OVERVIEW: An environmental conditions contingency specifies that Buyer’s obligation to close on the sale of the property is subject to a satisfactory report with respect to the environmental conditions affecting the property. Relevant information is typically obtained through a Phase I Environmental Assessment performed by a licensed and qualified environmental testing specialist. Environmental contingencies are important in any type of purchase, but understandably increase in their relevance when there is a history of an environmentally disfavored use of the property (ex: service station with an underground storage tank) or when the intended future use of the property is environmentally sensitive. It should be noted that the importance of and need for this contingency is tied to potential liability for environmental contamination, even if such contamination occurred prior to a purchaser’s ownership of the property.
SUGGESTED LANGUAGE (BUYER): It is advised that most buyers should include some form of an environmental contingency in a purchase agreement, although its relevance may be substantially reduced in some settings. It should be noted that a purchaser must anticipate the cost of (and be willing to pay for) the Phase I Assessment or the contingency serves no apparent purpose. Furthermore, a purchase agreement should require Seller to provide all prior environmental reports with respect to the property, a review of which may aid Buyer in determining the need for another report and this contingency. Suggested language of an environmental contingency might read as follows:
“Purchaser’s obligations under this Agreement are contingent upon its receipt of a satisfactory report regarding the environrmneal conditions directly and/or indirectly affecting the Property. The satisfactory nature of any such report shall be determined in the sole discretion of Purchaser. Purchaser shall have no less than___ days following the execution of this Agreement to obtain and review this report. In the event Purchaser determines that the report is not satisfactory, Purchaser may provide notice to Seller within this ___ day period and temrinate this Agreement.”
SUGGESTED LANGUAGE (SELLER): If an envrionmental conditions contingency is demanded by the purchaser, Seller should seek to limit Buyer’s discretion in determining the satisfactory nature of the Phase I report. Furthermore, it would be beneficial to disclaim any known environmental conditions. For example:
“Purchaser’s obligations under this Agreement are contingent upon its receipt of a satisfactory report regarding the environmental conditions directly affecting the Property. The satisfactory nature of any such report shall be determined in the reasonable judgment of Purchaser and in consideration of similarly situated properties. The following conditions shall not be considered in Purchaser’s determination of the satisfactory nature of the report and/or property: ______, ______, _______. Purchaser shall immediately obtain such report and in the event that Purchaser does not provide notice to Seller of its election to exercise its rights pursuant to this paragraph within ___ days from the executon of this Agreement, this contingency shall be deemded waived by Purchaser.”