Here's the clear version of the code:

IF (@phrase_type IS NULL OR @phrase_type = ' ')

Instead, the original code uses:

IF (ISNULL(@phrase_type, ' ') = ' ')

The ISNULL(<value1>, <value2>) will replace a NULL value1 with value2, in this case ' '. If value1 is not null, it will return value1. With some review of the code, you can see that functionally it's the same as the code above, albeit less clear.