This article covers several questions that we get at Hanis Consulting, Inc. regarding environmental due diligence and is intended for people that know very little about environmental due diligence, Phase I Environmental Site Assessments and All Appropriate Inquiry. This is the first in a series of articles to demystify the environmental due diligence process to obtain liability protections for environmental risks in real estate transactions. So let’s get started.
Environmental Due Diligence is the formal process undertaken to assess industrial, commercial, and in some cases, residential real estate for potential environmental risks that may be present in the soil, groundwater or air. This process typically starts with performing a Phase I Environmental Site Assessment.
In short, a Phase I Environmental Site Assessment researches government databases, historical information, and includes a site visit to determine if there are any recognized environmental conditions present in a commercial property that are cause for concern. Conditions that may be present and cause for concern include the potential for contamination liabilities in the soil, groundwater, and/or air. Sometimes, the Phase I Environmental Site Assessment will find conditions that require additional investigation by performing a Phase II Limited Site Investigation.
A Phase II Limited Site Investigation involves soil, groundwater, air and/or other sampling to determine if environmental contamination is present. By fulfilling the All Appropriate Inquiry requirements, potential buyers are afforded liability protections for any contamination that may be present at the site as long as all the continuing obligations are met.
Although the main focus of environmental due diligence is for the protection of purchasers, lessees should strongly consider performing environmental due diligence as a baseline prior to operating on a property. This can help protect the lessee in case the property owner alleges that any contamination at the property is due to the lessee although it may have been pre-existing prior to the lessee’s operations.
Think of environmental due diligence as a form of proactive environmental management for the long-term health of your property (also, most lenders require it). It is like taking a used car to a mechanic prior to purchasing. By letting a mechanic assess the condition of the used vehicle, you will better understand the risks and potential issues before you invest. Performing environmental due diligence following standards set forth by the Environmental Protection Agency (EPA) can protect you from financial liabilities associated with unknown and even known environmental conditions at a property, if all the requirements of All Appropriate Inquiry are met. The last thing anyone would want is to purchase a property without the proper environmental due diligence just to find out that they are now liable for millions of dollars due to contamination at the property and surrounding real estate resulting from prior operations at the property. Environmental issues can be very costly to investigate, manage, and clean. Liability can also become much worse if anyone becomes ill due to contamination if the environmental due diligence was not performed correctly.
By not performing environmental due diligence, you waive any potential liability protections. This could leave you liable for any investigation and/or cleanup costs for contamination that is found at the property after you purchase.
If contamination is found in the future, even after you divest from the property, you and other previous owners may have to foot the bill for the cleanup.
Also, if the site was previously cleaned up by the Government, it is possible for them to recuperate costs from future owners if environmental due diligence is not performed under certain conditions.
Here at Hanis Consulting, we seek to teach our clients about Environmental Due Diligence so that you can make informed decisions throughout the process of purchasing real estate, which will save you money and liability in the long run. We know you’re invested in your business, and we are honored to help you feel confident in your investment.