Hazardous Materials: Understanding the Impact of New Changes to Phase I Requirements

September 2014

When purchasing real estate, it is important to know exactly what you are getting. The mere act of owning real estate can lead to substantial liabilities—even if the owner has done nothing wrong. One area of potential liability is hazardous materials. To protect against such liability, buyers of real estate should conduct due diligence on the property before they purchase it. As part of this due diligence, buyers should obtain a Phase I environmental assessment (and sometimes a Phase II, if necessary) to determine what hazardous materials, if any, exist on the property. Without a Phase I report, there are laws that can hold buyers “strictly liable” for the existence of environmental contaminants, meaning that the government does not need to show that the buyers caused the contamination before forcing them to clean it up or pay fines – the cost of which can run into the millions of dollars in some cases.

By obtaining a Phase I report, buyers can protect themselves from liability by establishing what has been referred to as the “innocent landowner” defense. This defense is available to buyers who conduct “all appropriate inquires” regarding the condition of the property before purchase. The previously used standard that governed the process of Phase I reports was released in 2005 and an updated standard was announced in December 2013. The EPA made it clear that the new 2013 standard complies with the rules to avoid strict liability, but has not yet precluded the continued use of the 2005 standard. Below is a discussion of some of the differences between the two standards and the effects of these changes upon real property transactions.

Why is it better to follow the 2013 Rule when both are permitted?

With two potential standards to conform to, which should you choose? The EPA has not made any direct or explicit statements or requirements that the 2013 standard must be used. Based on the comments made when adopting the amendment, all parties may continue to use the 2005 standard. But the implication from the EPA’s “suggestions” made at the time of the amendment’s adoption is that the EPA wants parties to comply with the new 2013 standard for Phase I reports. The EPA stated that the 2013 amendment includes valuable improvements and that its use will result in greater clarity for potential contamination. The EPA also stated that it strongly encourages and recommends the use of the 2013 standard to conduct all appropriate inquiry investigations and Phase I reports, because the updates provide additional guidance for the determination of whether there are conditions on the property which are or could cause the release of hazardous substances. The EPA also stated in the Federal Register that, “in the near future, EPA intends to publish a proposed rule-making to remove the reference to the [2005] standard [and] the Agency’s intent will be to promote the use of the current [2013] industry standard.” Therefore, even though there is no clear timeline as to when the 2005 standard will be eliminated, the EPA’s preference for the 2013 standard is clear.

Vapor Intrusions

Vapor intrusion occurs when vapors travel and move from sub-surface sources, such as the soil, groundwater, or underground storage tanks, into the buildings constructed on the property. Properties that are likely to have the greatest risk for vapor intrusions include those that have been used for gas stations, dry cleaners and auto repair shops. Under the 2005 standards, it was not explicitly mandatory for an environmental site assessment to consider whether or not there were vapor intrusions of hazardous materials on the property. Now, the 2013 standards will require all environmental site assessments to determine the potential for migration of vapors from sources on and proximate to the property and identify them as a recognized environmental condition of hazardous or contaminated material. This new requirement will increase the amount of environmental sources that the consultant conducting the survey will need to consider, creating the possibility of an increase in the time the survey will take and an increase of the cost of Phase I reports.

Controlled Recognized Environmental Conditions

The 2013 standards include a category of “Controlled Recognized Environmental Conditions,” which allows certain contaminations to remain on the property so long as the property owner implements a way to control the hazardous material. In the short term, as long as the method of control does not affect the buyer’s intended use of the property, all should be fine. In the long term, however, the designation as a controlled condition will likely affect the ability to sell the property in the future if a change of use is contemplated. If, for example, the property was permitted to remain as commercial use without remediation of the controlled condition, but a future potential purchaser wants to redevelop the site for residential use, then the environmental condition would need to be remediated or fixed before the property would be allowed to be used for residential development.

Regulatory File Reviews

Under the 2013 standards, if an environmental database search identifies the property or any adjoining properties as having prior environmental issues, then regulatory files and records should be reviewed to determine if there is a risk that there are recognized environmental conditions existing at the subject property, or if there have been such conditions at the property in the past. This requires extra time to go through the adjacent property records, if necessary, and a summary of the information obtained from this review must be included within the Phase I report. As noted above, the standard says the records “should” be reviewed and not that they “shall” or “must” be reviewed. But even if the environmental professional decides not to conduct a review of records for the subject property or adjacent properties, he or she must document the reason for choosing not to do so in the Phase I report.

Conclusion

The new requirements for environmental due diligence will necessitate a greater amount of resources, whether time or money (or both), and will impact real property transactions. Parties should take this into consideration when contemplating the purchase of real estate.