Seller Refusing to provide Phase I ESA

13 Replies

Hi,  I've been lurking on the forums for awhile, but this is my first time posting.

I'm currently 14 days into a 60 day escrow on the purchase of a commercial property in California.  This would be our first commercial property, we also own a rental condo.  The property is 1/2 acre with a 2000 sq ft building containing 4 units.  My wife and I have been tenants in one of the buildings for the past 2 years, so we're pretty familiar with the property.  The landlord is a VERY difficult person to deal with, which is part of our reason for buying the building.  

This property was originally built as a gas station/mechanic's shop in the 1930's.  Gas tanks were abandoned in the 1960's.  In 1995, the tanks were filled in place by a reputable company and all required reports were filed with the county's environmental health department.  I have no reason to believe the property is contaminated.

Our landlord/seller is also a licensed real estate broker.  He is representing himself in the sale.  He provided a "Commerical Property Purchase Agreement Receipt For Deposit, And Escrow Instructions" Form from 1998.  A little outdated, but ok... Since seller was representing himself, I hired a real estate attorney to assist me with the purchase.  I figured this was the prudent thing to do.  My attorney reviewed the purchase agreement and made a couple of edits/addendums.  The seller agreed to the addendums, we both signed, and I gave him a check for a deposit made out to the escrow company.

One line item that the seller filled out on his own originally was: "10. [X] ENVIRONMENTAL SURVEY: Within ____ Days After Acceptance, Buyer shall be provided a phase one environmental survey report paid for and obtained by [  ] Buyer, [X] Seller. Buyer, within the time specified in paragraph 21, shall provide Seller with written notice of any item disapproved."

My attorney added the addendum: "(i) Buyer has 35 Days after receipt of the environmental survey (pursuant to paragraph 10) to complete any environmental inspection and remove any contingency or disapproval right concerning the environmental condition of the property."

5 Days into escrow, the seller provided a "Residential Property Disclosure Report" he purchased online as well as a copy of the UST closure report.  About 4 days later, I reminded him I needed a phase I environment report that the contract said he would provide because the contract said I had 35 days to review.  He told me the documentation he provided was a phase I and it released me from all liability.  I knew this was not the case and emailed the company that performed the UST closure report and asked if they had ever done a phase one on the property with the seller CC'd.  The company replied back that no, a phase I had never been done by them on this property.  I reply to the email asking for a quote for a phase I.  ($2300, which I find pretty reasonable).  The seller calls me on the phone and tells me that they must have lost the report, everything is OK, talking to them more would "open up a can of worms" etc....

I called up the environmental testing folks and chatted a bit.  They feel that since they did the job, they're pretty confident that everything is OK, but they would still most likely do soil sampling after the phase I to confirm at a cost of $8k-$9k.  I also found this price reasonable.  I had the same conversation with a different company, and they recommended the same testing.

At this point, I'm upset at the seller because he's not paying for the phase I that was agreed upon in the contract.  We really want this guy out of our lives, so my wife and I agree that we'd offer to pay for phase I and soil testing out of our own pockets.  Friday we were having an appraisal done on the property for the bank loan so we were all onsite.  I kept trying to explain to the seller that he did not give us a phase I as agreed upon in our contract.  I concede that maybe there was a misunderstanding, but my wife and I need a phase I to make an educated purchase, so we will pay for it out of our own pockets.  He gets angry and says if we do that the deal is off, and I have 72 hours to think about it.  I tell him I'm not buying without a phase I and he has 72 hours to think about it.  After that, we both walked away angry.  He calls me about an hour later and tries to convince me the reports he provided were OK.  I tell him to call my attorney.  I took a 20-minute walk to cool off and return to voicemails from the seller and my attorney.  Talk to my attorney who said the seller kept talking in circles and tried to explain environmental legal liabilities, my attorney.  My attorney said the conversation was "half confusing and half futile".  I called the seller back and got his voicemail so I left a message for him to contact my attorney and haven't heard from him since.

I'm really angry at this point, since I'm already several thousand dollers into this between appraisails and consulting from my attorney, not to mention the time applying for financing, etc....

We still really want to buy the property, but there's no way we're doing it without the legal protections of a phase I.  Has anyone else had an experience like this?  Any advice?  Since the seller is also acting like a broker, I wonder if there's any ethics issues with a broker trying to prevent a buyer from performing due diligence?

Sounds like the vendor knows, or suspects, the ESA will turn-up something.

That age of building there are many other things to worry about in addition to Phase one.

Is the owner providing a basic owners title policy to buyer? That will be another big expense if seller does not pay for it. What are the reps and warranties from the seller? Do they go away at closing, 6 months post closing,1 year?

If clean up from before there should be on file a ( no further action letter ). Sometimes the EPA has language that they reserve the right to retest a site in the future even if they say it was clean at the time of the letter. It's not just about the property itself but other surrounding properties that could have downstream contamination into your site.

You can't take what the seller says as absolute and fully correct as they are selling the property. Some sellers will do anything to sell a property and get to closing and then they are long gone if a problem is found by the buyer. Even then if the buyer has a post closing rep warranty against the seller it will be very expensive to litigate usually. So best practice is to really stick it to the seller and make them comply all the way until closing when motivation is highest.

