Purchasers of commercial real estate must perform their due diligence before committing to the sale, which basically means they are assessing the property for possible problems that should be resolved before closing or that could expose them to liability. This includes obtaining a Phase I Environmental Assessment (Phase I ESA).
What is a Phase I ESA?
A Phase I ESA is a report used as part of the commercial real estate sales process. The purpose of a Phase I ESA is to determine if the property being sold polluted the ground or groundwater underneath it. This is especially pertinent to certain businesses such as dry cleaners and fuel stations.
A Phase I ESA is executed before the property is closed upon, and it is often requested by buyers or their lenders.
A Phase I ESA satisfies Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) innocent landowner defense requirements. This means that if the buyer performs their due diligence and obtains a Phase I ESA, they will not be held responsible for the past environmental damage caused by the previous owner of the property.
The results of a Phase I ESA
Sometimes a Phase I ESA will uncover pollution of the land or groundwater underneath the commercial property or other regulatory violations. This allows the seller the time needed to address these concerns before closing. It also gives both parties the opportunity to re-negotiate the transaction and if the report is unfavorable, the buyer can decide to walk away from the sale.
Sometimes the buyer will follow up with a Phase II ESA to further test the land and groundwater underneath the property. Generally, a seller must agree to a Phase II Site Investigation, as it can involve retrieving test samples from the property.
When you think of a buyer’s due diligence in a commercial real estate transaction, environmental investigations may not immediately come to mind. But a Phase I ESA is an essential part of ensuring a buyer is not held liable for environmental damage caused by the seller.