A Phase I Environmental Site Assessment, commonly referred to as an “ESA” or “Phase I,” researches current and historical uses of real estate as part of a commercial real estate transaction. A Phase I assesses whether previous real estate uses have impacted the soil or groundwater beneath real estate and whether those previous uses could pose a threat to the environment or human health. If current or historical uses have created soil or groundwater issues, liability for cleanup costs and more may be placed on lenders and owners – not to mention the impact environmental issues can have on the value of real estate. A Phase I completed prior to the closure of a real estate transaction can be used to satisfy liability defense requirements provided under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and to notify potential purchasers of real estate of environmental issues so that informed decisions can be made on whether to close deals or walk away from them.
A Phase I report will often be lengthy and contain a great deal of information, but most importantly it will include: (i) a summary of information provided to the environmental professional who prepared the report; (ii) the results of the on-site inspection, including photographs of the property taken during the inspection; and (iii) a conclusion that discusses the presence of any Recognized Environmental Conditions (“RECs”). A REC is defined as “the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property: (1) due to any release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment.” ASTM E1527-13. If a REC has been listed in the Phase I report, the environmental professional that prepared the Phase I has identified information or conditions that indicate the presence or likely presence of hazardous substances or petroleum products on the real estate. RECs generally require additional investigation under a Phase II Environmental Site Assessment (“Phase II”) – a topic beyond the scope of this article.
A potential purchaser or lessee of commercial, industrial, or agricultural real estate should complete a Phase I to protect itself from potential environmental liabilities associated with the current and historical use of real estate. Which party pays for the Phase I may be negotiated in the purchase or lease agreement. In any purchase or lease agreement be sure to include provisions that permit the purchaser or lessor sufficient access to the real estate to conduct on-site investigations. In addition, always request the seller or lessor to provide copies of any historical environmental reports in the seller’s possession with other due diligence materials. Sufficient timing to conduct all necessary site inspections should be built into all purchase and lease agreements. Finally, purchasers and lessees should require a clause in the purchase or lease agreement that allows them to terminate the agreement if they are unsatisfied with site inspections or environmental reports. Failure to include a termination option could stick a purchaser or lessee with environmentally contaminated real estate that may significantly decrease in value and become difficult to sell or assign in the future.
A significant portion of Justin’s practice involves commercial and residential real estate transactions and related business law matters, including reviewing Phase I’s and advising on environmental liability issues. You can contact Justin with questions at (616) 458-3600.