It is Prudent to Involve Counsel at the Outset When Selling a Potentially Contaminated Property,

In most commercial real estate transactions, the buyer and/or lender require a Phase I environmental site assessment (“ESA”). Hopefully, the ESA does not identify any recognized environmental conditions (“REC”), and the transaction closes. However, if RECs are identified, it is not uncommon for the buyer to request a Phase II invasive investigation to verify the existence or non-existence of the REC. At this stage, it may be wise for the seller to obtain the advice of counsel. Instead, all too often, the seller promptly agrees to the request for several reasons. An inexperienced broker may be advising the seller that the Phase II is simple and non-intrusive, and he may be correct in describing the Phase II in that manner. The cost may be minimal when compared to the transaction price; indeed, the buyer may even volunteer to pay for some or all of the Phase II. It is difficult to find a reason not to authorize such work at that stage when one is close to the finish line of closing the deal. In fact, if the lender is requesting the work, then the thinking is that the deal most certainly will not close without the additional Phase II, so it is no-brainer to authorize the work.

However, a prudent seller should exercise caution at this point. If the Phase II does turn up significant impacts, then not only is the deal as structured off the table, but reporting obligations may also have been triggered. At that point, the seller holds an unmarketable property and now also faces further investigation and remediation costs and possibly an enforcement action if he or she fails to conduct such work. Depending upon the issue, these costs could exceed the original transaction price.

Of course, no one can advise the owner/seller beforehand of what the Phase II will turn up, but a seller should still conduct its own due diligence and protect its interests at this stage of the transaction. The buyer, broker, and environmental consultant may all have an interest in seeing the Phase II work conducted because there is no ultimate downside to them if the results are negative. Thus, the seller may want a “second opinion” on the Phase I from an independent consultant who can provide an unbiased view of the risks associated with a Phase II. Counsel could be retained to advise and potentially maintain these opinions as privileged and confidential. Counsel with a technical background that is also familiar with regulatory agency requirements would be especially beneficial in terms of advising of the potential risks of additional work. In fact, counsel can also provide helpful input from the outset. For example, a related issue is whether, the initial Phase I consultant should be instructed only to identify RECs and refrain from including its own recommendations for additional testing in the ESA report. It is one thing to identify REC’s, but if the ESA expressly recommends additional Phase II work, then the deal likely falters unless that Phase II work is conducted.

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