You're the prospective purchaser of commercial real estate, in contract. Your environmental lawyer (or environmental engineer or consultant) tells you "we should perform a Phase II Environmental Site Assessment (ESA) based on the recognized environmental conditions identified in the Phase I ESA." She adds, "we'd better do so before the end of the due diligence period, while we still have the right to terminate and get back your earnest money!"
If you've followed our advice, you have a good environmental attorney and experienced consultant chosen by your attorney right there who can guide you through this process, because it can get rather messy even before the first boring hole is drilled. With this blog, we provide 5.5 things you need to know about subsurface environmental investigations (colloquially known as "Phase IIs").
We recently posted about five things you should know about Phase I ESAs. As we noted there, Phase I ESAs evaluate the potential for whether contamination or RECs may be present. If the consultant recommends-or the deal demands-that further investigation be performed to look into that REC or potential contamination, a subsurface investigation is typically what you do.
First, please understand that subsurface investigations like Phase II ESAs (or Limited Phase II ESAs-more on the subtle difference between the two below) serve one main purpose: to evaluate if there is actually contamination, based specifically on RECs identified in the Phase I ESA (not some vague apprehension of "a problem" in some part of the property that "everybody knows about"). Notice carefully that we didn't say "actually contamination and how much, and what it will cost to clean it up."
If the Phase I environmental consultant did not catch something potentially significant-say, a listing for a leaking oil tank at the adjacent property, or a property across the street that is listed for soil vapor issues-your Phase II ESA scope of work might be incomplete. This is why it is so important to retain reputable and experienced environmental consultants to perform Phase I ESAs, because the findings of that initial report are critical and inform the basis for the potential Phase II ESA work that might be performed.
Second-and we hinted at this important thing above-Phase II ESAs do not provide an assessment of the potential cost for corrective or remedial action. You simply will not have enough data in a Phase II ESA to determine with any real certainty (i) how much contamination you have, (ii) how deep vertically or widespread horizontally (laterally) the contamination goes, (iii) if contamination has worked its way down to bedrock or other geologic formations, (iv) if groundwater is affected, and if so, the size of the plume, and (vi) if there are any off-site impacts, among other things. In order to answer these questions, owners would typically perform a much more intense investigation, called a Remedial Investigation, which is like a Phase II ESA on steroids - they're huge, expensive and too time-consuming to do in the period you usually have available for a Phase II ESA.
With all that in mind, here are the first two of five-and-a-half things you should know about Phase II ESAs (the remainder of the list will follow in a subsequent blog):
1. A Phase II ESA can take anywhere from 30-45 days: When planning for your Phase II ESA, you must consider the time it will take to complete it, including getting validated data. Assuming you will be using the same environmental consultant the performed the Phase I ESA, that consultant will need to coordinate with contractors, narrow the scope of investigation, deal with any site access issues, perform the work, receive results from a lab, validate and analyze those results and then prepare a report. This all assumes that the seller will not have any issues with where you propose to drill boring holes, and that there are no tenants to complicate the investigation. The owner will (and should) insist on a site access agreement that must also be negotiated if not already in place. That agreement will provide for insurance, restoration of the property, confidentiality of data obtained, control over the work plan (to a greater or lesser degree) and other matters.
What we're trying to say here is don't rush the process! For this reason, it's important as the buyer to get your environmental attorney involved early in the negotiation stage so that you can bake into the contract an appropriate due diligence period. A hurried Phase II ESA can lead to bad results that suffer from strained scope of work or can be needlessly more expensive than contemplated (those rushed lab results will add thousands of dollars to the investigation).
Oh, you can save some time by doing parallel Phase I and Phase II ESAs but the RECs still had better have been identified (to insure the Phase II work plan is complete), even if only in a preliminary, orally provided report by the Phase I ESA consultant.
2. Site Access agreement: Site access issues can get testy. The attorneys at Periconi, LLC advise handling the Site Access agreement during the contract phase so it doesn't fall victim to the haste and anxiety attendant on scoping and doing the Phase II ESA. We encourage our clients to get us involved during contract negotiations stage with a real estate attorney so that we can hash out the basic issues, such as allocation of liabilities and site access. Even before a Phase I ESA is performed, we can usually get a rough idea of whether we think a Phase II is even necessary, and we can use that to begin a conversation about site access issues early in the process
As for the access agreement itself, the agreement should establish the buyer's reason for accessing the property, and should inform the seller about the scope of work and the schedule for completing the work. Additionally, the buyer should ensure that the retained environmental consultant and any hired contractors have adequate insurance to cover any mishaps during the subsurface investigation. The owner's priority should be to should protect his/her property and interests. This means that the owner should be mindful of tenant disruptions, advising the buyer of any non-obvious utility lines or hazards, and ensuring that the site access agreement provides for sufficient insurance coverage to deal with significant business interruptions should something go wrong. Your environmental attorney should be able to handle these issues and negotiate with the buyer's attorneys.
Contact the attorneys of Periconi, LLC at (212) 213-5500 if you are considering a Phase II ESA or for general information regarding environmental due diligence.