Environmental contamination in real estate transactions
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Environmental Contamination in Real Estate Transactions. Environmental Law Meets Real Estate Law. Identifying and addressing environmental concerns in the transaction Preparing a property for sale Allocating the cost/risk Addressing concerns in the agreement Closing the transaction.

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Environmental Contamination in Real Estate Transactions

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Environmental contamination in real estate transactions

Environmental Contamination in Real Estate Transactions


Environmental law meets real estate law

Environmental Law Meets Real Estate Law

  • Identifying and addressing environmental concerns in the transaction

  • Preparing a property for sale

  • Allocating the cost/risk

  • Addressing concerns in the agreement

  • Closing the transaction


Identify the issues

Identify the Issues

  • Avoid discovery of unexpected environmental issues

  • Assuming contamination may unjustifiably impact price

  • Environmental liability can be applied to a wide range of actors- not just the polluter

  • There are methods to investigate and if required remediate the contamination


Preparing a property for sale

Preparing a Property for Sale

  • The level of due diligence required will vary with the nature and use of the property both past and future

  • Primary tool is an ESA either Phase I or Phase II

  • A Phase I is mainly a paper search to determine actual and potential site contamination both on and off-site

  • Usually takes 2-3 weeks and cost approximately $2000-3500


Preparing a property for sale1

Preparing a Property for Sale

  • A Phase II is considered an intrusive investigation to assess potential or known impacts to the soil and groundwater

  • Includes installing boreholes/monitoring wells

  • Samples are taken and analyzed at a laboratory

  • The costs vary with each project


Preparing a property for s ale typical high risk activities

Preparing a Property for SaleTypical High Risk Activities

  • Chemical plants, battery manufacturing, recycling facilities

  • Asphalt manufacturing, electroplating, metal fabrication, circuit board manufacturing, steel works

  • Leather tanneries, ship building, repair yards

  • Textiles mills, drycleaners, scrap yards

  • Service Stations, properties with underground storage tanks.


Preparing a property for sale2

Preparing a Property for Sale

  • Large companies with known environmental liabilities often spend as much time/money on environmental investigations prior to a sale as they do for a purchase

  • If the Vendor obtains the ESA prior to offering the property for sale, delays are avoided and control maintained

  • The Vendor can dictate in the agreement restrictions on future use to limit future liability

  • Environmental diligence may provide the Vender with option to remediate prior to sale to maximize sale price and increase interest


Allocating the cost risk

Allocating the Cost/Risk

  • Involve professionals early

  • Complete Phase I and, if required, Phase II

  • Full disclosure and indemnities key

  • If contamination, Record of Site Condition (RSC) should be considered


Allocating the cost risk1

Allocating the Cost/Risk

WHY RSC?

  • Provides immunity to current and future owners from most MOE orders for contamination prior to RSC filing

  • Mandatory when changing from less sensitive use to more sensitive use (industrial to residential)

  • EPA allows the Vendor to obtain same protection as the Purchaser if RSC required in agreement


Allocating the cost risk2

Allocating the Cost/Risk

  • Every deal is different

  • Best addressed in agreement, could include separate indemnity or even insurance policy

  • Former owners may face risk even when selling on an “as is” basis

  • Purchasers may be liable for existing contamination, ongoing mitigation or off-site discharge

  • Lenders will require diligence and reliance on ESAs


Addressing c oncerns in the agreement

Addressing Concerns in the Agreement

  • Representations and Warranties

    • Qualified by knowledge and time period

    • Full disclosure if known issues

    • Survival beyond closing

  • Covenants and Conditions to Closing

    • Copies of all reports

    • Right to investigate

    • Pre-closing and post-closing remedial work (holdback)

    • No material changes prior to closing


Addressing concerns in the agreement

Addressing Concerns in the Agreement

  • Indemnities

    • Covering disclosed information/unknown information

    • Threshold or cap to liability

    • Time limit on claims

    • Assignment to future purchaser or lenders

    • Carve out for known accepted issues


Addressing c oncerns in the agreement1

Addressing Concerns in the Agreement

  • Security

    • How strong is the covenant of the other party

    • Will they have resources to meet obligations

    • Holdback on covenants or to fund remediation

    • Environmental insurance may be appropriate


Closing the t ransaction

Closing the Transaction

  • Address environmental issues early

  • Knowledge of risk/issues can lead to solutions

  • ESAs only as good as the consultant and work scope

  • Reports must be properly reviewed to ensure all issues properly addressed and no inappropriate assumptions


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