Bar News - September 16, 2011
Environmental & Natural Resources: Due Diligence: Considering Environmental Aspects of Business Real Estate Purchases
By: Sherry Burnett Young
When your clients are in search of that perfect place for their business, theyíll find that open space is harder to come by these days. Owners must often consider redeveloping properties instead of having the opportunity to start fresh on virgin soil ("green fields"). Old properties (sometimes called "Brownfields") bring a higher risk of contamination from past activities at the site. But that should not deter a smart businessperson from making a sound investment. They just need a little advice. When you are advising your clients on the pitfalls of potential liability for contamination, here are some helpful tips:
|Sherry Burnett Young
Before they hang their sign out on that perfect piece of real estate, some environmental "due diligence" is in order. Donít let them be the buyer who closes the deal without doing an Environmental Site Assessment (ESA) first. What they donít know can cost them dearly. The law is complicated, but its bottom line is clear. If a property owner buys a property without taking "All Appropriate Inquiry" regarding potential environmental contamination, then the new owner assumes all liability of any contamination discovered in the future at the property. So urge them to hire a reputable environmental professional (EP) to do an effective "Phase I" ESA. If the ESA uncovers "Recognized Environmental Conditions" (RECs), with the help of the EP, you will need to determine how serious the risks are, (and in some cases you may also need to consult with an environmental attorney) in order to navigate the potential liability risks and make smart decisions to allow your clients to purchase that property AND protect themselves from liability for historical contamination.
First, make sure you hire an EP that is properly licensed and with the appropriate experience to be qualified to do an ESA. Your EP will start by walking the property looking for any suggestions of possible contamination. Oil puddles, distressed grass, drums, metal, junk and debris are all signs of a potential hazard below the surface. The EP will also investigate the historical uses of the property, as well as the properties in the vicinity. Could anything nearby contaminate your ground water?
1. Thoroughly investigate the property (with the help of an EP) before the purchase, completing "All Appropriate Inquiry" (AAI) in accordance with the standards set forth in CERCLA.
2. If you should discover any environmental conditions (RECS) affecting the property, make sure your client thoroughly understands the implications and risks, and potential costs of remediation.
3. Make sure that a Phase II ESA is completed in the event that the EP reasonably recommends it, in order to satisfy the AAI standard.
4. Negotiate on behalf of your client to allocate risk between buyer and seller, often by adjusting the purchase price. 5. Should contamination later be discovered at your clientís property that was not unearthed in the ESA, you may be faced with defending your client against the costs and burden of cleaning up the contamination. If youíve done your homework carefully, then the law is on your side.
In addition to reviewing the property, your consultant will interview current and past owners to learn if there is any knowledge of historical environmental conditions, undertake a standardized data base search and local records review to learn of any spills or hazardous waste sites in the vicinity. Importantly, the consultant must also identify any "data gaps" in the information it reviews, as well as identify any RECs.
If there are RECs, the consultant will likely recommend a scope of work for a "Phase II" ESA, which entails taking samples of the soil and/or groundwater to determine whether there is contamination present at the property. The Scope of Work should be focused on the issues identified in the Phase I report. If the samples come back clean, thatís very good news. If contamination is found, further investigation is required to fully understand the source and the scope of the problem.
There are strict federal standards regarding environmental site assessments. If those standards are not fully conformed to, the ESA report may be worthless, and no liability protection can be achieved. The standards were developed under the "CERCLA" or "Superfund" law which holds a landowner "strictly liable" for cleaning up contamination on its property UNLESS the owner qualifies as a "Bona Fide Prospective Purchaser" or an "Innocent Landowner" under the statute. In other words, if you donít ensure that your client carefully and fully complies with the proscribed environmental due diligence process, you might be exposing your client to considerable liability down the road.
The local commercial banker used to walk away from transactions involving contaminated property, but times have changed. Because "green space" is at a premium, and as banks have become more familiar with the environmental due diligence process, they are more likely to consider lending for a transaction if the liability or exposure is well defined. This is where you can assist your clients by helping them and the lender better understand what the environmental liability risks are, and how they can be managed and quantified. You can also assist in allocating the risk of known contamination between the seller and the buyer. Adjusting the purchase price is often the easiest means of allocating risk, but you can also create escrow ("holdback") accounts or other creative mechanisms.
In conclusion, few things can be more important to your client during property purchases than the due diligence you or an environmental attorney do for him or her. Your client will thank you later if you manage to save them from investing in a property that will only prove a liability in the long run.
Sherri Burnett Young is President and co-founder of Rath, Young and Pignatelli in Concord. She may be reached at firstname.lastname@example.org.