Due diligence: a necessary step in real estate transactions



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Congratulations! You've been searching for that prime piece of real estate, and there it is - you can already see the sign over the door. But before you hang your shingle, some environmental due diligence is in order. Don't be the buyer who closes the deal without doing an environmental site assessment first. What you don't know can cost you dearly.The law is complicated, but its bottom line is clear. If a property owner buys a property without taking "all appropriate inquiry" regarding potential environmental contamination, then the new owner assumes all liability of any contamination discovered in the future at the property. So start by getting a good environmental professional to do an effective "Phase I" assessment. If the assessment uncovers "recognized environmental conditions," you also may need to consult with an environmental attorney who can help you navigate the potential liability risks and make smart decisions to allow you to purchase that property - and protect yourself from liability for historical contamination.First, make sure you hire an environmental professional who is properly licensed and with the appropriate experience to be qualified to do an environmental site assessment. Your environmental consultant will start by walking the property looking for any suggestions of possible contamination. Oil puddles, distressed grass, drums, metal, junk and debris are all signs of a potential hazard below the surface.The consultant also will investigate the historical uses of the property, as well as the properties in the vicinity. Could anything nearby contaminate your groundwater?Your consultant will also interview current and past owners to learn if there is any knowledge of historical environmental conditions, undertake a standardized database search and local records review to learn of any spills or hazardous waste sites in the vicinity.Importantly, the consultant also must identify any "data gaps" in the information under review, as well as identify any recognized environmental conditions.If there are any such conditions, the consultant will likely recommend a scope of work for a "Phase II" environmental site assessment, which entails taking samples of the soil and/or groundwater to determine whether there is contamination present at the property.If the samples come back clean, that's very good news. If contamination is found, further investigation is required to fully understand the source and the scope of the problem.The best courseThere are strict federal standards regarding environmental site assessments. If those standards are not fully conformed to, the assessment report may be worthless, and no liability protection can be achieved.The standards were developed under the federal CERCLA, or Superfund, law that holds a landowner "strictly liable" for cleaning up contamination on his or her property unless the owner qualifies as a "bona fide prospective purchaser" or an "innocent landowner" under the statute. In other words, if you don't carefully and fully comply with the prescribed environmental due-diligence process, you might be exposing yourself to considerable liability down the road.Your local commercial banker used to walk away from transactions involving contaminated property, but times have changed. Because green space is at a premium, and as banks have become more familiar with the environmental due-diligence process, they are more likely to consider lending for a transaction if the liability or exposure is well defined. This is where an environmental attorney can assist the lender in better understanding the environmental liability risks, and how they can be managed and quantified.As a prospective buyer, the best course is to thoroughly investigate the property (with the help of an environmental consultant) before you purchase, completing all appropriate inquiry in accordance with the standards set forth in CERCLA.If you do, you should discover any environmental conditions affecting the property. In the event that, despite all due diligence, contamination is later discovered at your property that was not unearthed in the environmental site assessment, you may be faced with defending against the costs and burden of cleaning up the contamination.But if you've done your homework carefully, then the law is on your side.Sherry Young, a founder of the Concord-based law firm of Rath, Young and Pignatelli, heads its Environmental Practice Group.

 

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