Why You Need An Environmental Assessment Before Closing A Real Property Transaction

Environmental site assessments help expose risks and liabilities associated with a property.  For the buyer, seller, lender and insurer, an environmental assessment prior to property transfer can identify potential problems and help assess liability, costs and management issues.  Property transfer environmental assessments can help determine the probability and extent of a site problem, potential financial liability, costs of future assessment and remediation, and the potential impact on property value (see blog post “Evaluating the Costs of Environmental Property Damage”).

Full disclosure of environmental, health and safety problems prior to closing is a critical element of compliance with governmental regulations, where owners or holders of title can be responsible for environmental cleanup of the property even if they had no participation in the actual contamination.  However, if a prospective purchaser follows certain guidelines, it may escape responsibility for the cleanup if a problem caused by a previous owner is later discovered. 

A Phase I is a preliminary site evaluation which reveals past activities through a review of existing records, interviews, historical information and physical inspection of the site.  Depending on the findings and the party’s needs, the Phase I may be all that is necessary.  In other cases a Phase II may be required to confirm or alleviate suspicions of contamination.  The Phase II may include sampling, testing and analysis of soil, water, air and suspect building materials of the site.

A professional Phase I report will follow the standards of EPA’s All Appropriate Inquiries Rule and the current ASTM standard consistent with that rule.  The Phase I report should be confidential and a draft reviewed by counsel.  It is imperative that all parties understand the significance of, and risks associated with, written documentation of contamination on the property.   The language of a report is critical.  Unnecessary adjectives, and sensitive or subjective terms should be avoided or used with caution.

Sloppy environmental reports filed with regulatory agencies may result in unwarranted assumptions about the property’s condition and additional cost.  Loose wording in reports can deter buyers and lenders.  If an adversarial situation arises a party may be placed in an awkward position, defending or explaining a poorly worded report that paints an inaccurate picture of the property’s condition.  One way to protect the integrity of a report is to use counsel as an intermediary and maximize the protection of the attorney/client privilege.

Generally, the report should describe all of the information sources reviewed and the data developed in a straightforward and objective fashion.  Subjective interpretations of the condition of the property, when necessary, should be carefully articulated.  The report should avoid legal interpretation.  Again, it is helpful if legal counsel can review the report in draft form.  But even if there is no opportunity to review a draft, an environmental attorney may help spot and resolve issues concerning regulatory requirements, liability, and the allocation of liability.

 The costs of attorney reviews vary depending on the property.  A professional report on a small scale relatively “clean” property may take relatively little time.  A report on an old industrial property will likely require more effort.  That time and effort is well spent if it helps avoid or contain future expense and liability.

Image by Versageek, licensed for use under Creative Commons Attribution-ShareAlike 3.0 Unreported (CC BY-SA 3.0)

Topics