Before purchasing real property, you should conduct “all appropriate inquiries”, also known as “due diligence”, to investigate and identify any potential environmental concerns which you may become liable if you become the property owner. Environmental concerns regarding real property include past uses, which may have left the land “contaminated” with hazardous waste, which may impact operations on the property and other nearby properties.
Environmental Due Diligence is an important part of any property acquisition. The importance of understanding environmental liability on a property being considered for purchase is very important and has significant legal implications. The current property owner may be held responsible for contamination detected on their property even if a previous owner caused it. The purpose of an Environmental Due Diligence is to evaluate potential environmental related liabilities associated with the property prior to acquisition.
Phase I Environmental Site Assessment (ESA) is a tool to determine if there are any recognized environmental conditions regarding the property being considered for purchase, as well as surrounding properties. Phase I ESAs should be performed in conformance with the American Society for Testing and Materials (ASTM) due diligence standards to properly identify potential recognized environmental conditions.
During the Phase I ESA, environmental specialists should review readily available topographic, geologic, and hydrogeologic information, as well as available historical land use activities at the property. This process also includes interview individuals with knowledge of the history of the property (including available owners, operators, and/or occupants), review available federal, tribal, state and local government records, conduct a visual inspection of the property and review previous environmental reports, if available.
If a recognized environmental concern is identified during the Phase I ESA, completing a Phase II investigation may follow to collect additional information regarding the environmental conditions of the property and/or surrounding properties. This investigation generally includes collecting soil, soil vapor, and/or groundwater samples for laboratory analysis. This analysis and identification process is important in determining not only the risk tolerance of a potential purchaser or lender, but can also affect negotiation proceedings of a property transaction.
Once All Appropriate Inquiries are completed, various options may be considered in conjunction with the potential sale/lease of the real properties, including:
- Environmental Insurance for unknown conditions.
- Establishing environmental Baselines.
- Seller’s escrow deposit for cleanup costs.
- Delay closing until remediation is complete.
- Restructure transaction, including lease with option to buy.
- Contractual risk allocation through indemnity provisions.
- Prospective Purchase Agreement, requiring negotiations with regulatory agencies.
- Record notice of environmental condition and/or remediation against title.
- Record institutional controls.