Evaluating Environmental Risks in a Commercial Real Estate Purchase
Today, environmental concerns have become a part of common consciousness, but with respect to commercial real estate transactions, they reached the forefront some fifty years ago and have evolved since. Due to spills and disposal practices, hazardous and toxic chemicals have ended up in the soil and groundwater. The resulting contamination has the potential to compromise drinking water, impact indoor air quality, and spread to adjacent properties
Prospective Buyer Concerns
Under federal and state environmental laws, a real estate owner can be held liable for the entire cost of cleaning up existing contamination, even if the current owner had nothing to do with causing it. Such contamination may have even occurred through permissible activities, under weaker environmental laws that were in place in the past. Operational practices potentially leading to contamination were generally unregulated until the 1970s. Furthermore, an owner discovering contamination post-purchase can’t then avoid liability simply by selling the property.
Potential commercial real estate buyers should exercise scrutiny in assessing whether contamination may be present. By making a mistake when purchasing a property, a buyer could possibly be liable for the cost of an environmental disaster that they did not know existed, with clean-up costs potentially reaching very substantial levels.
What is known as a Phase I Environmental Site Assessment (ESA) is a comprehensive investigation by an environmental professional as to the potential for contamination. A Phase I includes a review of available public records regarding historic use, interviews with persons familiar with the property and surrounding area, and site inspection. A Phase I finding doesn’t necessarily mean that there is contamination, just that it is possible.
Where the Phase I identifies a significant concern as to the presence or threat of release of contamination to the environment, purchasers may then want to conduct a Phase II ESA. The Phase II involves sampling of soil, groundwater or air. Conducting a Phase II ESA can help confirm the existence, and sometimes the extent of any contamination, which can help provide greater certainty regarding the nature and extent of the liability.
Environmental regulations offer statutory defenses to prospective purchasers provided that the purchaser can prove it conducted “all appropriate inquiry,” showing that it made reasonable inquiries to determine whether the property was contaminated prior to the acquisition. To qualify, the innocent owner must demonstrate that they did not cause the contamination; that the contamination occurred prior to their acquiring the property; that they made all appropriate inquiries into the previous uses and ownership of the facility; that they took all reasonable steps to stop any continuing release and limited exposure to a previously released hazardous substance discovered on the property; and finally that they not be affiliated with any person who is potentially liable for the contamination at the facility through any familial, contractual, or corporate relationship.
In considering a purchase of commercial real estate, amongst an array of other concerns, it’s important to evaluate the likelihood of possible contamination, and to investigate those risks where they may exist, to the extent necessary to determine the presence of contaminants and the financial risks they may pose, before taking title. Environmental consultants, experienced attorneys, and experienced commercial Realtors can help guide you through this process.