A Primer on Buying and Selling Contaminated Property

More and more buyers or sellers of commercial real estate are encountering contamination issues these days. The presence of contamination should not be a deal-breaker, but to avoid liability the prospective purchaser or seller should be pro-active in evaluating the nature and scope of the contamination.

The first step is to consult with an environmental attorney, who will recommend the appropriate environmental consultant for the specific contamination issues. The consultant will review existing technical documents about the contamination and, if appropriate, perform some sampling and analysis to get data on the extent and severity of the contamination. I always advise a client to perform his or her own environmental due diligence, even if the other side has already done environmental review: The other party may not be using a competent environmental consultant, and the other party has an incentive to skew the data and recommend a remedy in its favor. I want my client to have an objective evaluation and control the process.

Concurrent with technical review, the attorney should discuss your goals for the transaction and future use of the property. For example, if the property will be re-developed into mixed use housing and retail with extensive excavation, then a more permanent and expensive cleanup may be required. By contrast, if the property is already paved and the future use will be for warehousing, then a less costly remedy may be acceptable. The lawyer and consultant should communicate well during this period to ensure that the consultant understands your or the buyer’s (if you are selling) future use goals, since that will inform the consultant’s scope of work and recommendations.

After the consultant has completed the review, you should sit down with him or her and the attorney to discuss liability risks and a path forward. This may be the first exit ramp from the deal. The contamination may be too significant and extensive to clean up or it may pose an unresolvable conflict with the planned future use of the property.

If you fully understand the risks and want to move forward, then the environmental attorney and consultant should craft a strategic plan with you. Whether you are buying or selling, you may decide to perform the cleanup and accept future liability risk. Of course, this will implicate the structure of the transaction: is the buyer released of all future liability; does either party indemnify the other for liability; will one party fund an escrow to pay for cleanup; can the seller trigger insurance coverage to pay for the cleanup? The parties can structure the transaction and allocate environmental liability however they desire, but working with an experienced environmental lawyer and consultant helps you accurately value the property and avoid environmental liability. It is an investment of time and money that is well spent.

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