Concern over environmental contamination and the potential health hazards it poses to the public is on the rise. Federal and state regulation efforts have stepped up, and new chemicals of concern are posing new and unanticipated problems. Now more than ever, prospective commercial real estate buyers need to take steps to protect their interests from incurring liability for environmental issues. On the buyer side, this means early assessment of the environmental conditions at, beneath, and adjacent to the commercial site they are considering for purchase.
Environmental liabilities associated with a commercial site can result from, among other things, the type of historical operations that were on the site and on adjacent properties. A new owner of a site contaminated by a prior owner or tenant is generally responsible, along with the prior owners and operators, for the environmental liabilities. There are steps a prospective buyer can take to mitigate its exposure, but that is a topic for another day. (See, e.g., January 2023 Blog Post ). For present purposes, suffice to say that the prospective purchaser conducting fulsome due diligence, including a Phase I Environmental Site Assessment (“Phase I”), early in the transaction is critical.
While a seller of a commercial property has a duty to disclose facts affecting the value or desirability of the property, including whether there has been any release of hazardous substances, a buyer should perform an early investigation of the property’s environmental condition. This includes a review of both the current and past uses of the property as part of a Phase I conducted by an environmental consultant. While the environmental consultant can use data from site inspections, historical records, interviews, and past regulatory actions to evaluate the likelihood of environmental contamination on, under, or emanating from or to the property, work beyond the Phase I is often needed. Indeed, depending on the Phase I findings, further investigation, including invasive soil, soil gas, surface water, groundwater, or ambient air testing as part of a limited Phase II Environmental Site Assessment (“Phase II”), may be warranted. The review of the Phase I report by a trained environmental attorney, as well as the scope, intent, and ultimate results of a Phase II, is recommended to best assess the nature and extent of potential environmental liabilities and if warranted, future remediation costs associated with acquiring the property.
The information garnered from a Phase I and, if conducted, Phase II, will help inform other key terms of a purchase and sale agreement for the commercial property. For example, a buyer should generally require a seller to represent and warrant that there has been no release of hazardous materials on, under, or around the property and that the seller and the property comply with all applicable environmental laws. A buyer should also require an indemnity from the seller against any liability to third parties for cleanup costs and other damages associated with hazardous substances or other environmental conditions at the property. A buyer may also consider the availability of an environmental impairment insurance policy or endorsement if proceeding with the transaction despite some environmental challenges is deemed warranted.
Long story short, now more than ever, environmental due diligence by experienced environmental consultants and counsel is a critical component of a contemplated commercial real estate transaction. With a limited window of time to conduct due diligence, environmental assessments should be done as early in the proposed deal process as possible to allow sufficient time to perform a fulsome environmental investigation. Excluding environmental due diligence in a rush to get a deal done or not allowing environmental issues to “tank the deal” is often a recipe for disaster as environmental liabilities can be massive and addressed, or avoided, if known before a deal closes.
If you are contemplating acquisition or disposition of real estate that might have environmental issues, or if you are a lender involved with such transactions, please feel free to contact me with any questions or requests for assistance.
ABOUT WARREN KOSHOFER
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Warren A. Koshofer is a principal in the firm’s Commercial Litigation, Environmental, and Insurance practice groups. Mr. Koshofer focuses his practice on business, commercial, environmental, insurance, intra-company, real estate, and toxic tort construction-related litigation matters, as well as on due diligence, indemnification, and risk management relating to commercial or industrial real estate transactions or company mergers and acquisitions involving such real estate assets and/ or potential environmental liabilities. He represents clients at the state, federal, trial, and appellate court levels, including Fortune 100 companies, partnerships, and high-profile individuals. He also handles matters before administrative law courts, regulatory agencies, and alternative dispute resolution forums nationwide. Mr. Koshofer has consistently been recognized by Martindale Hubbell as an AV (preeminent) peer-rated attorney and by Super Lawyers and Who’s Who in Law.