For any company buying real estate or conducting a M&A where a contaminated site is suspected of being part of a package of assets, the gold standard for environmental due diligence on property is the ASTM International Phase I Environmental Assessment. Insurance companies also rely on the results of the Phase I assessment in determining coverage options for current or potential insured within the business transaction.
However, even with the attention given to PFAS by the media, legislatures and courts, PFAS is absent from the current Phase I assessments. This means that buyers and sellers are at significant risk of future PFAS problems associated with real estate transactions, which in turn affects insurers and investors.
ASTM will amend the wording of the Phase I assessment by December 2021 to include a reference to the PFAS. While this change is likely to increase the level of testing of PFAS in real estate and M&A transactions, the parties involved in these transactions should be aware that these changes will not suddenly remove their liability risks. Insurers should also be aware that, despite the upcoming ASTM changes, the risks of losing PFAS associated with real estate or mergers will continue to grow.
Buyers and sellers use a Stage I assessment because it may allow them to avoid liability under the CERCLA (also known as the Superfund Act) if it is subsequently determined that there is a pollution problem with the property. This risk reduction is often sufficient assurance that the parties will enter into a transaction.
However, the purpose of Phase I is to identify “recognized environmental conditions”, which ASTM defines as substances classified as “hazardous substances” under the CERCLA. None of the 7000+ PFASs are currently considered “hazardous” by CERCLA. Thus, PFASs are not included in the Phase I assessment, which exposes buyers and sellers to potentially huge future commitments, especially considering forecast that federal drinking water standards and CERCLA designations for PFAS will be available very soon.
Workarounds exist to close the Phase I gap for PFAS, but they come at a cost to the buyer or seller as a Phase I ancillary service. Many companies choose not to spend extra money on this testing as it is currently not required. … Moreover, with over 7000 types of PFAS that are theoretically subject to testing, many companies find it impossible to decide how much PFAS testing should be. Based on information gathered through discussions with environmental consultants, it is estimated that in some markets, less than 10% of Phase I participants currently choose to test PFAS.
ASTM changes 2021
The ASTM Phase I Working Groups are composed of more than 200 due diligence consultants, lenders, attorneys and others who are currently working to revise the Phase I standards. The Working Groups have been working for almost two years to incorporate PFAS into the Phase I standards and are actively working. over the draft language to include PFAS in the revised language. ASTM intends to publish final revised standards by December 2021.
However, while ASTM will almost certainly include references to PFAS in its revised standards, it is important to understand that the references are likely to be in the form of an acknowledgment that while PFAS is an “out-of-scope problem,” they do not arise. to the level of recognized environmental pollutants.
In essence, this means that ASTM recognizes that PFAS do not fall within the definition of required chemicals for testing, given the lack of a CERCLA designation for PFAS.… However, PFAS is a serious enough concern that anyone conducting a Phase I assessment should consider taking proactive measures to check for the presence of substances.
While this would be a tribute to ASTM a hint that PFAS should be of particular concern to both buyers and sellers, it does not require PFAS testing in Phase I. This type of “you might want to do this” position is what ASTM accepts also against asbestos and mold.
Implications of change
It is likely that more parties to real estate transactions will start testing some degree of PFAS on sites prior to closing; however, the overall use of this ancillary service is unlikely to increase over most assessments conducted unless required by a large investment or insurance.
While parties understand the risks of PFAS more than they did a few years ago, many buyers will still wait for the CERCLA designation rather than trying to guess which PFAS to test locally, or paying to test PFAS only to discover that proactive moves might be not enough to protect them from PFAS liability.
Insurance companies and investors will continue to take these risks into account when choosing the balance between investing in a deal or insuring it. As knowledge of financial risk with respect to PFAS continues to grow, the risks may ultimately outweigh the benefits for some investors and insurers given the significant PFAS commitment.
This, in turn, will affect buyers and sellers in real estate transactions, and the parties to any such transaction must continue to work together and proactively with respect to PFAS risks to ensure that transactions are not terminated at increasing rates due to PFAS concerns.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Information about the author
John P. Gardella is a shareholder of CMBG3 Law in Boston, a law firm specializing in regulation, litigation and compliance with numerous environmental and toxic torts at the national level. He is a member of the firm’s PFAS team, which advises clients on PFAS-related matters ranging from state violations to litigation in all 50 states.