A Hitchhiker’s Guide to What’s New in All Appropriate Inquiries
ASTM (American Society for Testing and Materials) due diligence standards have been updated to address environmental conditions not widely recognized in 2013 but EPA’s “all appropriate inquiry” regulations have yet to conform.
ASTM International (ASTM) issued its seventh version of Environmental Site Assessment (ESA) standards, E1527-21, on Nov. 1, 2021. These ASTM standards provide the leading source of guidance on minimum standards for Phase I ESAs for commercial and industrial property acquisitions. While ASTM E1527-21 improves upon the predecessor E1527-13, the US Environmental Protection Agency’s (EPA) “all appropriate inquiry” regulations (40 CFR § 312.11(b)) currently codify E1527-13 as setting the appropriate due diligence standard. As a matter of course, EPA is expected to amend its regulations to replace the reference to E1527-13 with a reference to E1527-21. However, until EPA amends its rules, buyers should recognize that the improved commercial standard for due diligence is based on E1527-21, but the regulatory safe harbor for complying with “all appropriate inquiry” standards for purposes of meeting EPA requirements remains E1527-13.
The changes in E1527-21 make it more stringent than E1527-13 and make E1527-13 insufficient for current transactions. Because rigorous ESAs provide important pre-acquisition business information, as well as statutory liability protection, we recommend, until EPA updates its Section 312 regulations, that purchasers immediately require that ESAs be performed to meet both E1527-13 and E1527-21 requirements. And following such EPA rulemaking, buyers should require ESAs meet E1527-21 requirements (presuming that is the outcome of the rulemaking).
E1527-21 identifies new requirements to be addressed in Phase I ESAs, including the following:
Enhanced research into the history of both the subject and adjoining properties.
Enhanced site recon investigation.
Definition changes to clarify what is or is not a recognized environmental condition (REC). For instance, a closure of an underground storage tank site may not have been remediated in the past to current regulatory standards. So there is now a requirement to look beyond, for example, a prior No Further Action letter. This is now a REC requiring further due diligence analysis.
Examples of RECs, such as poorly stacked drums and bulging tanks, are provided in new Appendix X.4.
Clarification of property use limitations and significant data gaps, which respectively may impair future site use or render an assessment’s findings of no RECs questionable.
Clarification on when the shelf life of a Phase I ESA commences, e.g., with an early record review component (or after a timely update) as opposed to using the final report date of the ESA.
Caveats about emerging issues like PFAS. See “Not So PFAS,” National Law Review (Nov. 2, 2021).
Clarification that the user is responsible for identifying environmental liens or land use or property use restrictions in a title search going back to 1980.
The environmental professional remains responsible for reporting to users on title search information and for finding institutional or engineering control records.
A systemic flaw in the E1527 standard is that it treats compliance issues like stepchildren, or not at all, by relying on users to add non-scope items such as wetland, air, water, and waste permit compliance. While this absence may be prudent for commercial properties and “green fields,” industrial properties require more. Compliance audits, including air, water, and waste compliance review, are needed for them. Unfortunately, the ASTM standard for those audits is only consultant process oriented (see ASTM E2107-20) and not sufficiently detailed, in our opinion.
However, the new E1527-21 standard will produce more conservative ESAs, perhaps increasing the cost of closing or raising additional cleanup concerns.