February 8, 2016
What Is Environmental Due Diligence And Why You Want It
Due diligence is defined in the dictionary as: “reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something”
When it comes to commercial real estate, environmental due diligence is one of the legal requirements for buying and selling property. While it is easy for buyers and sellers to treat environmental due diligence as a box to be checked in a transaction, it can be helpful to step back and consider the purpose of this step in the process and how it can help a property buyer.
The biggest benefit of environmental due diligence for property owners is protection from liability for environmental risks. The most costly environmental risk with commercial properties is that the property contains environmental liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). CERCLA liability has been known to strike fear into the hearts of commercial real estate owners, buyers, lenders, insurers and anyone else associated with a transaction.
CERCLA gives regulators broad authority to fine property owners and to require them to remove hazardous materials from properties at their own expense, even if the owner is not responsible for the presence of the materials. CERCLA can be imposed retroactively as well, meaning an owner can be held responsible for environmental issues that occurred before the legislation was enacted. The new owner can also be responsible for all the studies needed to define and determine the extent of contamination, and to create the plan for removing the contamination. The costs can easily run into the millions. This is why it is important that environmental due diligence is taken seriously and is performed in accordance with all applicable local, state and federal regulations.
Now for the good news. Properly performed environmental assessments can protect buyers from CERCLA liability, even if contamination is found after the purchase. The new owner must be able to demonstrate that all appropriate inquiries were undertaken to to understand the status of the property prior to acquiring it. This practice has come to be known as AIA. To go all legal on you, the U.S. EPA has defined all appropriate inquiries to mean a Phase I Environmental Site Assessment prepared in compliance with ASTM Standard E1527-05. 40 C.F.R. Part 312. Thus this assessment is where most due diligence investigations start.
While CERCLA liability is the 900-pound gorilla in the environmental due diligence process, there are other benefits that can help property buyers. Short of CERLCA-level issues, other findings can help buyers confirm or revise the value of the property they are buying. Some issues may be significant enough to scuttle a deal, while other issues may allow buyers to adjust the purchase price, or to negotiate an indemnity to shift financial responsibility for an environmental risk. It may also be possible to purchase environmental insurance for sufficient financial protection.
Due diligence is important. Done right, it can help real estate buyers protect themselves from expensive compliance obligations and ensure that they are getting the best value for their investment.