Who Pays for a Phase 1 Environmental Site Assessment?

When a commercial property changes hands, the Phase 1 Environmental Site Assessment (ESA) is a standard part of due diligence. One of the first practical questions buyers, sellers and brokers ask is simple: who is actually responsible for paying for it?

Why the buyer usually pays

The Phase 1 ESA exists to protect the party taking on ownership and long-term environmental liability. Under the federal Superfund law (CERCLA), a new owner can be held responsible for contamination they did not cause. The law offers defenses, such as the innocent landowner and bona fide prospective purchaser protections, but a buyer can only claim them if they conducted All Appropriate Inquiries before buying, which in practice means a Phase 1 ESA to the ASTM E1527-21 standard. Since that protection benefits the buyer, the buyer is the one who commissions the report and wants it addressed to them.

There is also a reliance issue. A Phase 1 report is addressed to a specific party who is entitled to rely on it. If the seller ordered the report, the buyer may not have the legal right to rely on it unless the firm issues a reliance letter. That is a second reason buyers prefer to order their own report rather than inherit one commissioned by the other side.

Who pays in different scenarios

The lender's role

Even when the buyer pays, the lender is often the reason the Phase 1 happens at all. Most commercial lenders require a satisfactory Phase 1 ESA as a condition of financing to protect their collateral, because a contaminated property is weak security for a loan. The lender typically wants the report completed by a qualified firm and addressed so that the lender can rely on it. Government-backed loans are stricter still: SBA 7(a) and 504 programs have specific environmental due-diligence requirements, which is why a Phase 1 ESA for an SBA loan is often non-negotiable. The borrower, almost always the buyer or refinancing owner, pays regardless of who requires it.

A practical implication: because the lender's reliance matters, coordinate with your lender before you order the report. Confirm which firms the lender accepts and how the report should be addressed, so you do not pay for a report the lender then rejects.

When the seller pays or shares the cost

• Pre-listing diligence. A seller may commission a Phase 1 before going to market to surface issues early and avoid surprises that could break a deal later.
• Negotiated concession. In a competitive situation, a seller might agree to pay for or credit the cost of the Phase 1 to keep the deal moving.
• Known history. On a property with an obvious past use that buyers will scrutinize, a seller-funded report can speed the sale, though buyers will still want reliance rights or their own report.
• Lease transactions. On some long-term leases of industrial space, the parties negotiate who funds environmental due diligence, though it is less routine than in a sale.

Even when a seller pays, a cautious buyer often still wants to control the engagement so the report is addressed to them and their lender. The dollar figures involved are modest relative to the deal; see what a Phase 1 ESA costs for current ranges. That relatively small cost is one reason buyers rarely fight hard to shift it to the seller, since controlling the report is worth more than saving the fee.

What about reliance letters?

If a report already exists, say the seller or a prior buyer commissioned one, a reliance letter from the environmental firm can let an additional party rely on it. This can save time and money, but it comes with caveats. The report must still be current under the 180-day window for All Appropriate Inquiries, the firm must agree to extend reliance, and your lender must accept it. On an older or borderline report, ordering fresh is often cleaner than stacking reliance letters on a document you did not control.

What if the deal falls through?

This is a real risk the paying party carries. If the buyer orders and pays for the Phase 1 and the transaction collapses, the buyer generally still owes for the work performed, and the report belongs to the party it was addressed to. That is simply the cost of doing diligence, and it is one reason buyers sometimes try to defer the Phase 1 until other contingencies clear. The counter-pressure is the closing timeline: wait too long and the two to four week turnaround can jeopardize your date. Most buyers accept the modest sunk-cost risk in exchange for keeping the schedule safe. For businesses, the fee is typically treated as a transaction or due-diligence expense, though you should confirm treatment with your accountant.

How to handle it in your deal

Settle payment and reliance in the purchase agreement, not after the fact. Spell out the following so there is no scramble later:

• Who orders the Phase 1 and who pays for it.
• Who the report is addressed to, including the lender.
• Whether the other party gets reliance, and on what terms.
• What happens to the timeline and the deal if the Phase 1 identifies a Recognized Environmental Condition.

If you are not sure the transaction even requires an assessment, start with whether you need a Phase 1 ESA. Getting these terms right up front avoids the common headache of a lender asking for a report addressed to a party who never ordered it, days before closing.

Frequently asked questions

This is general guidance, not legal advice. Payment and reliance terms vary by deal and should be confirmed in your purchase or loan agreement. A Phase 1 ESA should follow ASTM E1527-21 and be performed by a qualified environmental professional.