An Overview:  Changes to Phase I Environmental Site Assessment Requirements

Author: Brian Gilbertson

The United States Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) was enacted in 1980 and imposed strict liability on owners and operators for costs associated with any required remediation of contaminated property. CERCLA was subsequently amended in 1986 and 2002 to include specified landowner liability protections, which require completion of an All-Appropriate Inquiries (“AAI”) investigation prior to acquisition of a subject property and impose post-acquisition obligations.

This discussion provides a high-level overview of the available landowner liability protections and highlights some recent changes to AAI requirements. It is not intended to be a comprehensive summary of CERCLA and associated liability protections, which include other requirements that should be reviewed by environmental professionals and legal counsel.

Three Liability Protections

A property owner or operator may be classified as an Innocent Purchaser and not be liable for costs associated with remediation of pre-existing environmental conditions, but only if these conditions were not identified by an AAI investigation prior to property acquisition. An owner or operator may use the Bona Fide Prospective Purchaser (“BFPP”) defense and avoid liability for remediation of known contamination identified by an AAI investigation, if they do not impede the performance of response actions or natural resource restoration and meet other specified requirements. An owner or operator is also afforded Contiguous Property Owner Liability Protection, but only if an AAI investigation was completed prior to acquisition and said investigation did not identify that their property was or could be impacted by the contiguous property.

The United States Environmental Protection Agency (“USEPA”) specifies requirements for AAI investigations in its AAI rule (40 CFR Part 312 – Innocent Landowners, Standards for Conducting All Appropriate Inquiries). The following industry standards are referenced in 40 CFR 312.11 and may be used to comply with the AAI requirements set forth in 40 CFR 312.23 through 312.31:

  • The procedures of ASTM International Standard E2247-16 entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property.”
  • The procedures of ASTM International Standard E1527-13 entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.”

How to Make All Appropriate Inquiries

Prior to acquisition of property through purchase, lease, or easements, project developers typically engage a qualified environmental professional to conduct a Phase I Environmental Site Assessment in accordance with the AAI investigation requirements as set forth in 40 CFR Part 312 and the referenced ASTM standards. As noted above, the ASTM Standard E1527-13, which is commonly used for most properties, currently references the 2013 version of ASTM Standard E1527. ASTM Standard E2247-16 includes less rigorous site reconnaissance requirements and may be used for evaluation of rural and forested areas due to the nature or size of the subject area.
The goal of an ASTM E1527-13 Phase I ESA is to identify the confirmed presence, likely presence or a material threat of a Recognized Environmental Condition (“REC”), which is defined as the presence or likely presence of hazardous substances or petroleum products at a real property (1) due to a 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.” The ASTM E1527-13 Standard defines what constitutes “good commercial and customary practice for conducting an environmental site assessment of a parcel of commercial real estate with respect to the range of contaminants within the scope of CERCLA and petroleum products.

New Requirements for Phase I ESAs

On November 1, 2021, ASTM submitted a revised ASTM E1527-21 Standard to the USEPA for review of compliance with the AAI rule. USEPA approval may take up to one year and environmental consultants may continue using and citing the ASTM E1527-13 Standard until the USEPA approves the new ASTM E1527-21 Standard. However, in Lummus Consultants’ opinion it would be prudent for environmental consultants to use the existing ASTM E1527-13 Standard and indicate that the Phase I ESA also incorporates procedures as prescribed in the new ASTM E1527-21 Standard.

The revised ASTM E1527-21 Standard includes several changes, a few of which are generally described below:

  • Requirements are specified for more historical research of site and adjacent property records and uses, which may be in addition to what would be required under the ASTM E1527-13 Standard
  • Clarifications and revisions are provided for the definition of RECs
  • Restrictions on shelf life of Phase I ESAs based on the earliest date of completion of the five components of the Phase I ESA, rather than the date of the Phase I ESA report
    • 180 days for original report
    • One year for updated reports
  • Expanded list of chemicals and compounds of concern
  • Additional guidance on significance of data gaps and property use limitations

The 180-day report shelf life or one-year updated report shelf life-time periods are to begin with the date of completion of the first of the following five components: interviews, searches for recorded environmental cleanup liens, review of government records, site reconnaissance of the subject property and the Environmental Professional [EP] Declaration.

