What Every Buyer Needs to Know About Environmental Due Diligence Before Closing a Real Estate Deal

Environmental due diligence is a key aspect of evaluating any potential commercial real estate acquisition. Yet, it frequently goes overlooked. When buyers fail to identify environmental liability risks before closing, they can find themselves facing significant unexpected costs—and, at this stage, it may be too late to hold the seller accountable. Learn more from an experienced California environmental attorney at Bick Law LLP:

3 Key Environmental Due Diligence Considerations for Prospective Commercial Real Estate Purchasers

While every proposed real estate transaction is unique, in most cases, there are three main aspects of environmental due diligence. These three main aspects are: (i) conducting a Phase I Environmental Site Assessment (ESA); (ii) meeting the All Appropriate Inquiries (AAI) requirements; and (iii) identifying other potential environmental liability risks.

1. Phase I Environmental Site Assessments (ESAs)

Conducting a Phase I ESA minimizes a prospective buyer’s risk of being held liable for cleaning up contamination caused by a prior owner of the property. ASTM International Standard E1527-21 outlines the standard practices for conducting Phase I ESAs. As ASTM International explains, some of the key characteristics of a Phase I ESA include:

• “A Phase I Environmental Site Assessment must be performed by an environmental professional as specified in [Section] 7.5.1” of Standard E1527-21.
• “Consistent with good commercial and customary standards and practices . . . the appropriate level of environmental site assessment will be guided by the type of property subject to assessment, the expertise and risk tolerance of the user, future intended uses of the subject property . . . and the information developed in the course of the inquiry.”
• “The environmental site assessment is based upon conditions at the time of completion of the individual environmental site assessment elements.”

As ASTM International also explains, “[n]o environmental site assessment can wholly eliminate uncertainty regarding the potential for recognized environmental conditions in connection with a subject property[, and p]erformance . . . is intended to reduce, but not eliminate, uncertainty regarding the potential for recognized environmental conditions in connection with a subject property . . . .” Thus, working closely with an experienced California environmental attorney is critical during the Phase I ESA process.

By working closely with their environmental counsel, prospective buyers can ensure that their Phase I ESAs are as comprehensive as possible and that they understand the limitations of the assessment’s findings. If the decision is made to move forward with the acquisition, buyers can also rely on their environmental counsel to document their due diligence and draft appropriate protections for inclusion in the purchase agreement as necessary.

Along with risk mitigation, one of the main purposes of conducting a Phase I ESA is to identify any recognized environmental conditions (RECs) that could trigger cleanup responsibility. If a Phase I ESA identifies an REC, then a Phase II ESA may also be necessary (assuming the prospective buyer is still interested in moving forward).

2. All Appropriate Inquiries (AAI) Requirements

Conducting a Phase I ESA is part of the broader process of meeting the AAI requirements for due diligence in commercial real estate transactions. As the U.S. Environmental Protection Agency (EPA) explains:

“AAI may be conducted in compliance with [ASTM Standard E1527-21] to obtain protection from potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) as an innocent landowner, a contiguous property owner, or a bona fide prospective purchaser.”

Along with conducting a Phase I ESA, meeting the federal AAI requirements involves several additional steps. These include (but are not limited to):

• Interviewing past and present owners and occupants
• Reviewing historical sources of information about the subject property
• Reviewing “commonly known or reasonably ascertainable information”

While conducting AAI is not strictly required from a federal environmental compliance perspective, it is a necessary step for any prospective buyer of commercial real estate that wishes to insulate itself from potential liability under CERCLA. Given the substantial direct and opportunity costs that environmental cleanups can entail, conducting AAI will be a desirable step in essentially all cases.

3. Environmental Liability Risks for Unsuspecting Buyers

Along with potential cleanup liability under CERCLA, unsuspecting buyers can face a variety of other environmental liability risks as well. These include risks that exist under federal law, such as the Resource Conservation and Recovery Act (RCRA), as well as risks that exist under state law, such as California’s Hazardous Substances Account Act (HSAA) and Hazardous Waste Control Law (HWCL). EPA and other regulators (including the California Department of Toxic Substances Control) can impose substantial liability for non-compliance, and, even when purchasers have potential defenses, asserting them may require litigation.

Private litigation can be a liability concern for unsuspecting purchasers as well. Downstream impacts from contamination can lead to environmental and financial losses—and these losses can in turn lead to lawsuits in federal or state court. If a purchase agreement does not provide adequate protections (i.e., a right to defense and indemnification by the seller), the purchaser’s liability exposure could be substantial.

Given the wide range of liability risks associated with commercial real estate acquisitions, a comprehensive approach to environmental due diligence is essential. Prospective purchasers should work with experienced environmental counsel to ensure that they have a clear understanding of what the due diligence process entails and what the potential outcomes of the process can be. In some cases, a preliminary assessment may be enough to determine that a potential acquisition is not viable. In others, going through the whole environmental due diligence process will be a necessary step toward successfully acquiring a desirable property while simultaneously mitigating the risks involved.

Learn More from a California Environmental Attorney at Bick Law LLP

If you would like more information about the environmental due diligence process for commercial real estate acquisitions, we invite you to get in touch. To learn more from an experienced California environmental attorney at Bick Law LLP, give us a call at 949-432-3500 today.