Environmental Due Diligence – An Absolute Necessity in Commercial Transactions

When making a commercial real estate purchase, hidden environmental liabilities can be devastating, costing up to millions of dollars in some cases. If you’re about to make a major property transaction including a purchase, sale, lease, or refinancing, then environmental due diligence will be a key tool for managing risks and avoiding liabilities.

Environmental due diligence is a formal process that assesses real estate for potential risk of environmental contamination, such as soil or groundwater contamination. Standards for conducting environmental due diligence are set forth by the Environmental Protection Agency (EPA). Environmental professionals determine the extent and type of assessment warranted, which varies based on the property.

Are You at Risk for Costly Liability?

The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) establishes a process to determine who is liable for hazardous substances. The act even authorizes regulators to fine property owners and require the removal of hazardous materials at the owner’s expense, even if the owner is not responsible for the contamination. This means that the owner may be held liable by simply owning the property no matter how innocent the purchaser may be.

Environmental Due Diligence Can Protect You

Proper assessments made through environmental due diligence can protect you from the potentially crippling environmental liabilities under CERCLA, even if contamination is found after the purchase is made. Protection under the CERCLA is for owners, innocent landowners, and bona fide prospective purchasers. To demonstrate qualification for one of these party protections, this means conducting environmental due diligence through a Phase I Environmental Site Assessment (ESA), which is where most due diligence investigations begin.

A Phase I ESA investigates the current and historical uses of a property to identify potential environmental risks. Continuing obligations must be followed during property ownership. Including the exercise of appropriate care with respect to hazardous substances and complying with land use restrictions.

Aside from CERCLA, be sure to follow any laws set forth by state, local, or federal regulations for assessment requirements and liability protection. It is worth noting that hiring a well-qualified environmental consultant and carefully defining your goals with the consultant is crucial for ensuring a proper assessment. Additionally, conducting due diligence early during the acquisition process is necessary because the discovery of post-acquisition liabilities holds the current owner responsible for remediation.

Making the Most of Environmental Due Diligence

Alongside liability protection, environmental due diligence is a useful tool for Buyers. Buyers can ensure they are getting the best investment value for a property and structure their acquisition based on what the assessment reveals. For instance, if contamination is found on the property, a Buyer can negotiate a commensurate reduction in the price of the real estate or decide not to purchase.

A Seller that is faced with the realization that their property is contaminated may be able to mitigate the potential reduced value of their sale, as well as the financial cost of remediation, by locating old insurance policies that do not contain an effective pollution exclusion.  In certain instances, there are state and federal reimbursement programs existing for property owners who are required to spend money to remediate contaminated sites.

So, do your due diligence, do it early, and do it well to protect against costly environmental liability and use as a tool to preserve your property value in a real estate transaction. For questions, speak to one of our Sioux Falls, Sioux City, or Omaha attorneys today.