If you are paying all cash then everything is an option for you as to what to do with reports,risk levels,etc.

If you are getting a loan the lender will require their checklist to fund a loan. Generally if a phase one report is older than a year and for some lenders 6 months they will require a new or updated one. Soil samples are generally not performed for a phase 2 unless there is reason from a phase one reports finding to do so.   

With my clients on a property we typically do a non-binding LOI to look at due diligence before crafting the PSA. This way known issues are handled in the first version of the PSA and not future amendments. Commercial attorneys and reports are expensive so before we get to that point we want to see the property does not have deal killer type issues.

"One line item that the seller filled out on his own originally was: "10. [X] ENVIRONMENTAL SURVEY: Within ____ Days After Acceptance, Buyer shall be provided a phase one environmental survey report paid for and obtained by [ ] Buyer, [X] Seller. Buyer, within the time specified in paragraph 21, shall provide Seller with written notice of any item disapproved."

I do not like the language used for the contract.

It does not specify that seller will provide and pay  for a ( current & updated ) phase one report for the property.

So the seller it seems by the contract is here is what they have and gave it to you. Since they gave it to you they might think they have completed their requirement for the contract and any further expense and due diligence is on you. Additionally there should be language about you having to return the building and land to it's pre- testing condition if you or your testing company damages the property or land. Proper insurance requirements should also be required before conducting any tests on the site.

I can't stand sloppy contracts where interpretations can get vague. If it's vague that provision of a contract is generally not enforceable in a court of law.

I do not know all the specifics of your situation.

No legal advice of any kind is given.     

Thanks for the input Joel.  I am consulting my attorney through this process, but just looking for any other input/experience from here.  I do have a copy of a letter from 1995 from the county environmental health department stating that the cleanup is in accordance with all current standards and no further action was required at the time, but they reserve the right to require something different in the future.  

My lender is not requiring a phase I.  My attorney strongly advised it, and the seller agreed to it in the contract.  There is no wording in the reports he has giving me implying it is a phase I, or has ever been considered a phase I.  I told the seller that maybe there was a misunderstanding, so I have since offered to pay for the phase I myself, but the seller is refusing to allow it.

Here is the previous line in our contract: 

"9. BUYER'S INVESTIGATION OF PROPERTY CONDITION: Buyer's Acceptance of the condition of the Property is a contingency of this Agreement, as specified in this paragraph and paragraph 21. Buyer shall have the right, at Buyer's expense, to conduct inspections, investigations, tests, surveys, and other studies ("Inspections"), including the right to inspect for wood destroying pests and organisms. No Inspections shall be made by any governmental building or zoning inspector, or government employee, without Seller's prior written consent. unless required by Law. Property improvements may not be built according to codes or in compliance with current Law, or have had permits issued. Buyer shall, within the time specified in Paragraph 21, complete these Inspections and notify Seller in writing of any items reasonably disapproved. Seller shall make Property available for all Inspections. Buyer shall: keep Property free and clear of liens; indemnify and hold Seller harmless from all liability, claims, demands, damages and costs; and repair all damages arising from Inspections. Buyer shall carry, or Buyer shall require anyone acting on Buyer's behalf to carry, policies of liability. worker's compensation, and other applicable insurance, defending and protecting Seller from liability for any injuries to persons or property occurring during any work done on the Property at Buyer's direction, prior to Close Of Escrow. Seller is advised that certain protections may be afforded Seller by recording a notice of non-responsibility for work done on the Property at Buyer's direction. At Seller's request, Buyer shall give Seller, at no cost, complete copies of all Inspection reports obtained by Buyer concerning the Property. Seller shall have water, gas, and electricity on for Buyer's Inspections, and through the date possession is made available to Buyer."

Must the seller allow me to perform a phase I, and do soil sampling as long as I perform any required repairs?

Do you plan to own this for ever and ever? The dirt has underground fuel storage tanks that were left in place, not removed, but filled in.  Should you, or your heirs, ever decide to sell with this flapping crimson red flag, any and every investor will either walk away completely or beat you to death on price when you go to sell.  Even if there is zero contamination.  Even if you have a phase 2, with soil testing finding no evidence of contamination. Your future buyer and their broker will say "Fine and dandy, but absence of evidence is not evidence of absence. We'll pay you 10 cents on the dollar because of the risk that we are taking on." Your seller is an idiot, or dishonest, or he doesn't really want to sell. Maybe all those descriptions apply.  The foregoing is NOT advice. It was bombastic non-expert opinion from a source that has no knowledge of the PIQ except what you have posted on this thread. 

The below is not intended to be legal advice, and we do not have an attorney-client relationship -- if you accept then keep on reading. 

*Two things are blaring in my mind - why isn't your lender requiring one? Maybe they THINK they do not need it, but will inform you a few weeks into the process that they do need it, especially if they are transferring it to Freddie/Fannie.

