Environmental and ESG in Commercial Deals: Phase 1 Reports, Asbestos, and Sustainability Clauses Explained

If you’re buying, selling, leasing, or refinancing a commercial property, environmental risk and ESG obligations can land right in the middle of your deal. Sometimes it’s obvious (a former industrial site, an older warehouse, a floodplain location). Other times it’s hidden in the paperwork: a lender insisting on a Phase 1 Environmental Report, an asbestos register that’s out of date, or “green” lease clauses that quietly shift cost and responsibility onto you.

The good news is you can manage most of this with the right due diligence and clear contract wording. The goal is simple: you want to understand the risk, price it properly, and make sure the legal documents say exactly who does what, and who pays.

This guide breaks down the 3 issues you’ll see most often in UK commercial deals: Phase 1 reports, asbestos, and sustainability clauses.

Why environmental and ESG issues matter more in commercial property

Commercial property tends to come with bigger commitments and longer timelines. You might be signing up to a 10-year lease, buying an asset you plan to hold for decades, or taking on a full repairing and insuring obligation that makes you responsible for the building fabric and compliance.

Add in the reality that lenders, insurers, investors, and major tenants are increasingly focused on environmental risk and ESG reporting, and you can see why these topics now show up in “standard” transactions.

A strong legal process helps you keep control. If you want a clear picture of how the overall transaction is structured, start with commercial conveyancing, because that’s where due diligence and risk allocation usually live.

Phase 1 Environmental Reports: what they are and why lenders ask for them

A Phase 1 Environmental Site Assessment (often called a Phase 1 report or “ESA”) is a non-intrusive, desk-based assessment. It pulls together information about the site and surrounding area to identify potential environmental concerns.

A typical Phase 1 report can include:

• Historic mapping and past land use (what the site used to be)

• Local authority and regulator data

• Landfill, waste, and industrial activity nearby

• Pollution incident records

• Flood risk indicators

• Ground stability factors

• The likelihood of contamination based on the site history

What a Phase 1 report does for you

A Phase 1 report is mainly about early warning and decision-making. It helps you decide whether you need:

• Further investigation (Phase 2 intrusive testing)

• Stronger contractual protections (warranties/indemnities/conditions)

• A price adjustment

• Extra time built into the timetable

• A different property altogether

Lenders often want a Phase 1 because they don’t want to lend against a property that could be hard to sell, hard to insure, or potentially expensive to remediate later.

If you’re comparing this to “normal” property searches, it helps to understand what the baseline searches do. Athi Law’s guide to environmental searches explains the sort of risks that standard search products are designed to flag.

What a Phase 1 report does not do

A Phase 1 report does not involve drilling, soil sampling, groundwater testing, or lab analysis. If the Phase 1 identifies credible risk, it may recommend a Phase 2 investigation.

So if someone tells you a Phase 1 “clears” the site, be careful. It’s a screening tool, not a guarantee.

Environmental searches vs Phase 1: why you often need both

In many commercial transactions you’ll see environmental searches ordered as part of the wider search pack, alongside local authority, drainage, and other checks. Environmental searches are usually quick and relatively cost-effective, but they’re often broad-brush.

A Phase 1 report is usually more tailored to the site and more helpful for lender comfort.

Think of it like this:

• Environmental search: fast flags and risk indicators

• Phase 1 report: deeper context and clearer next steps

Flood risk is a good example. The Environment Agency’s national flood risk assessment indicates around 6.3 million properties in England are in areas at risk of flooding from rivers, the sea, and/or surface water. That can affect insurance, business interruption planning, and even the property’s long-term value.

If you’re dealing with a transaction where flooding is a key concern, Athi Law’s article on environmental and flood searches helps explain why those results matter and how they can influence the deal.

Contaminated land: where the legal and commercial risk can land on you

Contaminated land issues can arise from obvious sources (fuel storage, chemical processes, heavy industry) and less obvious ones (historic “made ground”, old waste disposal, small workshops, or neighbouring activities).

In England and Wales, the statutory contaminated land regime sits under Part IIA of the Environmental Protection Act 1990, supported by statutory guidance.It exists to identify and remediate land that poses a significant risk to health or the environment where other routes (like planning) won’t deal with it.

