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Acquiring Real Estate Before the Construction Project: Should Buyers Order a Phase I Inspection?

One of the key issues a buyer should consider before purchasing property is whether or not to order a Phase I Environmental Site Assessment. The purpose of the Phase I is to evaluate a property’s environmental conditions and assess the likelihood of any contamination being present onsite. From a buyer’s perspective, the Phase I is used to identify possible contamination on the property and to provide some protection from liability should environmental hazards later be discovered.

This protection from liability is generally achieved if the buyer has met the requirements of the “all appropriate inquires” rule. The EPA issued final standards and practices for conducting all appropriate inquiries in 2006. Those requirements are applicable to any party who may potentially claim protection from the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) as an innocent landowner, a bona fide prospective purchaser, or as a contiguous property owner.

A liable party is not necessarily the entity that created the environmental hazard!

As a buyer, obtaining exemption from environmental liability is important because under CERCLA, the EPA can require liable parties to clean up the property or charge those costs to the liable party. A liable party under CERCLA may include:

(1) the current owner and operator of a contaminated property; (2) any owner or operator at the time of disposal of any hazardous substances; (3) any person who arranged for the disposal or treatment of hazardous substances, or arranged for the transportation of hazardous substances for disposal or treatment; or (4) any person who accepts hazardous substances for transport to the property and selects the disposal site.

Given these facts, it is likely in the best interest of a potential buyer to conduct a Phase I investigation prior to purchasing real property. This is particularly true in urban areas where the history of uses conducted on the property or the uses conducted on adjacent properties are unknown.