If you are reading this, you are either the buyer or seller involved in a commercial property transaction which requires a Phase 2 environmental testing. An environmental professional found a Recognized Environmental Condition (REC) during the Phase 1 Environmental Site Assessment process. The short answer to the question of who pays for the Phase 2 environmental testing when a REC is found is; “it’s a negotiation, the best negotiator gets the other guy to pay.” Maybe you were hoping for a legal or customary “standard practice” answer to that question? In a negotiation, it all comes down to strategy. Stick with me and I’ll help explain your best options.
Before we start you might want to read about “Who pays for the Phase 1 ESA during a property transaction.” In it you will find lots of good information about strategy for negotiating costs for environmental assessments. Once a contract is signed, your wiggle room for negotiation narrows but it doesn’t disappear. You should be thinking about the whole process of environmental due diligence before a contract is signed, including the contingencies of what to do if a Phase 2 environmental testing is needed.
Table Of Contents
Buyer with a contract not signed.
This is the most powerful position to be in. The buyer gets to decide which property to buy or whether to buy a property at all. The seller has already made their choice to sell. They either need to sell or want to sell but the buyer generally doesn’t need to buy, or at least not the seller’s property. A buyer without a signed contract should have the forethought to anticipate the possibility of a subsurface investigation, which is expensive, and negotiate into the contract that the seller pays for it.
Buyer with a contract signed.
A buyer with a signed contract that doesn’t stipulate who pays for a Phase 2 environmental testing should RECs be found is still in a powerful position. The due diligence clause of the contract allows the buyer to walk away if environmental issues are found. As we discussed earlier, the property owner has already chosen that they want or need to sell the property. The optionality of the buyer’s position brings with it a power differential in the negotiation. As a buyer, you can and should flex the muscle that your position allows, especially because you are under contract. As a buyer, the option to exit the contract under the due diligence clause is yours alone (not the seller’s). So have your agent pick up the phone and squeeze the seller to pay for the Phase 2 environmental testing.
Seller with a contract not signed.
You are expecting me to suggest, as a seller with the contract not signed, to negotiate to NOT be responsible for a Phase 2 environmental testing, should the need arise.
That’s not true.
You want to sell your property right?
So the mission isn’t to avoid all the costs associated with marketing your property, the mission is to get you through the process as fast as possible while minimizing the headache and heartache.
You need to be honest with yourself about the type of property you are selling and the odds that the buyer will hire a cranky, overly cautious or downright corrupt environmental consultant to do the Phase 1 ESA. You are risking unknown outcomes and blown-up sales if you let the buyer pick the consultant and pay. The best play is to get ahead of the process. Hire your own consultant to do the Phase 1 ESA and if necessary the Phase 2 environmental testing and provide the results to potential buyers.
The thing that blows up real estate sales is the fear of the cost of unknowns. Make the unknowns known before you go to market and your sale will go smoothly.
Seller with a contract signed.
A seller with a signed contract that doesn’t stipulate who pays for the Phase 2 environmental testing is in a bad spot if demand for the property is low. They are going to have to compromise. The seller has two good plays if they want to minimize the costs for a Phase 2 ESA. Which one is better depends on your situation.
- Agree to pay half the cost of a Phase 2 ESA, if you can. I say “If you can” because the buyer can easily walk away from the sale at this point. You’ll find out how badly they need or want the property by offering to pay half.
- Agree to pay for the whole Phase 2 ESA, at closing. The buyer pays up front and the seller pays the buyer back at closing. This is a better position than just agreeing to pay the Phase 2 environmental testing costs because deals fall apart for all sorts of reasons, not just environmental. Also, in the back of your head a seller should be worried about what the Phase 2 environmental testing will find and what additional, and more expensive, work will need to be done. What the Phase 2 ESA will find could easily kill your sale too. If the sale doesn’t go to closing the costs are all the buyer’s.
Two more pieces of good advice for Sellers who are being asked to pay for a Phase 2 environmental testing.
- If as a seller you are presented with a Phase 1 ESA with RECs from a buyer and asked to pay for a Phase 2 environmental testing you should immediately ask the buyer to have the consultant that did the Phase 1 ESA provide you with a “scope of work” (SOW). The scope of work is one paragraph that explains where samples will be taken, how many will be taken, what type of environmental contamination they are looking for and the machinery, means and methods they plan to use in the subsurface investigation. Take that Scope of Work and bid the project out to several other environmental companies. Then, agree to pay only up to the lowest bidder. If the buyer wants to use their own consultant, they can pay the difference.
- Always make sure as the seller, if you are paying for the work, your name goes on the report as the client. In our industry, the only entity that can “rely” on the work done in a report we make is the entity that paid for the report. If your name is not on the report, you can’t use it, rely on it, or give it to other potential buyers should this sale fall apart.
If you need a Phase 2 environmental testing, research or testing done on your property or one you are interested in purchasing, give A3 Environmental Consultants a call. We’ll get your project done with the utmost in confidentiality, we’ll meet or exceed ASTM Standard E1903-19 on any sort of commercial or industrial property. Our Assessments meet the requirements of all lenders and government agencies such as the Small Business Administration (SBA), Housing and Urban Development (HUD) and the United States Department of Agriculture (USDA). A3 Environmental Consultants can be reached at (888) 405-1742 or by email at Info@A3E.com.