For any company buying property or undertaking a merger and acquisition where a polluted site is suspected as part of the asset package, the “gold standard” for environmental due diligence on the property is the ASTM International Phase I environmental site assessment. Insurance companies also rely on the Phase I assessment results when determining coverage options for current or potential insureds as part of the business transaction.
Yet, even with all the attention given to PFAS by the media, legislatures, and courts, PFAS is absent from current Phase I assessments. This means that buyers and sellers are exposed to significant risks for future PFAS issues stemming from real estate transactions, which in turn has insurers and investors concerned.
By December 2021, ASTM will amend its Phase I assessment language to include reference to PFAS. While this change likely will increase the level of PFAS testing in real estate and M&A deals, parties involved in these transactions must understand that the changes will not suddenly absolve them of liability risks. Insurers, too, must understand that despite the ASTM changes to come, PFAS loss risks stemming from real estate or merger deals will continue to abound.
The Current Landscape
Purchasers and sellers utilize Phase I assessments because it may allow them to escape liability under CERCLA (also known as the Superfund law), if it is subsequently determined that there is an environmental pollution issue with the subject property. This reduction of risk is often enough of an assurance for parties to proceed with a deal.
The purpose of a Phase I, however, is to identify “recognized environmental conditions”, which ASTM defines as substances classified as “hazardous substances” under CERCLA. None of the 7,000+ PFAS are currently deemed “hazardous substances” under CERCLA. PFAS are therefore not included in Phase I assessments, exposing buyers and sellers to potentially enormous liabilities in the future, especially given the prediction that federal drinking water standards and CERCLA designations for PFAS are coming very soon.
There are workarounds to the Phase I gaps with respect to PFAS, but they come at a price to buyer or seller as an added service during a Phase I. Many companies choose not to spend additional money on this testing, since it is not currently required. Moreover, with over 7,000 PFAS types theoretically for which to test, many companies see it as an impossible task to decide what the scope of PFAS testing should be. From information gathered in discussions with environmental consultants, it is estimated that in some markets less than 10% of Phase I participants currently choose to have PFAS testing done.
2021 ASTM Changes
ASTM’s Phase I task groups are composed of over 200 due diligence consultants, lenders, attorneys, and other professionals that are currently working on revisions to Phase I standards. The task groups have worked for close to two years now to include PFAS in the Phase I standards and are actively working on drafting language to incorporate PFAS into the revised language. ASTM intends to publish its final revised standards by December 2021.
However, while ASTM is virtually certain to include references to PFAS in its revised standards, it is important to understand that the references will likely come in the form of a recognition that while PFAS are a “non-scope issue,” they do not rise to the level of recognized environmental contaminants.
Essentially, what this means is that ASTM recognizes that PFAS do not fall within the definition of required chemicals to test for, given the lack of CERCLA designation of PFAS. However, PFAS are of significant enough concern that anyone undertaking a Phase I assessment should consider taking proactive steps to test for the substances.
While this will be a nod by the ASTM to the fact that PFAS should be of particular concern for buyers and sellers alike, it stops short of requiring PFAS testing in Phase I assessments. This type of “you might want to do this” stance is something the ASTM also takes with asbestos and mold.
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Implications of the Changes
It is likely that more parties involved in real estate related deals will start testing for some degree of PFAS on sites prior to closing deals; however, it is unlikely to increase the overall use of this added service to a majority of assessments done, absent a major investment or insurance side requirement to do so.
While parties understand PFAS risks more so than they did a few years ago, many buyers will still wait for a CERCLA designation, rather than try to guess at which PFAS to test for at a site or pay for PFAS testing only to discover that the proactive steps might not be enough to protect them from PFAS liability.
Insurance companies and investors will continue to take these risks into consideration when balancing whether to invest in or insure a transaction. As the knowledge regarding PFAS financial risks continues to grow, the risks may ultimately outweigh the advantages for some investors and insurance companies given the significant liabilities with respect to PFAS issues.
This will in turn impact buyers and sellers in real estate transactions, and the parties to any such deal must continue to work collaboratively 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.
John P. Gardella is a shareholder at CMBG3 Law in Boston, a law firm specializing in the regulatory, litigation, and compliance aspects of numerous environmental and toxic torts issues nationally. He is a member of the firm’s PFAS Team, which counsels clients on PFAS related issues ranging from state violations to remediation litigation in all 50 states.