be considered in determining if a client wants to include BERs in the scope of the phase 1.

A couple comments on these potential changes:

  1. REC Definition-  It will be interesting to see how the definition of REC is modified.   In my experience, there is a wide range of interpretations applied by environmental consultants.  Some will opine that any property that had industrial operations should be identified as a REC.  Others say there needs to be some information suggesting a release or at least the potential for a release to have occurred to be identified as a REC.
  2. Vapor Intrusion-  Adding specificity that vapor intrusion issues should be identified as a REC will add to the complexity of analyzing Phase I reports.  With the clarification discussed, it may lead to the vapor intrusion pathway being identified as a REC in more Phase I reports.  This has big implications for due diligence because the vapor intrusion pathway is often the most difficult to assess in a subsequent Phase II.  It doesn't help that U.S. EPA still hasn't finalized its vapor intrusion guidance and relies upon 2002 OWSER vapor intrusion guidance still labeled draft.

Questions Persist Regarding the Quality of Environmental Assessment

Phase I environmental assessments have become the norm in virtually any commercial or industrial property transaction.  Almost any financial institution will require a Phase I report prior to agreeing to finance a transaction.  

In this regard, Phase I's have become a commodity- A box that needs to checked off before a deal can go through.  But buyer beware, beyond securing your financing you may not truly know the condition of your property.  Or even worse, you may not secure the legal protections from environmental liability you intended by procuring your Phase I.

A recent U.S. EPA study evaluated the quality of 35 Phase I reports that were performed on brownfields in connection with federal grant funding.  The Phase I reports were evaluated against basic requirements necessary to secure protections under the "All Appropriate Inquiries Rules (AAI)" (a shield from CERCLA liability for innocent purchasers).

"All Appropriate Inquiries"

Under federal law, in order to establish a shield from liability under CERCLA, a purchaser must, prior to the date of acquisition, perform "all appropriate inquiries" into ownership and uses of the property.  In 2005, U.S. EPA finalized its rule establishing mandatory standards for conducting AAI to secure liability protection.

IG Evaluates 35 Phase I's

In the study, the Inspector General evaluated the 35 Phase I reports to see if they met the required elements of the AAI rule.  Not one of the reports met the U.S. EPA required elements (or alternative ASTM standard).  Worse yet, the missing components were simply formalistic elements necessary for a Phase I to meet U.S. EPA standards.  They did not evaluate the professional judgments in the reports which would be more prone to varying opinion.  Aspects evaluated included:

  1. Environmental Professional Qualification Statement- U.S. EPA AAI rule requires a boiler plate statement to be included in the report that the consultant meets the standards to be considered an environmental professional. 
  2. Signature-  The environmental professional who responsible for the assessment must sign the report. 
  3. Data Gaps-  The professional must identify any data gaps that may have impacted their ability to identify whether conditions at the property indicate a release or potential release occurred at the site.
  4. Opinion Statement-  The report must include a conclusion section that summarizes all "recognized environmental conditions" at the property.  Any areas where there were conditions identified on the property which indicate a release or potential release occurred.

In the opinion of the Inspector General, not a single one of the 35 reports evaluated adhered to all of the requirements set forth above. 

The report is another example of the risks associated with hiring an environmental consultant to perform a Phase I.  From my discussions banks don't often evaluate the quality of the consultant or even whether the report meets the ASTM or EPA rule requirements. 

What are the risks to the future property owners in the transaction?  The Inspector General summarized the risks as follows:

Improper AAI investigations introduce risk that the environmental conditions of a property have not been properly or adequately assessed. Consequently, decisions about appropriate uses of redeveloped or reused brownfields properties may be based on improper assessments. Ultimately, threats to human health and the environment could go unrecognized.

Beyond the risks of the unknown conditions, you also could be jeopardizing the legal protections available under the AAI rule.  The rule is very specific in mandating an ASTM or EPA regulatory compliant Phase I assessment before the legal liability protections kick in.  Years later, when an issue arises, you may find you have no shield from liability due to an inadequate Phase I.

