When you’re a party to a commercial real estate transaction, whether buying or selling, it’s crucial to perform environmental due diligence on the property. Properties can have any number of hidden environmental liabilities that can cost a fortune, devalue the property, or turn into a legal nightmare.
What is environmental due diligence?
Environmental due diligence occurs when environmental professionals assess the property for all known or potential risks of environmental contamination. Such contamination may include:
- Hazardous building material on the property (e.g., asbestos, lead-based paint, etc.
- Actual or potential groundwater or soil contamination beneath the property
- Potential for contamination to migrate to the property from another
Due diligence experts will also investigate whether the property is compliant with state or federal environmental regulations.
How does performing environmental due diligence protect me?
Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), a buyer who performs satisfactory due diligence may avoid inheriting legal responsibility for the property’s environmental problems. Without due diligence, a new owner may be liable for resolving their property’s environmental issues even if they didn’t know about them or cause them.
Sellers can also benefit from environmental due diligence. Knowing any actual or potential contamination or compliance issues allows the seller to understand the property’s true value. The seller can thus respond knowledgeably to potential buyers who have performed their own environmental due diligence and seek a discounted price based on an unrealistic scenario.
Understanding the property’s environmental issues can help a seller avoid unpleasant surprises before closing. If a buyer learns of the environmental contamination prior to closing, they may decide to abandon the deal rather than renegotiate terms. With foreknowledge, the seller retains some degree of control over the situation, even if it means that they’ll be responsible for the environmental clean-up.
What kind of environmental due diligence is adequate?
Most due diligence investigations start with a Phase I Environmental Site Assessment (ESA). This investigation examines whether the current and historical uses of the property have impacted the soil or groundwater beneath it and might pose a threat to humans or the environment. If necessary, the party can follow up with a Phase II ESA, which will define the nature and extent of environmental liabilities, as well as explain the future actions necessary.
To be thorough, a party should also ask an environmental consultant to determine whether the property is compliant with state and federal regulations and whether it contains any hazardous building materials. In addition, prospective buyers should conduct a title search for any recorded environmental clean-up liens and confirm that there are not use limitations on the property.
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