This is a guest post by Jeryl Olson, Andrew Perellis, Ilana Morady, and Craig B. Simonsen with Seyfarth Shaw LLP.
In conducting environmental due diligence associated with brownfields properties, parties to a sale of real estate often ask the question: What is a REC, anyway?
The question arises because the term “REC” (short for “Recognized Environmental Condition),” is the terminology used by environmental consultants in “Phase I Environmental Site Assessments” (Phase I) to identify environmental risks on properties to be sold, purchased, or financed.
Business and legal professionals, including lenders, when they are anticipating the transfer of real property, typically understand that a Phase I will be necessary as part of environmental due diligence to provide the various parties (buyer, seller, developer, lender) information on any environmental risks at the property. Generally, the purposes of a Phase I include: (1) to gain information on the environmental conditions of a property so that appropriate language can be negotiated in a contract, development agreement, or loan documents to address the conditions; (2) to establish defenses to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) (42 U.S. Code Chapter 103); (3) to secure lending; and (4) to secure insurance.
Many professionals are generally familiar with the CERCLA defenses that parties seek to establish when conducting environmental due diligence for a transaction. They include: (1) the Innocent Purchaser defense; (2) the Bona Fide Prospective Purchaser defense (also applies to tenants); (3) the Contiguous Property Owner defense; and (4) the Lender Liability defense. However, collectively these professionals are not at all clear about just what the very important “REC” is. So, we seek here to briefly answer the question: What is a REC, anyway?
Just last year ASTM E1527-13, the Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process (ASTM Standard), was adopted by USEPA as the measuring guide for Phase I due diligence. That is, for a party to be entitled to a CERCLA defense, its Phase I must have been conducted according to the ASTM Standard, and the Phase I report must be written according to the ASTM Standard, and it must identify any and all RECs.
The ASTM Standard defines a REC as “the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property….” The broad definition is as a “catch all” and is sometimes interpreted differently by different consultants. Some important points to remember:
- Central to the term is the occurrence of a “release” which can be a spill, or other occurrence or event which results in contamination at a property.
- There may be additional environmental concerns that are not within the scope of an ASTM E1527-13 assessment, such as asbestos or lead in buildings.
- Petroleum is included in the scope of conditions that could be RECs, even though petroleum is not covered by CERCLA.
- Testing protocols change. Don’t be surprised if the consultant identifies a former UST as a REC, even though past testing suggests the former tank never leaked.
Historical Recognized Condition (HREC) is “a past release of any hazardous substances or petroleum products that has occurred in connection with the property and has been addressed to the satisfaction of the applicable regulatory authority or meeting unrestricted use criteria established by a regulatory authority, without subjecting the property to any required controls. The definition of HREC has several critical phrases:
- “Has been addressed to the satisfaction of the applicable regulatory authority;”
- “Meeting unrestricted use criteria established by a regulatory authority;” and
- “Without subjecting the property to any required controls.”
In practice, these points mean:
- A No Further Action (NFA)/No Further Remediation (NFR) Letter (or Administrative Order) has been issued by the state agency, acknowledging the past contamination has been abated to the satisfaction of the state;
- The property can be used for any purpose, including residential; and
- There are no deed restrictions, environmental land use covenants (ELUCs), restrictions on groundwater use, prohibitions on excavation, or any requirements for paving, capping, encapsulation, vapor barriers or other physical means of minimizing exposure to contaminants.
HRECs are conditions which occurred in the past, but have been addressed to the satisfaction of the state, and the property can be used as if it were never contaminated.
The ASTM Standard defines a Controlled Recognized Environmental Condition (CREC) as “a recognized environmental condition resulting from a past release of hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority, with hazardous substances or petroleum products allowed to remain in place subject to the implementation of required controls.”
A CREC would be a historic leak or spill that has been remediated to something less than “clean,” so that the property may not meet residential or “unrestricted” use criteria. It should be noted that the identification of a CREC does not imply that the control put in place has been evaluated for effectiveness or adequacy.
Like HRECs, CRECs may have the approval of a state agency. Unlike HRECs, however, CERCs are associated with contamination that remains on site. Thus, CRECs may affect development. CRECs may also require ongoing due care or mitigation to ensure the continued validity of an NFR when a site has been remediated, and will likely require maintenance/oversight to ensure the Bona Fide Prospective Purchaser defense.
Per the ASTM Standard, a de minimis condition is defined as “a condition that generally does not present a threat to human health or the environment and that generally would not be the subject of an enforcement action if brought to the attention of appropriate governmental agencies.” This can include areas of minor staining or spills below reportable quantities. De minimis conditions are not RECs or CRECs, and generally don’t pose risks that need to be addressed in purchase agreements involving only real property.
The ASTM Standard refers to “non-scope” Business Environmental Risk (BER), “a risk which can have a material environmental impact on the business associated with the current or planned use of [a property].” BERs include conditions such as the presence of asbestos, lead-based paint, radon, mold, wetlands, OSHA compliance, and endangered species or cultural/archaeological issues. These risks are considered on a site-specific basis to determine whether the environmental consultant should include the issues in the scope of work to be evaluated in the course of the Phase I investigation, and addressed in a any related agreements.
For detailed discussion on RECs, including Q&As, readers are encouraged to review our previous in-depth article.