The real-world impact in a deal

When contamination risk appears, you’re normally thinking about:

• Cost: consultants, investigations, remediation, disposal

• Time: delays to completion or redevelopment

• Funding: lender conditions, retentions, or refusal to lend

• Use: restrictions on change of use or development

• Exit: harder resale, price chips, tougher buyer due diligence

This is why commercial due diligence isn’t just a formality. It’s the process that tells you what you’re really buying or committing to. Athi Law’s guide to title review, searches, enquiries and CPSEs is a solid overview of how environmental issues fit into the wider enquiry process.

Asbestos in commercial property: what you need to check before you commit

Asbestos is still a major issue in older commercial buildings. The Health and Safety Executive notes asbestos was widely used in buildings until it was banned in 1999, and it may be present in buildings built or refurbished before 2000.

Just as importantly, asbestos exposure remains a serious health issue in Great Britain. HSE information commonly references around 5,000 deaths per year from asbestos-related diseases, and HSE statistics report 2,218 mesothelioma deaths in 2023 due to past asbestos exposure.

The key point: asbestos risk is about management and liability

Asbestos doesn’t automatically mean you can’t buy, lease, or refinance a building. In many cases, it’s manageable. The commercial problem is:

• Is asbestos present?

• Is it in good condition or likely to be disturbed?

• Is there an up-to-date asbestos register and management plan?

• Who is responsible for compliance and cost?

Athi Law’s article on commercial property surveys explains why asbestos checks sit alongside building condition surveys and other practical inspections, especially if you’re planning alterations or fit-out works.

The “duty to manage” and why lease wording matters

In commercial settings, the duty to manage asbestos generally sits with the person in control of maintenance and repair, but in leased premises that can depend heavily on the lease structure and who controls common parts or the building fabric.

Before you sign a lease (or exchange contracts on a purchase), you should be asking:

• Do you have an asbestos management survey (not just a vague reference)?

• Is there a live asbestos register you can see?

• Who is the dutyholder in practice (landlord, tenant, managing agent)?

• Who pays for ongoing surveys and any required works?

• What happens if your fit-out disturbs asbestos-containing materials?

This is where proper lease advice matters. If you’re negotiating terms or trying to understand your responsibilities, commercial lease advice is the right starting point.

Sustainability clauses: what they are (and what they can do to your costs)

Sustainability clauses—often called “green lease clauses”—are increasingly common in commercial leases. They’re designed to improve environmental performance, support ESG reporting, and manage building efficiency over the term.

You’ll commonly see clauses covering:

• Sharing energy and water consumption data

• Energy efficiency upgrades and cooperation

• Waste and recycling arrangements

• Minimum standards for alterations and fit-outs

• Requirements around plant, heating/cooling, and lighting

• Targets linked to building performance or landlord ESG commitments

Soft clauses vs hard clauses

Not all sustainability clauses are the same. Some are “soft”, meaning they focus on cooperation and information sharing. Others are “hard”, creating enforceable obligations and allowing costs to be recovered (sometimes through service charge).

As a tenant, you should be cautious about:

• Open-ended upgrade obligations

• Clauses that allow landlords to recover major works through service charge without clear limits

• Requirements that interfere with trading or fit-out timing

• Data sharing that exposes sensitive operational information without safeguards

As a landlord, you’ll often want:

• Access to consumption data for reporting and performance improvements

• The ability to implement building-wide improvements

• Tenant cooperation to keep the asset lettable and compliant

Common sustainability clauses you’ll actually see (and what to watch for)

1) Data sharing and metering

What it says: You provide energy/water usage data, meter readings, or agree to smart metering.

Watch for:

• Whether installation costs are pushed onto you

• Whether reporting is proportionate

• Confidentiality and data handling

2) Alterations and fit-out standards

What it says: Any alterations must meet certain efficiency standards or align with landlord sustainability policies.

Watch for:

• Restrictions that make it hard to adapt the space

• Approval timelines and professional fee requirements

• Hidden costs in “specification” demands

3) Landlord improvement works and access

What it says: The landlord can carry out energy efficiency works and you must allow access and cooperate.

Watch for:

• Clear notice periods

• Limits on disruption

• Any right to compensation or rent suspension where works impact trading

4) Service charge recovery for sustainability projects

What it says: Certain sustainability improvements can be recovered via service charge.