*Maybe the Seller does not want to know the Phase I results, since it may trigger certain notice requirements, if he himself has a loan on the property. (i.e. if he is aware of certain hazardous environmental conditions this may trigger a duty on him to tell his Lender, or else the Lender may place him in default of his loan). If Seller has a loan, might be a smart idea to see who the lender is - because if its a national lender, then I wouldn't be too worried, since they've gone through the whole underwriting process and evaluated the risk associated with the tank. Also, maybe the Seller could provide you with an old Phase I (if Seller doesn't have a copy, he can easily ask his Lender, or have your attorney ask -- the Lender's attorney usually keeps a copy in their file). 

*What if you told the Seller  "look I understand that you do not want to pay for the Phase I, but since we agreed to this before hand, I will order the Phase I and it will be paid out of the closing proceeds when we close, and if we do not close, then lets agree to split the costs with respect to the Phase I." 

*what does your "default" section say with respect to a default by Seller? & What are your thoughts on an Environmental Indemnity, so that if anything does arise, Seller, and any principals of seller (so that you have a real person on the line - and not some entity whose only asset was the property being sold) has the duty to indemnify you for all costs. (this indemnity is only meaningful and worthwhile if the person you are going after has enough $$ to cover your losses - hence i said make sure you get a real person and not an entity). 

I didn't read the entire thread - but wanted to pop these little tools your way. 

Excited for you and your wife - best of luck!

Anyone acting this upset over you doing your due diligence is highly suspicious.

1. He doesn’t want to pay for it. Fine.

2. He STILL gets squirreled out over you funding the phase 1. Flags raised....

My guess is the phase 1 will discover things. The lifespan between original tanks and when filled in 1995 is plenty for leaks. As others mentioned, there are plenty of other ways your site could have been impacted. Pretty sure a high probability that your soil tests will also raise new environmental flags. Again, why is the seller freaking out about your homework as a buyer?!?!?

Based simply upon the history of the property, get a Phase I. Any reputable environmental engineering group is going to then require a Phase II. I have worked with several environmental engineering groups across the US and if there is any hint of any possible contamination they are going to require a Phase II, especially with this properties history. This type of work for an environmental engineering group is low margin, high risk and therefore they are very cautious. Be prepared for a further action required result and soil drilling/sampling.

I have been involved with several contaminated properties over the years and the primary reason you want to get a thorough environmental review is to provide an "innocent landowner" defense. This defense is basically one where you plead ignorance as to any contamination and avoid the expense of the resulting cleanup. If you have not done your due diligence and cannot prove it, you run the risk of not only losing the money from your investment but also the additional expense of cleaning up the site. This is why lenders require a certain level of environmental review. If a lender ever forecloses on a property with environmental contamination the lender runs the risk of becoming an owner in the chain of title and therefore possibly responsible for the cleanup.

There is a similar case in CA. Have a car repair shop (LI zoning) converted to clustered homes. There were contaminants, oil, grease, toxic material, tanks down there. Back then 100% car repair shop dumped oil in the ground. Because the home is new seller bought it. Right now there is a litigation buyers from HOA are suing developer who did not disclose it properly. Move forward, I am opt to walk away if it does not sound like a good investment. A few $K of investigation is cost of doing business.

The seller does not want to deal with the environment and could care less if it is contaminated below. He wants you to deal with it.

@Sam Shueh

Overtures of Love Canal (1950s) .... or Puerto Rico (post Maria)?

@Erik Nizenkoff you need to call a company and get a quote for a Phase 1 and limited Phase 2 (basically soil tests) to be done at the same time. I get Phase 1s done on all properties and ask my guys to do a limited if it ever had a gas station, service station, or laundry on site. 99.99% of the time they would go out and do a Phase 1 but recommend the Phase 2.

The fact that the Seller refuses to allow you to do your due diligence is a huge red flag. I'm not suggesting you give up, but why on earth would he not let you spend the $8K to do it!? Do you have to buy this property? Bottom line, is the deal worth taking this risk? 

Good luck and let us know the outcome.

I think @Maheen Akhter nailed it. Seller's knowledge of environmental condition may trigger mandatory reporting which may lead to other obligations. I don't know about California environmental law, but here in NC no one (including the lender) is released from liability until the state issues a no further action letter.

I think your getting a little worked up here.. its normal at least in every deal I have ever done that I PAY FOR MY OWN phase one.. not the seller... and if you already know there was a gas station that's all the phase one is going to do is tell you what you already know... the bottom line is you need soil samples if your worried about this.

to me its the cost of doing business and should have been contemplated by YOU when you wrote your offer.. you don't want to rely on sellers inspection reports.. you want to do them yourself and pay for them yourself so you have the consultants E and O and other fiduciary to YOU not the seller.  at least s how I do things..   When you step into the development world or commercial real estate there Is always cost you need to pay to satisfy yourself that your getting what you think  your getting.

Just wanted to follow up with how it turned out.  After a couple days of my lawyer battling with the seller, the seller ALLOWED me to have a phase I performed.  I paid for this, then subsequently paid for the Phase II soil sampling.  Everything turned out OK and we closed escrow yesterday. 

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