If you’re reading this, you’re likely knee-deep in a commercial property transaction and have just heard those dreaded words from your environmental consultant: Recognized Environmental Condition (REC). This means your Phase 1 Environmental Site Assessment (ESA) has flagged something suspicious, and a Phase 2 ESA is now on the table.
So who pays for it? Spoiler alert: there is no hard-and-fast rule. The cost responsibility is a matter of negotiation—and the best negotiator wins. While you may have been hoping for a standard legal answer, the reality is that it comes down to strategy, positioning, and timing.
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.
A Phase 2 Environmental Site Assessment is triggered when a Phase 1 ESA identifies RECs, such as evidence of potential contamination. The Phase 2 ESA digs deeper (literally), using soil and groundwater sampling, lab analysis, and other investigative methods to confirm or rule out contamination.
In the U.S., this process follows ASTM Standard E1903-19 and satisfies requirements for lenders, the Small Business Administration (SBA), HUD, USDA, and other agencies. The costs can range from a few thousand dollars to tens of thousands, depending on the complexity and site conditions.
This is why the negotiation over who pays can get heated—and why understanding your leverage matters.
Table Of Contents
Buyer and Seller Scenarios
Buyer — Contract Not Signed
This is the strongest position a buyer can hold. Without a contract, you’re free to walk away entirely, which gives you maximum leverage. The smart move? Anticipate the possibility of a Phase 2 ESA and negotiate in writing that the seller will pay for it if needed.
Pro tip: Reference your Phase 1 ESA negotiation strategy early. Build contingencies into your offers that protect you from unexpected environmental costs.
We Fix Gnarly Environmental Problems
Buyer — Contract Signed
A buyer with a signed contract that doesn’t stipulate who pays for a Phase 2 ESA 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 ESA.
Seller — Contract Not Signed
Counterintuitive as it may sound, it’s often smart for a seller to proactively commission both the Phase 1 ESA and any needed Phase 2 ESA before going to market. This eliminates uncertainty, reassures buyers, and speeds the sales process.
The biggest deal-killer in commercial real estate? Fear of the unknown.
Seller — Contract Signed
Assets Not Liabilities
A seller with a signed contract that doesn’t stipulate who pays for the Phase 2 ESA 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 ESA 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 ESA 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 ESA.
- 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 ESA 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 ESA, 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.
