With industrial real estate, due diligence is key

Anna Eberlin, The Daily Record Newswire

Industrial real estate is ripe for potential environmental liability due to historical uses leaving traces of chemicals in soil and groundwater both on and around the property. Uses both on-site or on adjacent properties can result in contamination that is potentially undiscovered and undocumented. Those that are buying industrial real estate should focus on two main concerns to reduce or eliminate potential environmental liability: first, effective due diligence through a well-planned Phase I assessment and possibly a Phase II assessment, and second, negotiation of seller representations and stringent environmental indemnity and disclosure terms in the purchase and sale agreement. The unprepared purchaser can inadvertently end up with a contaminated property and potentially significant liability.

Search for the facts

Environmental due diligence begins with a search for the facts. The most effective search tool is a thorough Phase I environmental assessment that includes the scope of inquiry in the ASTM protocol applied to the specific environmental issues at, on or around the subject property. In order for a purchaser of potentially environmentally-impacted property to be considered an "innocent purchaser" under the Comprehensive Environmental Response, Compensation & Liability Act (CERCLA), compliance with the ASTM protocol is critical. This is because liability under CERCLA can be strict, i.e. an owner can be held liable for the contamination, regardless of fault.

For example, if a buyer acquires property that in a past life was used as a service station, oil, gas or other chemicals may have seeped into the ground without the prior owner's knowledge. Even though the new buyer had nothing to do with this use as a service station 20 years ago, liability for cleanup costs can attach to the new owner. In order for innocent parties who purchase contaminated parcels to be considered a "bona fide prospective purchaser" and take advantage of protections under CERCLA and its successor laws, buyers must conduct "all appropriate inquiry", which starts with a Phase I environmental assessment.

A Phase I environmental assessment will include a review of the property history, noting any past industrial and commercial activities. The consultant will interview the current owner of the property, focusing on material usage and waste disposal information. Obvious on-site potential indicators will be assessed as well, such as on-site operation of underground storage tanks or usage of the property as a dry cleaner or gas station. If a "recognized environmental condition" is found, then a consultant should perform additional investigation and assessment in the form of a Phase II environmental assessment that will include soil tests and water tests.

As a buyer, performing the necessary due diligence described above regarding the target property will not only inform the transaction itself as to whether to move forward, make adjustments to the purchase price, or to make some other key revisions to the contract terms, but it will set the buyer up with defenses to avoid future liability for existing environmental issues.

Prepare for the unknown

The purchase and sale agreement will allocate the environmental risks and liabilities based on what is known about the subject property and what is unknown about the subject property. The seller should be required to make certain representations regarding the subject property and the environmental conditions. These may be qualified or unqualified (i.e. "no knowledge of such"), depending on the leverage and negotiating power of each party, and may include representations such as (a) the absence of hazardous materials at the site, (b) the absence of any governmental jurisdiction or other third party claims regarding potential contamination, (c) the absence of any historical hazardous materials usage, and (d) that the seller has provided all environmental reports and relevant information.

From the buyer's perspective, the purchase and sale agreement should provide a strong indemnity running to the buyer in the event that the seller's environmental representations are untrue. However, where environmental conditions are already known at the time of the transaction, the parties should include additional indemnity provisions that provide specific details regarding the investigation of potential environmental issues, cleaning up the contamination, who controls the cleanup of the contamination, and finally, an allocation of expenses for the cleanup and for any later claims made. Buyers should seek to obtain protection against future environmental indemnity discovered as a result of continued investigation and cleanup through solid and thorough indemnity language that will survive closing.

Conclusion

The presence or even suspicion of environmental conditions on a subject property may kill a deal, depending on the parties' tolerance of risk and the negotiating power of both parties. Knowledge, however, is the first step to determining whether a transaction involving a potentially contaminated property is still viable. Transactions involving properties with environmental issues may still go forward and be profitable if the buyer has done its proper due diligence and has negotiated effective risk allocation and indemnity provisions in the purchase and sale agreement. They key, of course, is knowing what you are getting into and getting the requisite assistance from environmental consultants and an experienced legal team.

-----

Anna Eberlin is a commercial real estate attorney with Holland & Hart LLP. She assists clients with transactions ranging from land use and permitting to leasing, acquisitions and sales. She can be reached at aeeberlin@hollandhart.com. This article does not constitute legal advice and is not intended to create an attorney-client relationship between you and Holland & Hart LLP. If you have specific questions as to the application of the law to your transaction, you should seek the advice of your legal counsel.

Published: Tue, Jun 28, 2016

Comments

  1. No comments
Sign in to post a comment »