September 28, 2010

Proposed Changes to ASTM Phase II Due Diligence Standard Would Dramatically Increase the Time and Cost for Completing Environmental Due Diligence

Holland & Knight Alert
Amy L. Edwards

ASTM continues to move forward with planned changes to the standard for conducting Phase II Environmental Site Assessments (ESAs) (ASTM E 1903). If approved, these changes would impose drastic new obligations on Users (i.e., the parties commissioning the reports) and likely increase the time and cost for completing environmental due diligence investigations. Parties involved in commercial real estate and M&A transactions need to be aware of, and involved in, these ongoing discussions.


The ASTM Standard Guide on the Phase II Environmental Site Assessment Process was first published in 1997 and reapproved in 2002. The current changes have been underway for a couple of years and are proceeding under the auspices of the ASTM E50.02 Task Group. The Task Group has stated that it hopes to make the Phase II process more transparent and consistent with scientifically sound methods, with the goal of making the process more “objective, representative, reproducible, and defensible” (Section 1.1). While all of this sounds good in theory, it will require dramatic changes in the way in which Phase II ESAs are conducted in order to achieve these lofty goals. The proposed changes will require the Phase II Assessor and the User to examine issues that go well beyond CERCLA liability, including looking for the mere presence (not releases) of substances (not just hazardous substances or petroleum products) on the property. The scope of the Phase II ESA will be directly related to the User’s objectives and may require refinement as the investigation progresses. More than one round of sampling may be required to achieve the User’s objectives. The Phase II process would also become much more prescriptive (in particular, see Sections 5, 6 and 7) than it is at the present time if the proposed changes are adopted.

Nature of the Proposed Changes

The proposed changes to ASTM E1903 would require, among other things, that the User and/or the Phase II Assessor do the following:

  • confer before initiating the investigation to determine the “question” to be answered (Section 6.4.1 and Section 7.1); the Standard identifies six potential objectives (Section 1.2) that can be addressed in the assessment:
    1. to assess whether there has been a release of hazardous substances within the meaning of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), for purposes including the landowner liability protections under CERCLA
    2. to provide information relevant to identifying, defining and implementing “continuing obligations” for maintaining CERCLA landowner liability protections
    3. to develop threshold knowledge of the presence of substances on properties defined as brownfields sites as required for qualifying for brownfields remediation grants
    4. to provide information relevant to identifying property conditions associated with target analytes that may pose a risk to persons on the property
    5. to provide information relevant to evaluating and allocating business environmental risk in transactional and contractual contexts, and related due diligence
    6. to provide information to support disclosure of liabilities and contingent liabilities in financial statements and securities reporting
  • prepare a written Statement of Objectives (Sections 5.1.1 and 6.4.1), including a statement of the question to be answered and the hypothesis to be confirmed or refuted by the investigation; the statement must be part of the scope of work, contract or similar instrument
  • prepare a written scope of work, identifying the methods and tasks to achieve the User’s objectives (Section 5.1.4 and Section 7)
  • identify any predetermined limits on the scope of work because of schedule, cost or budget considerations (Section 5.1.2); in other words, if the User is not willing to spend more than $12,000 on the Phase II ESA, and/or needs the results within 45 days, that limitation must be shared with the Phase II Assessor before the work begins, and must be described in the final report
  • develop a conceptual model (Sections 6.4.3 and 7.4); the conceptual model must consider each area where target analytes are present or likely present, in light of the environmental behavior, fate and transport characteristics of those target analytes; the Phase II Assessor must determine how the target analytes are likely to have first entered the environment and infer the locations most likely to be impacted by the target analytes (Section 6.4.3)
  • develop a written sampling plan after developing the conceptual model (Sections 6.4.4 and 7.5)
  • conduct the sampling (Sections 6.4.5 and 7.6)
  • include a Quality Assurance/Quality Control Plan (Section 7.5.7)
  • validate the conceptual model by evaluating the sampling results to determine whether the available information is consistent with the conceptual model (Sections 6.4.6 and 7.7)
  • in the event of deviations (i.e., the results are not consistent or do not support the assumptions of the conceptual model), revise the conceptual model and sampling plan to meet the objectives of the assessment (Sections 6.4.6 and 7.6)
  • interpret the sampling results in light of the conceptual model and the objectives of the assessment in order to develop conclusions, either answering the question or stating why the question cannot be answered (Sections 6.4.7 and 8.1)
  • prepare a written report (Sections 6.4.8 and 9.2)

If all of the requirements of the Standard have been followed, the Phase II Assessor is required to put the following statement in the final report:

“We have performed a Phase II environmental site assessment at the property at [address] in conformance with the scope and limitations of ASTM E1903-xx and for the following objectives: [list “statement of objectives” developed pursuant to Section 5.1.]”

What Will These Changes Mean in Practice?

For the User, it will no longer be sufficient to simply request that a Phase II ESA be conducted. The User will need to confer with the Phase II Assessor to explain what it hopes to accomplish in the investigation and should share with the Assessor all of the existing environmental information in its possession. Here is an example:

The subject property previously had an auto repair facility on it and there were a number of suspect sources (dry cleaners, gas stations, heating oil tanks, etc.) in the immediate vicinity of the site.

  • What does the User want to know, and which of the six identified objectives is relevant?
  • Does the User simply want to confirm whether the auto repair facility has had any releases for purposes of establishing a defense to CERCLA liability? For purposes of allocating business environmental risk in the context of a planned transaction? For purposes of reporting contingent liabilities to the Securities and Exchange Commission?
  • Does the User want to confirm whether the nearby dry cleaners, gas stations and heating oil tanks have impacted the property? Does the User need to know this with a reasonable degree of certainty, because it plans to redevelop the property, or does it simply want a present/not present determination?
  • Are there any limitations that it intends to impose on the Phase II Assessor because of scheduling or cost reasons? Who gets to determine when “enough” investigation has been conducted?

For the Phase II Assessor, he or she must confer with the User to determine the question to be answered and the User’s objectives for the investigation. The Assessor will need to consider what to do if the User fails to cooperate in identifying the question to be answered or in formulating the objectives or in identifying any limitations on the scope because of schedule, cost or budget considerations. It is certainly not uncommon at the present time for the User to fail to provide information required under the ASTM Phase I ESA Standard (E 1527), whether it is title information, environmental liens, activity and use limitations, litigation, or purchase price. The following are some considerations:

  • Why should we expect Users to be more cooperative in identifying the objectives of the Phase II assessment?
  • What should the Phase II Assessor do if the User is unwilling to disclose its objective(s) for the assessment?
  • How can the assessor prepare a conceptual model and written sampling plan if the User is unwilling to identify the question to be answered? Failure to follow the prescriptive requirements in the Phase II Standard may also result in increased liability for the Assessor.
  • What will be the consequence for failing to include each of the mandatory tasks identified under Section 6 of the proposed Standard?
  • What if the Assessor fails to include one of the areas where target analytes might be present? Or fails to investigate an area that has been identified as a data gap?

The proposed changes would give the Phase II Assessor little discretion in these areas. See, e.g., Sections 6.4.3 and 7.3. The proposed changes to the Phase II Standard also demand that the Assessor’s sampling results be “accurate and reproducible.” What happens if another Assessor is unable to reproduce the Phase II Assessor’s results?


The revised Phase II ESA standard is currently being balloted at the ASTM subcommittee level. An E50 main committee ballot will be required before the proposed changes can be finalized. Users are underrepresented on the E50.02 Task Group and need to make their views known on these important due diligence matters. If you are not already involved in the ASTM standard setting process, now is the time to get involved in the proposed changes to the ASTM Phase II ESA Standard.

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