DMI-EMK
Environmental Services

Why Is a Phase I Investigation Performed?

by DMI-EMK

For many people, the answer would probably be “because the lender made me do one”.  However, a Phase I can offer benefits to the buyer or seller in the case of a property transaction regardless of a lender’s requirement.  The three primary reasons to conduct a Phase I investigation are:  1) to avoid buying contaminated property; 2) to protect legal recourse if contamination is found after buying the property; and, 3) to obtain access to the Phase I provider’s professional insurance coverage.

To avoid accidentally buying contaminated property.

For the Buyer, purchasing contaminated property can create a very complicated situation.  It typically takes tens of thousands of dollars to investigate contamination, and can cost hundreds or thousands of dollars to clean it up.  Even in the case where the buyer can place all or partial responsibility on other parties (see discussion below), the process of taking legal actions to do so and subsequently having the property investigated and cleaned up is complex, challenging, and time consuming.

For the Seller, while they may not wish to discover contamination issues exist on a property, selling the property does not absolve them of these problems or responsibilities. In many cases, it just adds the potential legal costs to the list of impacts when contamination is eventually identified. In general, it is better to find a problem before it becomes a legal issue.

Protect legal recourse if contamination is found.

Sometimes contamination at a property is unknown to the seller and/or not discovered during the Phase I investigation.  However, for the Buyer, just conducting the Phase I investigation is important to preserve their rights in the future if/when the contamination is discovered.  Under the “Buyer Beware” rules of property transactions, if you don’t perform a reasonable “Due Diligence” investigation before buying a property, then you can be forfeiting your future rights to go back to the prior owner to pay for any associated cleanup requirements at the site – leaving yourself without any legal recourse in the matter.  However, conducting a Phase I meets the requirements of performing this due diligence review and helps to protect your future rights as an “innocent landowner”.

For the Seller, meeting this due diligence review also identifies known property conditions at the time of the property transaction, and documents that the seller cooperated in every way.  Later, if contamination is found, this documentation helps show it occurred after the property transfer and could not be the seller’s responsibility.

To obtain access to the Phase I provider’s professional insurance coverage.

Regardless of the cost of a Phase I or the depth of historical review performed, it is always possible to miss a condition at a property during a Phase I investigation due to: a lack of available documentation; limited time allowed to conduct the Phase I; and/or a lack of clear indicators of the potential presence of contamination. As such, it is still possible that such a condition may later be identified. The new owner – who is automatically considered the primary Responsible Party in such cases – will be held responsible. By hiring a professional Phase I provider, you are inherently adding another layer of financial protection through their professional errors and omissions insurance policies. These policies are maintained by reputable Phase I providers specifically for a situation where contamination was missed due to actions the provider did or did not take during their Phase I investigation.