Thousands of chemicals and compounds from pharmaceutical, manufacturing, and personal care products that are detected at low levels in the water cycle that may impact our environment, aquatic organisms, or human health are currently not classified as hazardous by CERCLA and accordingly have not been required to be evaluated in Phase I ESAs. These emerging contaminants frequently include, but are not limited to, per- and polyfluoroalkyl substances (“PFAS”), perfluorooctanoic acid (“PFOA”), perfluorooctanesulfonic acid (“PFOS”), perfluorobutane sulfuric acid (“PFBS”), GenX chemicals, 1,2,3-trichloropropane (1,2,3-TCP), 1,4-dioxane, microplastics, and other endocrine disruptors. PFAS and other emerging contaminants are added to the list of “non-scope issues” that a user may want to evaluate as a business risk, as is commonly done with asbestos containing material, lead based paint, lead in drinking water, radon, and mold. This can be particularly important for those Phase I ESAs that are conducted in 17 states that already have adopted regulatory standards for such substances, states with guidelines, or in states where the adoption of regulatory standards and guidelines is anticipated soon. Note also that USEPA initiated a rulemaking in October 2021 to designate PFAS, PFOS, PFBS, and Gen X chemicals as hazardous waste under CERCLA and the presence of these contaminants will be required to be assessed in a Phase I ESA after the rulemaking process is completed.

Use of Phase I ESAs by Lenders

Lummus Consultants frequently reviews Phase I ESAs as a lender requirement in support of financing of a project. The Lender Liability Act of 1996 clarified that lenders cannot be held liable as “owners” under CERCLA if they foreclose on property, even if they take steps to preserve or protect the property prior to selling or disposing of it. The Lender Liability Act likewise clarified what steps a lender may take to protect its collateral without being deemed to have “participated in management” to such an extent that the lender may be deemed an “owner or operator” of the site who is liable for response costs.

Note that the protections of the Lender Liability Act apply whether a Phase I ESA is performed. Nevertheless, lenders require completion of a Phase I ESA in part because it may identify problems that may affect the collateral value of a project or the borrower’s ability to repay the loan, which is a focus of our review on behalf of lenders. The timing of completing the Phase I ESA should also be confirmed to meet the applicable existing or new requirements for shelf life if property acquisition occurred prior to financial closing.

The Devil is in the Details

A recent case in Indiana, involving a party seeking to avoid liability for the $1.7 million cost of remediation of a groundwater plume containing chlorinated solvents from its property that presented a risk of vapor intrusion to neighboring residences, illustrates the importance of an adequate Phase I ESA. In September 2021, the US Court of Appeals for the Seventh Circuit affirmed the District Court’s finding that a party was not entitled to assert the BFPP defense under CERCLA because the party’s Phase I ESAs did not comply with the AAI (Von Duprin LLC v. Major Holdings, LLC, No. 20-1711 (7th Cir. Sep. 3, 2021)).

The District Court had found that the environmental professional failed to make the required inquiries with the property owner and failed to include the necessary certifications in a Phase I ESA that was otherwise appropriately prepared for one property. In connection with a second property, the court found that the Phase I ESA was appropriately completed within the appropriate timeframe (180 days) prior to the party’s purchase of the property, but the party started a 99-year lease of the same property six years prior to it purchasing the property. Thus, the party became an operator under CERCLA at the start of its lease and had not satisfied the AAI rule at that time because the Phase I ESA the party conducted prior to signing the lease was not completed or updated within the 180 days before the start of the lease, as required by the AAI rule.

Be Careful Out There

In conclusion, it is important that an adequate and properly timed Phase I ESA is prepared for property that is to be acquired via purchase, lease, or easement and used on a project, particularly if there are pre-existing contamination issues. All parties to the transaction should work together to ensure that the Phase I ESA meets the applicable AAI criteria and other pre- and post-acquisition requirements specified by CERCLA. As we have done in the past, Lummus Consultants will review these issues as part of the environmental due diligence review for financing or acquisition of power, pipeline, process, and petrochemical projects.

