Reminder: Your Diligence Is Due
When I purchased my first house, I hired a random home inspector whose name my finger landed on in the Yellow Pages. He poked around for about fifteen minutes, and two weeks later I received his report, obviously canned with probably only the name and address changed. Three months later, there was a stream of water running down the basement wall. The chimney, I later learned, had no flashing, which left the entire roof rotten from years of unmitigated water damage. A more thorough inspection would have revealed the issue, and I could have worked out a solution with the seller or simply walked away. Instead, I learned an expensive lesson. When I purchased my next house, you can be sure that the home inspector earned every penny he was paid.
Hidden environmental contamination can be exponentially more costly. Whether you are purchasing, leasing or even selling a piece of property, understanding its environmental condition is a crucial step to be taken early in the process. In other words, you need to do your homework. Environmental due diligence is the process through which you assess real estate for any potential risk of contamination. Typically, this involves an investigation of the current and historic uses of the subject property to identify any red flags. This is known as a Phase 1 Environmental Site Assessment (“Phase I ESA”). Then, if the Phase 1 reveals potential contamination at the property, testing of soils and groundwater should be performed to ascertain the existence and extent of any such contamination. This is known as a “Phase 2 ESA” and establishes the “baseline” environmental condition.
This seems costly, you may think to yourself, but is it really necessary? Absolutely. Here’s why:
- Liability protection, liability protection, liability protection. Perhaps the biggest benefit of performing environmental due diligence is that it can protect you from liability for contamination discovered at the property after you purchase it. Federal and state environmental laws are no joke. They can impose liability on a property owner simply by virtue of ownership, without regard to whether you caused the contamination or whether you had any inkling that contamination may exist at the property. In other words, if you purchase a property and later discover it’s contaminated, you may very well be responsible for paying for any remediation simply because you own the property, which can cost thousands and even millions of dollars. By performing your due diligence, however, you may be able to avail yourself of “innocent” or “faultless” landowner and bona fide purchaser defenses, which could clear you of liability under the law. Moreover, if you ever did cause contamination at the property, you would be able to measure it against the pre-determined “baseline” environmental condition from the ESA to limit your responsibility. As the seller, this information is helpful too to limit your responsibility to only the baseline condition if there ever is found to be subsequent contamination.
- It is a useful negotiation tool. If your due diligence uncovers contamination, you can use it to obtain a reduction purchase, to obtain contractual indemnification, to obligate the seller or lessor to address the contamination, or even just to simply walk away from the deal. If you have plans to redevelop the property, this information will guide your decision as to whether the property suits your intended purpose. At the same time, if no contamination is discovered, you can have a comfort level that you are making a worthy investment.
- It establishes a basis for you to apply to voluntary clean-up programs, which provide benefits to “innocent” purchasers that voluntarily clean-up a contaminated property. These benefits include releases from liability and tax credits. Similarly, the information can be used to submit for reimbursement of costs expended remediating the property from state “spill” funds.
- It is information that any bank providing financing for a property will likely require. Banks want to be sure that the collateral is truly worth the value of the purchase price. Presumably, so do you.
Environmental due diligence must be taken seriously. Hire a good team of professionals to make sure you are protected. The cost is a drop in the bucket compared with the potential cost of remediating a contaminated property.
Alicyn B. Craig, a partner with MARC in Florham Park, NJ, has significant experience in all areas of environmental law, from regulatory advice to complex litigation, focusing on soil/groundwater contamination and agency cost-recovery actions. She also handles employment and commercial litigation matters.