Watch for:

• Whether there’s a cap

• Whether projects are properly defined

• Whether the clause is too broad and future-proofed in a way that leaves you exposed

Where these issues sit in the deal timeline (and when you can still influence them)

Heads of terms stage

This is where you can often protect yourself most effectively, because you can set the commercial ground rules early:

• Who pays for reports (Phase 1, surveys, asbestos)

• What happens if serious risk is found

• Whether sustainability clauses are included, and how strict they are

• Timetable allowances for additional investigations

Athi Law’s guide to heads of terms to completion is a helpful reference for what should be agreed before the legal drafting gets too far.

Due diligence and enquiries stage

This is where your solicitor will typically review:

• CPSE replies and supporting documents

• Search results and report recommendations

• Asbestos documentation (registers, surveys, management plan)

• EPC and building documentation where relevant

• Contract protections (warranties, disclosures, indemnities)

To understand the role searches play across transactions, you can also look at understanding the role of searches in property transactions.

Drafting stage

This is where risk becomes legally allocated. You’ll typically see:

• Conditions (for example, dependent on satisfactory reports)

• Indemnities (where someone agrees to pick up certain liabilities)

• Limitations on liability and exclusions

• Lease obligations that continue for the full term

If you’re taking a lease, it’s also worth understanding how common drafting issues affect flexibility later on—like assignment, underletting, and consent. Athi Law’s article on assignments, underlettings and alienation clauses explains the practical pitfalls.

Don’t ignore rights and documents that can affect sustainability works

Even if your sustainability plan is simple—LED lighting, improved heating, EV charging, solar—your ability to make changes can be affected by legal rights and third-party consents.

For example:

• Rights affecting service routes (cables, drainage, ducts)

• Wayleave agreements giving utilities access and rights over equipment

• Restrictions in the title or lease that limit alterations

If the property has lots of third-party infrastructure, it’s worth understanding wayleave agreements because they can affect both your development options and your ongoing obligations.

Budgeting properly: the “real” cost of environmental and ESG issues

In commercial deals, the price or rent is only the start. Environmental and ESG issues can create extra cost through:

• Report fees (Phase 1, surveys, asbestos)

• Professional fees (consultants, engineers, specialists)

• Remediation or management works

• Insurance implications

• Delays (lost trading time, extended rent-free negotiations, extra finance costs)

• Service charge exposure in multi-let buildings

The point isn’t to fear these issues—it’s to see them early and allocate them fairly. Even a well-run site can still carry risk if the paperwork is weak or the lease wording is too broad.

If you want to explore the commercial legal services that sit around these transactions, you can also browse Athi Law’s commercial solicitors offering for a wider view of what’s covered beyond just conveyancing.

FAQs

Do you always need a Phase 1 report in a commercial transaction?

No. But you’ll often need one if a lender requires it, if the site has industrial history, if you’re changing use, or if searches flag environmental risk. A Phase 1 is most useful when it helps you make an informed decision early rather than reacting late in the deal.

What happens if a Phase 1 recommends a Phase 2 investigation?

A Phase 2 is intrusive testing (like soil and groundwater sampling) and can add cost and time. In practice you may renegotiate the price, seek contractual protection, agree a retention, ask the seller to investigate, or pause until you understand the true scale of risk.

If a building might contain asbestos, should you walk away?

Not automatically. Many buildings with asbestos are occupied safely, but you need proper documentation and a clear management plan. The key is understanding whether your plans (fit-out, refurb, maintenance) could disturb asbestos-containing materials and who carries the legal and financial responsibility.

Does asbestos only matter for very old buildings?

It’s most common in buildings built or refurbished before 2000, because asbestos use was banned in 1999 and may still be present in older stock. If the building falls into that category, you should assume asbestos could be present unless proven otherwise.

Are sustainability clauses just “nice-to-have” wording?

Not always. Some clauses are light-touch and cooperative. Others are enforceable obligations that can affect what you must do, how you operate the premises, and what costs can be passed to you. Always read them as carefully as repair, service charge, and alterations clauses.

Can sustainability clauses increase your service charge?

They can, depending on how they’re drafted. If the lease allows recovery of sustainability improvements through service charge, you’ll want clear definitions and limits so you don’t inherit open-ended future projects.

Speak to Athi Law before you sign or exchange

Environmental risk, asbestos, and ESG clauses can be managed—if you spot them early and get the documents right. If you’re buying, leasing, selling, or refinancing commercial property and you want clear advice that protects your position, contact Athi Law to discuss your transaction and the practical steps you can take before you commit.