Are you a project developer purchasing or leasing land or are you acquiring an existing project that is located on property that may have pre-existing contamination issues? Are you a lender considering financing a project like that? Then you will want to understand the laws applicable to liability for remediation of site contamination and how your possible liability can be determined or eliminated by preparation of a Phase I Environmental Site Assessment.

Charlie Bowser leads the decarbonization advisory practice and is responsible for strategy, execution and financing support for net zero projects and greenhouse gas reduction planning. Charlie has more than 25 years of experience in nuclear, renewable (wind and solar) and natural gas-fired power generation technologies. His expertise includes finance, engineering, business development, project development and operations. Previously, Charlie was president of NET Power, leading the engineering, development, construction, commissioning and operation of a first-of-a-kind, supercritical CO2 zero emission prototype, as well as various positions with Exelon Generation and the U.S. Navy. Charlie earned a Master of Business Administration in Corporate Finance from Cornell University and a Bachelor of Science in Systems Engineering from the United States Naval Academy.
John Senner is responsible for the power industry technical advisory practice for North America and Asia. He has more than 40 years of industry experience in technical support, financing, acquisition, execution and divestiture on a wide range of projects. John’s expertise includes renewable and non-renewable power generation, waste management, emissions controls, new technology evaluations involving pyrolysis and gasification, and decarbonization involving carbon capture and hydrogen production technologies. Previously, he managed life-cycle inventory assessment projects in waste-to-energy and solid waste for the aluminium, paper and plastics industry. John has worked for Lummus Consultants and its predecessor companies for 25 years after earning a Bachelor of Science in Chemical Engineering from Cornell University.
Mark White is responsible for the power industry technical advisory practice for Europe and the Middle East. He has more than 30 years of experience in design, engineering, construction, commissioning, testing, project management, operation and maintenance, business development, and consulting. Mark has managed technical assignments, studies, advisory roles and due diligence reviews and specializes in the technical, contractual and commercial issues associated with the development of independent power and water projects, primarily in Europe, Asia, the Middle East and Africa. Mark earned a Master of Engineering in Fuel and Energy Engineering from the University of Leeds with energy engineering coursework at the National Institute of Applied Science, Lyons, France.
Shahid Bhatti is responsible for the process industry technical advisory practice for the Middle East. He has more than 35 years of experience in refining, petrochemicals, oil and gas development, liquefied natural gas, and oil storage terminals. Shahid provides technical expertise, critical studies and support on technology evaluation, process design, construction, startup and operations. He has worked for Lummus Consultants and its predecessor companies for almost 30 years. He earned a Bachelor of Science in Chemical Engineering from the Polytechnic of the South Bank, London, and Master of Business Administration from Cranfield University, Bedfordshire.
Keith Darby leads the process industry technical advisory practice in the United States. He has 45 years of experience in design, construction and operation of oil and gas facilities, focusing on technical, environmental and social due diligence to support the international finance community. Keith is responsible for global projects encompassing the production, transportation and treatment of oil and gas into products and biofuel, as well as technical due diligence for project financing. Previously, he was a technical director for WS Atkins and led its Scottish operation. Keith has been with Lummus Consultants and its predecessor companies for 25 years and earned a Bachelor of Science with First-Class Honors from Portsmouth University in the United Kingdom, where he is a Chartered Engineer.
Susan Garven serves as president and managing director of Lummus Consultants. She has more than 40 years of experience in the delivery of independent technical advisory services to the industrial power and process industries and has held senior management positions with Lummus Consultants’ predecessor companies, Stone & Webster and Shaw Group. Susan has worked with gas utilities, petrochemical and refining companies providing economic evaluations, feasibility studies, forecasting and marketing studies. She is also an experienced process engineer with a background in refining and petrochemicals. Susan earned a Bachelor of Science in Chemical Engineering from Lafayette College and a Master of Business Administration from the University of Houston.
Lummus Consultants’ deep industry and project expertise provides valuable litigation support and expert witness testimony in legal cases involving power and oil and gas processing and transport technologies. When deep technical evaluations and engineering project analysis are required to support your case, you need an expert witness with impeccable technical credentials, unimpeachable valuation assessments and strong environmental insights. The experts at Lummus Consultants stand ready to assist your case with the strongest combination of technical, commercial and environmental project experience in the process and power industries.

