Seller Refusing to provide Phase I ESA

[Erik Nizenkoff]

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  A little outdated, but ok...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?

[Joel Owens]

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.