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Posted over 1 year ago

Importance of Environmental Due Diligence

When purchasing commercial properties, it is fairly common to conduct physical due diligence and assessments, as well as inspections, but environmental due diligence is another important aspect. Some commercial properties have buried fuel tanks or the like, when for example, it was used as a gas station decades ago. Or, there may be a minor contaminant in the land, from a prior use, or seeped over from a neighboring properties.

Common Mechanisms to Conduct Environmental Due Diligence

Environmental due diligence usually consists of, at a minimum, a Phase I environmental site assessment, and if recommended a Phase II environmental site assessment. Most prospective buyers obtain a Phase I, whether because their lender requires as much, or for the buyer’s own protection. A Phase I researches the current and historical uses of the subject property, reviews property records, and usually entails owner interviews and a site visit. The Phase I will contemplate whether there is current or potential contamination. A Phase I will conclude that no further assessment is recommended or that further assessment should be conducted.

If a Phase I concludes that further assessment is recommended, a Phase II is usually conducted. A Phase II is expensive to conduct - approximately three times the price of a Phase I - and delves much deeper than the Phase I. The Phase II will take soil samples and drill at the property to perform chemical analysis. The analysis will test for contamination by way of hazardous substances, petroleum, etc.

Remediating Contamination

If the Phase II concludes that contamination is present, remediation will likely be recommended. The type of remediation depends on the contamination, and the pricing for same can vary greatly. Oftentimes, the buyer or seller must report the contamination to the proper State-body, and follow strict guidelines during the remediation process.

Reasons to Conduct Due Diligence

The cost to remediate environmental issues can quickly add up to the six-figures. Further, if a person suffers an injury as a result of contamination at the property, the owner can be liable. Thus, it behooves a prospective purchaser to take steps to limit their liability. It is advisable to consult with an environmental attorney. The prospective purchaser can ensure that the Purchase and Sale Agreement, and any amendments, adequately protect their rights. Additionally, the prospective purchaser can lay down the groundwork for qualifying for the Bona Fide Prospective Purchaser defense. Finally, while the buyer and seller are exchanging documents, the buyer can request the seller’s insurance policies. This may prove valuable because those insurance policies, if they are old enough, may include coverage for environmental issues, and at the least, provide an insurance contact if the buyer seeks to have an environmental claim assigned.

How are you conducting your environmental due diligence? What additional steps do you take?



Comments (1)

  1. @Michael Margarellaundefined