The execution phase typically carries the highest level of risk for cost overruns in a project lifecycle. Lenders and owners benefit from an independent engineer to monitor the construction and initial operations, assessing quality control, costs, schedule, permitting and startup/testing of the project are properly executed; reviewing costs and schedules against corresponding budgets and contracts; offering guidance on emerging technical issues, and certifying construction completion and performance.

Lummus Consultants has performed construction and operations monitoring services for power plants, LNG facilities, process facilities and pipeline facilities all over the world. Our decades of experience in this area give us broad and deep knowledge across the spectrum of project construction methods, and from mega-projects to small single process units, enabling us to quickly identify critical risks and assess mitigation plans to ensure the best outcome for projects during construction, commissioning and commercial operation.

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Lummus Consultants has a proven track record of success performing cold-eye peer reviews for clients with large and complicated projects throughout the energy sector. The purpose and scope of every independent project review are developed closely with each client and typically include an assessment of project costs, schedule, execution plans, project team, quality factors, environmental, social and safety risks, and management systems. Findings include an analysis of key risks, a list of key mitigation actions and recommended timing of mitigating actions to improve successful outcomes.

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As an independent technical consultant or lender’s engineer, we use our decades of hands-on experience in the essential aspects of process, power and water plant design, construction and operation to assess areas of risk. We work with the global financial sector and investment groups, providing technical guidance to support project finance and acquisitions around the world. Our seasoned experts provide an effective combination of technical and commercial experience when assessing and confirming a project’s design, technology, expected performance, capital costs, operating and maintenance costs, schedule, operation, contractual obligations and pro forma financial projections are reasonable and aligned — to minimize our client’s risk.

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Lummus Consultants understands the risks associated with newly commercialized and evolving technologies, particularly in the growing energy transition areas where new ideas are hitting the market quickly. Through the breadth of our teams’ skills and our extensive due diligence experience, we can identify areas of risk associated with scaleup, design modification, product line evolution and first-of-a-kind technology innovations. Our unique combination of technical expertise and business evaluation skills enables us to effectively suggest appropriate technical and commercial mitigation strategies.
As energy industries and markets mobilize to optimize efficiency and maximize sustainability at every point in the value chain, a strong commitment to careful strategy and planning is more important than ever. From enterprise planning, project development and operational improvements to compliance and sustainability planning and everything in between, the experts at Lummus Consultants bring strong skills and trusted, independent advice to your project team or your investment plans.
As energy industries and markets mobilize to optimize efficiency and maximize sustainability at every point in the value chain, a strong commitment to careful strategy and planning is more important than ever. From enterprise planning, project development and operational improvements to compliance and sustainability planning and everything in between, the experts at Lummus Consultants bring strong skills and trusted, independent advice to your project team or your investment plans.

Due diligence services help companies and investors understand the technical, commercial and environmental factors involved in a potential investment, venture or project, providing an independent, fully objective and thorough assessment that helps strengthen decision making and mitigate project risks before they occur. Lummus Consultants’ due diligence advisory services are the hallmark of our firm, having provided technical advisory and consultancy in the power, oil and gas, refining and chemicals, and infrastructure space for decades. In fact, our teams have provided technical due diligence review services on more than 800 transactions representing more than $500 billion in funding on assets across the globe.

As an independent technical consultant or lender’s engineer, we use our decades of hands-on experience in the essential aspects of process, power and water plant design, construction and operation to assess areas of risk. We work with the global financial sector and investment groups, providing technical guidance to support project finance and acquisitions around the world. Our seasoned experts provide an effective combination of technical and commercial experience when assessing and confirming a project’s design, technology, expected performance, capital costs, operating and maintenance costs, schedule, operation, contractual obligations and pro forma financial projections are reasonable and aligned — to minimize our client’s risk.

​As an independent environmental consultant, we assess the project’s environmental, safety and social impacts, risks and liabilities, as well as the project’s ability to comply with permits, licenses and applicable environmental guidelines such as the Equator Principles. Our experts stay up to date on the continually changing environmental legislation and trends so clients can have confidence in our insight and advice in this crucial area.