Seller Beware! Selling commercial real estate and the hidden Phase I PSA trap

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I’m surprised when sellers of commercial real estate say they don’t care whether a potential buyer conducts a Phase I Environmental Assessment (“Phase I”) on their property as part of the buyer’s due diligence, or that they don’t want to “waste any time” negotiating this section of the purchase and sale agreement (“PSA”). True, obtaining a Phase I is an essential component of virtually every buyer’s due diligence. But seller beware! Care must be taken both when negotiating the PSA, and when called upon to answer a questionnaire in association with the Phase I.

Regarding the PSA, a seller with a recent Phase I who is generally aware of the history and use of the real estate may not need protective language in the PSA with regard to the results of the Phase I. Conversely, the seller who has never had a Phase I conducted on the property, or who has no understanding of the historical use of the property and the potential for the existence of recognized environmental conditions (“REC’s”) on the property, should consider adding certain requirements and protections to the PSA to avoid the potentially devastating effects of discovery of REC’s on the property.

When the Phase I is conducted, the seller will be asked to complete a questionnaire seeking information regarding the property and its historical use. Again, seller beware! There are generally two types of Phase I questionnaires; the User Questionnaire and the Pre-Survey Questionnaire. The User Questionnaire is to be completed by the party for whom the Phase I is being prepared; typically not the seller. This form document indicates that by completing the questionnaire, the user may be entitled to “certain federal liability protections that result from conducting ‘All Appropriate Inquiries’ into the previous ownership and uses of the property.”

Unfortunately, this document is sometimes mistakenly provided to the seller, who proceeds to complete the document believing it is legally required to do so, and believing that it is gaining certain legal protections in doing so. The more appropriate document for the seller to complete is the Pre-Survey Questionnaire, which offers the seller no protections if REC’s are found – much to the contrary – the document can be a trap for the unwary if accurate answers are not provided, and it is not difficult to inadvertently provide inaccurate answers. For that reason, sellers should consult with their environmental or legal professional prior to answering any form of Phase I questionnaire.

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