Phase One ESA Reliance – What is it good for?

Here’s a joke for you:

Q: Why did the banker do a Phase One Environmental Site Assessment (ESA) on the used mattress?

A: So they could “re-lie” on it!

If that isn’t the best environmental consulting joke you’ve ever heard I’d be surprised!  That joke works on so many levels (don’t feel bad if you didn’t get it) and is really meant to be an analogy for what this brief article is about…”the reliance and protection that the ESA process will provide you when doing your environmental due diligence”.

I’m not a lawyer so please don’t accept this information as legal advice but use it to be better informed when proceeding with your property transactions and speak to your council about your liabilities.

We all know that a Phase One ESA is important to get done.  If done correctly, it will identify for you the presence of any actual or potential contamination on a property.  More importantly, if there is any, the Phase Two ESA will provide you the verification of the environmental quality of the land. If you are the purchaser of this work (I.e., you hired a consultant to do the Phase One and Phase Two) then you are typically provided reliance on those reports by the consultant. Meaning that if you make certain decisions, such as the purchase of a piece of land that a Phase One said was ‘clean’, and you later found out that there was contamination, you may some protection through that consultant’s insurance company if they missed something during their investigation (errors and omissions policy).

Some people may forego the Phase One ESA process all together and purchase the land outright (maybe in cash if they don’t need financing).  If they were to find out later that the land was contaminated, guess who has to pay for the clean up?  Buyer beware!  Depending on how extensive that contamination might be, it could cost you hundreds of thousands of dollars or more to remediate…good thing you saved that $2,000-$3,000 by not doing the Phase One!  This is when it would have been good to have done that Phase One and you would have either identified it before you bought the land, or have the reliance from the consultant to put them on the hook for the clean up costs if they missed something in their investigation.

In many cases involving the financing of a property, that reliance can also be transferred by the consultant to the lender to protect said lender in the event that the land owner goes bankrupt and forfeits the land to the bank (lender).  The lender wants that protection as well.  So in simple terms, having that reliance is a form of environmental insurance for everyone involved in the deal.

Something that people should know when they commission a consultant to complete a Phase One or Two ESA on a piece of land, that they should have something in writing between them and the consultant which clearly identifies insurance amounts, associated liability, and who can rely on those reports.  Quite often, and this goes back to my previous post (When Phase One ESAs Get Weird), people will have hand me down reports that might be technically valid and current, however they are not the owners of those reports, and nor do they have third party reliance from the consultant to use them for the purpose of making business decisions.  This can get complicated when trying to use them at banks to get financing, or when trying to sell that property in the future.  In addition, if you have someone else’s reports, and you did purchase some land thinking it was ‘clean’, because of those reports and without written reliance, and later find out that its contaminated, you will not have that protection…that contamination will be your responsibility.

In summary, here are some key items to consider when commissioning this type of work:

  • Always make sure you have reliance from your consultant on your ESA reports (in writing);
  • Don’t rely on old reports done for someone else (they are worth the paper they are written on if you don’t have that authorization to rely);
  • Regardless of whether or not a Phase One is a condition needed to close a deal, consider doing one to identify any potential unknown environmental liabilities you could be faced with; and
  • Always make sure your consultant is qualified and your ESA reports are done to the applicable standards (CSA or ASTM).

So, like the banker and the mattress situation, consider the Phase One process not as a condition to be met as a part of your deal, but as a form of protection and insurance to make sure your investment and business are safe.

If you have any questions, please do not hesitate to email me at northenvironmental@gmail.com

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