Periconi, LLC

Environmental Due Diligence in Real Estate Transactions Blog Series: Part I - Introduction

This blog series is based on an article written by James J. Periconi and published in the Winter 2008 Bloomberg Corporate News Journal. Mr. Periconi also discusses the details and the nuances of environmental due diligence of commercial real estate transactions in his bi-monthly continuing legal education course. Although we've blogged about environmental due diligence in the real estate transactions before (see here and here, for example), we decided it was time for a refresher series, including legal updates and discussion of new and exciting topics.

What is "environmental due diligence"?

"Environmental due diligence" in the context of a real estate transaction is the process used to identify and assess the risk of environmental liability associated with the transfer of contaminated property. The primary goal in undertaking environmental due diligence is to protect buyer or seller as against the other party, or - sometimes even more importantly - against the government. It can also serve to provide lenders with the information they require for loans to decrease the likelihood of default on loan repayment or of a reduction in the value of collateral.

The parties to a property transaction need to perform this environmental due diligence because there is often strict liability imposed for cleaning up contaminated property, especially for the current owners of the property. Strict liability is a legal term which means that there does not need to be a showing of intentionality, culpability or even knowledge of the environmental problem for liability to attach. In brief, if you own the contaminated property, you usually own the problem...unless you have protected yourself by knowing the condition of the property when you buy it and by writing the proper protections into the contract of sale.

Thus, environmental due diligence is necessary for anyone who is considering purchasing contaminated, or potentially contaminated, property. In fact, in order to get protections from liability under some federal and state statutes, a prescribed due diligence investigation - or "all appropriate inquiry" - must be undertaken by a prospective purchaser.

What are the "tools" of environmental due diligence?

Think of environmental due diligence as a toolbox for minimizing or limiting liability associated with contaminated property: there are different "tools" in your toolbox that correspond to different aspects of environmental due diligence. One tool is knowing what the exemptions or defenses to statutory liability are, and whether or not you can avail yourself of them. Another tool is undertaking studies - or "all appropriate inquiries" - of the property, prior to purchasing a contaminated property. Another tool is allocating liabilities in just the way that the parties are willing to do so through contract drafting.

This blog series will introduce you to the different tools of environmental due diligence and will show you the ways in which you can wield those tools to your best advantage. Our focus, for ease of explanation, will be on how a prospective purchaser of a contaminated property can utilize the environmental due diligence tools. However, these tools can, and in some instances must, be used by sellers and operators of contaminated properties to protect their own interests as well.

But why do you need an environmental attorney?

Often buyers or sellers of property will ask whether their interests are protected with having a good environmental consultant working with a good real estate attorney, and whether an environmental lawyer actually needs to be retained. For the most part, the answer is yes; an environmental lawyer is crucial to this process for several reasons.

First off, environmental consultants are not lawyers and cannot - and should not - determine possible claims by or against their clients, and how to develop the scope of a Phase I Environmental Site Assessment or other property investigation to protect a client against any possible claims. They also cannot make legal judgments regarding government reporting issues. Furthermore, consultants have a vested interest in doing the most work they can persuade clients to engage them for, not so much to generate larger fees for themselves so much as to protect themselves against later claims that they failed to uncover a contamination condition. An environmental attorney can not only give you legal advice and protect your interests, but he can also act as a liaison between the environmental consultants and the clients. An environmental attorney can also act as a liaison between you and the governmental agency overseeing or requiring the cleanup, thereby ensuring that the property is remediated in a proper, yet cost-effective, manner.

Secondly, even the best real estate lawyers can not fully understand environmental law issues any more than environmental attorneys can the standard non-environmental real estate issues in your contract. In our experience, real estate lawyers working without environmental counsel often defer far too much to the expertise of the environmental consultant (which, as we mentioned above, could lead to some serious legal problems) or sometimes even the governmental agency (whose goals are not always in line with the client's best interests). They do not always admit that they lack more than a casual appreciation of what the results of analytical tests actually mean in practice (e.g., believing that soil or groundwater sample results showing contamination mean that remediation or even reporting to the government is necessary; it's not always). Therefore, just as you wouldn't hire a trust and estates attorney to review your purchase contract in a real estate deal, you shouldn't have your real estate attorney review the environmental provisions in the purchase contract.

Please contact us if you have any questions about environmental due diligence in real estate transactions, or if we can help walk you through the environmental aspects of your own real estate transaction.

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