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Phase I Environmental Site Assessments for Contaminated Property: Getting the Entity Name Right

Deals on commercial property often have various entities involved for both the buyer and the seller. If a Phase I Environmental Site Assessment (ESA) is completed for the contaminated real property, the purchaser may want to use that Phase I ESA report for the All Appropriate Inquiry (AAI) requirements of the purchaser’s Bona Fide Prospective Purchaser defense to potential environmental cleanup liability. Whether the report was done by the seller, bank or even the purchaser, more often than not, the original named user of the Phase I ESA report is someone other than the exact name of the entity that will hold title to the property upon acquisition. The prospective property purchaser will not have the BFPP defense if it is not properly named as a User in a compliant Phase I ESA report.

Steps must be taken, and they must be taken prior to closing, to ensure that 1) the User of the Phase I ESA is the exact entity name that will take title to the real property and 2) the entity itself can claim the entirety of the All Appropriate Inquiry work in the Environmental Professional’s Phase I ESA for the property purchaser’s benefit.

These steps are critical components of any cleanup liability defense. Early attention to environmental due diligence will help provide time for negotiations with others and help determine how best to make the best use of an existing Phase I ESA report. The development of a purchasing entity’s Phase I ESA reliance letter with the Environmental Professional must include the purchasing entity completing a User Questionnaire for that Environmental Professional to consider and unambiguously incorporate into the professional opinions of the Phase I ESA work. The negotiating time is limited, however. The purchasing entity needs to accomplish these tasks within 180 days of the date of certain Phase I ESA work, otherwise data in the report expires and the Phase I ESA becomes deficient in the AAI requirements for the defense.

The BFPP defense can allow a purchaser, who is willing to establish and maintain the defense, to mitigate the risks of buying historically contaminated property. The purchaser will not have established the defense if the entity taking title to the property is different than the named User of a current Phase I ESA report.

Jamie B. Dameron