Recommendations:

  • If you want a true evaluation of the conditions of the property hire a quality environmental consultant.  Avoid consultants who are simply churning Phase I's to move deals forward.  Low ball pricing can often be a red flag regarding the quality of the report.
  • Review the Phase I for compliance with standards to secure liability protections.

Addressing the State Liability Gap in the Federal "Innocent Landowner Defense"

Liability for pre-existing contamination acts as a strong deterrent to re-use of brownfield properties.  Prospective purchasers simply do not want to expose themselves to potential liability especially when they had nothing to do with the contamination.

At the federal level, there has been an attempt to address liability exposure in order to provide prospective purchasers some level of liability protection.  However, even though tools exist at the federal level, potential exposure to state environmental liabilities can act as its own deterrent. 

While Clean Ohio may be one of the best brownfield grant programs, not every redevelopment or re-use of a brownfield is right for Clean Ohio.  Given the number of vacant and idled brownfield properties in Ohio, perhaps its time Ohio looked to strengthen protections for innocent purchasers to encourage re-use and prevent urban sprawl.

Federal "Innocent Landowner" Defense

CERCLA (otherwise known as the Superfund law) establishes joint and several liability to a variety of parties, including property owners, for releases of hazardous substances.  Liability can attach regardless of whether you generated or brought the contamination to the property.

The 2002 Small Business Liability Relief and Brownfield Revitalization Act (“the Brownfield Amendments”) amended CERCLA to provide for protections for purchasers of property.  Under the Brownfield Amendments a person can receive liability protections when purchasing contaminated property, it the person meets certain requirements. This is commonly referred to as the “innocent landowner defense.”

Under federal law, in order to establish the innocent landowner defense the purchaser must, prior to the date of acquisition of the property, perform “all appropriate inquiries” into prior ownership and uses of a property. In 2005, U.S. EPA finalized a rule which establishes mandatory standards for conducting all appropriate inquiries ("AAI Rule").

If the investigation (a Phase I assessment) spots no issues, then the legal protection attaches if procedures are followed set forth in the AAI rule. If the investigation of the property reveals the likelihood that a release has occurred, the AAI rule requires reasonable steps be taken to address the release or contain it before you receive liability protection.

But what about State environmental liability?

State environmental statutes provides separate authority to bring actions for historical contamination on brownfield properties.  While there are certain limitations on that authority, I have had clients express concern regarding this liability exposure.

The State of Ohio does not have a regulation or even a policy that recognizes the "innocent landowner" defense.  Meeting the AAI rule will not establish a legal defense against state statutory environmental liabilities.  While the State may exercise enforcement discretion, some clients don't have the risk tolerance to live with that potential exposure.

Should Ohio adopt some kind of "innocent landowner" protection to attract re-use of brownfields?

At a minimum, some formal recognition of the AAI rule by the State would at least provide some level of comfort.  However, given the number of brownfield sites in the State, something stronger is warranted. 

One potential model is the Clean Michigan Initiative.  Under this law, the State provides liability protection to innocent purchasers similar to the federal AAI rule.  Here is a quick synopsis of the program:

  • Baseline Environmental Assessment (BEA)- A BEA is performed which is a simpler, streamlined alternative to full blown clean up of the site.
  • Establish the Baseline- BEA is used to gather information about a contaminated property when the owner or operator changes so existing contamination can be distinguished from any that might occur once a new owner or operator acquires the property.
  • Timing- the BEA must be performed prior to or no more than 45 days after the date of purchase, foreclosure, or becoming the operator, whichever occurs first; 
  • Disclose -  the results of the BEA must be provided to the Michigan Department of Environmental Quality (MDEQ) and subsequent purchasers and lessee operators.
  • Due Care Responsibilities- Purchasers need only take actions sufficient to ensure that their use of the property: 1) does not allow an unacceptable exposure to contamination, 2) does not worsen the contamination, and 3) protects against the reasonably foreseeable actions of third parties such as contractors or trespassers.

Very similar to the Federal AAI rule, Michigan's BEA serves as a good model to address State liabilities at contaminated properties.  Such protection could further encourage re-use of industrial sites that remain idled or vacant.