In many real estate transactions, a seller/landlord may have a recent Phase I and offers to provide a purchaser/tenant a reliance letter. There are a few issues to consider when deciding how to proceed.
- Contractual Reliance—A reliance letter is merely a grant of a contractual right by the Phase I consultant for the purchaser/tenant to rely on the Phase I. Consultants handle reliance letters in various ways. Some have the purchaser/tenant sign an agreement which lays out the terms of reliance and others simply note in the reliance letter the terms of reliance. Either way the reliance normally will be limited by the terms of the original engagement, so if the seller/landlord agrees to a liability limitation of the fee for completing the Phase I then that will be the limit for the purchaser/tenant. There are times when the environmental consultant will agree to a higher liability limitation for a fee. Also, some consultants charge a reliance fee in any instance.
- Seller’s/Landlord’s Consultant—A purchaser/tenant must keep in mind that the Phase I was performed for the seller/landlord, who has a different end goal than the purchaser/tenant. In most instances one would expect the Phase I to come to the same conclusions regardless of who is the client of the consultant, but items such as recommendations could vary. Also, if the purchaser/tenant is borrowing money to purchase the property the lender may not agree to the use of the consultant as the company may not be on the lender’s approved list. The purchaser/tenant should consult with its counsel and others about the consultant if not familiar with the company and also confirm that the consultant is acceptable to its lender before agreeing to accept the reliance letter.
- User Provided Information—One critical item to keep in mind when considering whether to accept a reliance letter is that the reliance letter alone does not satisfy the “all appropriate inquiries” requirement for the defenses to liability. As noted in our February 7, 2022, post entitled “User Provided Information,” the purchaser/tenant is required to provide certain information either to the Phase I consultant for inclusion in the report or to memorialize it separately. The required information is: (1) an environmental liens and activities and use limitations search, (2) the specialized knowledge of the proposed purchaser or tenant, (3) the relationship pf the purchase price to the fair market value of the property if it were not contaminated, (4) commonly known or reasonably ascertainable information regarding the property, (5) specialized knowledge of the User, and (6) reason for performance of the Phase I. The concern with completing this independently is making sure that it is retained with the Phase I in case it is ever needed for the defense to liability. The better practice is to have a hybrid reliance letter and Phase I addendum where the consultant indicates that the purchaser/tenant may rely on the Phase I as a user and incorporate a user questionnaire completed by the purchaser/tenant.
Note that the Phase I prepared for a seller/landlord may not have included an environment liens and activities and use limitations search since the Seller/landlord is not trying to complete “all appropriate inquiries” to qualify for defenses to liability. The purchaser/tenant will need to make sure it is included from a current title commitment or possibly pay the Phase I consultant to obtain a third-party search for an additional fee. Also, the purchaser/tenant needs to remain focused on the components of the Phase I that must be completed within 180 days of acquiring title or the leasehold interest as discussed in our April 11, 2022, post entitled “ASTM Standard E 1527-21 Analyzed (Part 4): Report Viability and 180 Day Components.” It may be that one or all of such components will need to be updated, but that can be some additional add-ons for the addendum. Of course, if the components need updating then the costs get much closer to that of a new Phase I so the purchaser/tenant may want to consider engaging its own consultant to simply complete a new Phase I that takes the reliance on the seller’/landlord’s Phase I off the table.