United States: Environmental Due Diligence In The Era Of Contaminants Of Emerging Concern

Published: Seacoast Online
July 27, 2023

Many buyers understand that if they purchase property with any pre-existing hazardous contamination, they can be held liable for the costs of the cleanup. Consequently, before purchase you can commission an environmental assessment to identify hazardous substances at the property and then decide whether to proceed with the transaction, or instead terminate the deal. What happens, however, if something at the property is not classified as "hazardous" today, but its status changes in the future? A recent update to environmental due diligence standards is a step toward addressing the problem.

Sophisticated buyers contemplating the purchase of property are aware of the importance of conducting due diligence with respect to potential environmental issues. Prior to closing, purchasers of a property should fulfill the "All Appropriate Inquiries" (AAI) requirements established by Environmental Protection Agency (EPA) to be in a position to assert, if necessary, the "innocent landowner," "contiguous property owner," or "bona fide prospective purchaser" defenses to environmental liability. A Phase 1 Environmental Site Assessment (Phase 1 ESA) done in full conformance with the most recent American Society of Testing and Materials (ASTM) standard can be used to satisfy EPA's AAI requirements and will advise a potential buyer of environmental problems located on, beneath and adjacent to the property.

Prospective buyers should be aware that as of February 2023, the EPA deemed ASTM's updated E1527-21 standard effective as an AAI tool. Specifically, EPA amended AAI regulations to allow the use of ASTM E1527-21 in place of the prior ASTM E1527-13. There are important differences between the prior ASTM standard and updated E1527-21, including revisions to the instructions to assist buyers and environmental consultants conducting Phase 1s and changes to definitions of some key terms to clarify ambiguities. These and other revisions are of great importance and should be understood prior to performing the Phase 1 ESA, although a full description is beyond the scope of this short report.

For the purposes of this article, a prospective buyer's attention is directed to the manner in which so-called, "contaminants of emerging concern," (CECs) should now be addressed in the Phase 1 ESA. A properly performed Phase I ESA looks for the presence of pollutants defined as "hazardous" under federal law. Substances referred to as CECs have not yet received the federal "hazardous" designation, although many may receive the formal designation in the future. Consequently, CECs have had the potential to be left out of a Phase 1 ESA, raising the possibility that property is acquired without a full understanding of potential future environmental risks.

The class of CECs currently receiving the most attention are poly- and perfluoroalkyl substances, better known as PFAS. PFASchemicals, are used in a wide variety of application including to keep food from sticking to packaging or cookware, making clothes and carpets resistant to stains, and creating specialized firefighting foam. Although New Hampshire and some other states have established drinking water standards for certain PFAS chemicals, the federal government has not yet formally classified any PFAS substances as "hazardous." Nevertheless, it is well known that a "hazardous" designation for two PFAS chemicals is being worked on now by EPA, and it is anticipated within the next year those two PFAS chemicals (PFOA and PFOS) will be listed as "hazardous substances."

To address the problem of CECs falling into a "gray area" in which a future "hazardous" classification may be coming, the new ASTM standard provides that CECs can be considered for inclusion in Phase I ESA as "non-scope" or "business risk" issues. Prospective buyers should take advantage of this provision.

So with all of this information, what should a prudent prospective purchaser do? First, always commission a Phase 1 ESA prior to closing the transaction. Next, be certain that the Phase 1 ESA will identify and consider appropriate CECs, and particularly PFAS. Beyond that, become knowledgeable about CECs generally. The risk of the presence of PFAS as well as other CECs should be discussed with an environmental consultant prior to performance of the Phase 1 ESA. Buyers of commercial properties need to educate themselves about substances that are under consideration for regulation. The EPA regularly publishes technical information that provides insight into CECs being considered for new or expanded regulation. That is why it is important to retain an experienced environmental professional to conduct the ESA and to consult with experienced counsel about issues identified before closing on a potentially contaminated property.

As new chemical compounds are developed each year, and the universe of CECs expands, risks identified in environmental due diligence inquiries will evolve and CECs will remain an issue that must be constantly reevaluated.

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.