What Is Environmental Due Diligence And Why Is It Required?

When performing a commercial real estate transaction, certain hidden environmental liabilities can result in millions of dollars in damages. If you’re preparing to make a major property transaction, whether a sale, refinancing, or lease, then you’ll need to practice environmental due diligence to avoid these issues.

Environmental due diligence is a formal process that properly assesses real estate for the potential risk of contamination of the environment. This contamination could include groundwater or soil contamination. Standards for due diligence are governed by the Environmental Protection Agency (EPA).

Determine if You’re at Risk for Costly Liability

If you want to determine who is liable for hazardous material management, consult the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). This act authorizes regulators to find property owners and order the removal of hazardous materials at the expense of the owners, even if they’re not responsible for any contamination. In other words, simply owning the property may make you liable in the event of environmental contamination.

The costs of cleanup, compliance obligations, remediation, and legal action could add up to millions of dollars in the end.

How Environmental Due Diligence Can Help Avoid Liability

By performing the proper assessments through environmental due diligence, you can avoid the potentially devastating issues when conflicting with CERCLA, even if contamination is discovered following a land purchase. If you want to qualify for CERCLA protection, you must conduct All Appropriate Inquiries (AAI) before acquiring the property, including a Phase I Environmental Site Assessment (ESA), which is how most due diligence investigations start.

Phase I ESA investigates the current and previous uses of property to determine if there are any existing risks. Continuing obligations must also be followed during property ownership, including handling hazardous substances with extra care and complying with land use restrictions.

In addition to CERCLA regulations, you’ll also need to follow those set by local, state, or federal regulations. Hiring an experienced environmental consultant to inspect your property and define your goals is a necessary step for proper assessment.

Environmental Due Diligence’s Impact on Buyers

Apart from liability protection, environmental due diligence is also useful for buyers. Buyers can use it to make sure they get the best value for a property and structure acquisition based on what the assessment shows. For example, a buyer can negotiate a commensurate reduction to the tune of the real estate price or decide not to purchase in the event of contamination.

Sellers faced with the realization that their property is contaminated may be able to avoid potential value reduction in their sale by finding old insurance policies that don’t contain pollution exclusion.

Ultimately, due diligence is a necessary step that you’ll need to take if you plan on avoiding liability and making the acquisition of property smooth and stress-free. Consult with an environmental consultant if you want to make the process easy and faster, and you’ll be able to comply with CERCLA without issue.

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