wells. These searches rest with the prospective buyer and not
the Phase I environmental consultant, as most Phase I ESA
contracts will exclude such a review.
3. IF CONTAMINATION EXISTS, YOU CAN STILL CLOSE
THE DEAL AND AVOID FEDERAL CLEANUP LIABILITY
Yes, that’s right. Even if a “recognized environmental
condition” (REC) is identified by the Phase I ESA, there is a
legal defense known as the “bona fide prospective purchaser”
defense that allows a prospective buyer to buy contaminated
property and still avoid federal cleanup liability. But the
acquiring property owner still has to perform all appropriate
inquiries and make sure any continuing care obligations are
satisfied. Working with professionals who understand these
nuances is advisable in these situations.
4. MANY ENVIRONMENTAL RISKS ARE EXCLUDED
Asbestos, PCBs, lead-based paint, mold, regulatory
compliance, wetlands, and many other risks are not part of a
Phase I ESA. Additional surveys are needed to assess these
risks. Vapor intrusion risk, however, is now a consideration
with the 2013 version of the ASTM standard.
5. THEY HAVE A SHORT SHELF-LIFE
A Phase I ESA that pre-dates the closing by more than 180
days will have to be updated to qualify for protection. And if
the analysis and report are more than one year old, you will
need to commission a new review.
6. SPECIFIC LANGUAGE IS REQUIRED
Yes, really. The Phase I ESA standard and the federal law
specifically identify language that “shall” or “must” be included.
For example, you must use a qualified “Environmental
Professional” to perform the review. When contracting for
a Phase I ESA, be sure to work with a firm or individual
with vast experience in environmental law – one who knows
the exact language required by CERCLA and the Phase I
7. RELIANCE IS LIMITED
Buyer beware if all you do is review the Phase I ESA that was
8. ALWAYS REQUEST A DRAFT REPORT
prepared for the current owner of the property when he or she
previously bought it. Aside from the fact that the report will
likely have exceeded its shelf-life (see above) and new risks
may be present, the Phase I ESA was prepared for a different
user and you will not be able to qualify for the defenses to
liability. Simply put, if the report is prepared for another user,
certain updates and actions need to be taken if you want to rely
on the report, and the report should specifically identify the
landowner seeking protections. This is particularly important
if you plan to have a separate LLC or similar entity own the
property, as commonly occurs.
Requesting a draft report will allow you and the environmental
professional to identify and isolate any particular issues that
require attention before the report becomes finalized. Equally
important, because timing of the transaction is often critical, it
is also helpful to have a verbal report immediately after the on-site reconnaissance to identify if the consultant believes any
RECs are present. This also allows you to begin parallel work
on subsurface investigation activities – Phase II ESA – on a
faster timeframe if necessary.
9. LENDERS TYPICALLY REQUIRE THEM
Even though financial institutions have their own separate
legal defense under CERCLA, if you need a loan from a bank
or the SBA, chances are good a Phase I ESA will be required
to protect credit risk and the loan value.
10. RECOMMENDATIONS ARE NOT REQUIRED
Although an environmental professional should provide
an “opinion” regarding whether additional appropriate
investigation is necessary to confirm the presence of a REC if
it is not obvious, “recommendations” are not required for an
ASTM-compliant Phase I ESA. And if recommendations are
desired, consider having them addressed in an accompanying
side letter and not the report itself.
Beyond these issues, there are also a variety of considerations
for both buyers and sellers in the process, including the hiring
and contracting with an environmental professional, adequacy
of insurance, limitations on liability, indemnity obligations,
and the like. In this regard, it is advisable to integrate your
legal counsel and real estate professionals into the Phase I ESA
early on in the process rather than waiting until the time of
closing to work through these issues.
In summary, while contracting for and conducting a Phase
I ESA has a number of subtle nuances with substantial
ramifications, working with seasoned advisors through the
process will allow your business to achieve its goals for the