Environmental due diligence (EDD) is the legal process of assessing environmental conditions and liabilities surrounding real property transactions. Before making real estate transactions, buyers and investors should assess all risks that may incur high costs.
EDD comes into play before selling or leasing real estate property for risk management purposes. It addresses several factors, including hazardous chemicals, soil contamination, groundwater, radioactive materials, lead contamination, and much more.
It is essential to understand that as the purchaser of the property, you can be responsible for potential environmental liabilities once you claim ownership.
Areas Covered by Environmental Due Diligence
The Environmental Protection Agency (EPA) sets the standards to assess environmental risks depending on the property’s nature. Even though environmental professionals should perform the task, you should also carry out simplified assessments of your own to ensure everything is in order. Here’s an overview of what Environmental Site Assessment (ESA) covers.
Historical Overview of the Property
Phase I of ESA looks into the property’s present and past uses to discover if any liabilities existed. Digging into historical records unearths any previous liabilities such as underground water, soil contamination, and other environmental issues. The previous owner must have been in compliance with land use regulations and must have cared for the property; otherwise, any fines and penalties will be transferred to the new owner.
Background Check for Previous Environmental Risks
The second level of due diligence is to check for fires, spills, and the causes of these environmental risks from the relevant authorities. Before engaging in real property transactions, ensure that you have records, especially those involving hazardous waste. In addition, ensure that everything is per the Comprehensive Environmental Response, Compensation, and Liability Act, which prevents dangerous waste from endangering the public. Consider aligning your assessment goals with federal, state, and local laws, and seek professional services and an attorney familiar with environmental law.
Understanding the foundation of your property is a critical step in assessing its environmental liabilities. The property loses value when exposed to risks such as contamination from surrounding sites, but not many sellers willingly provide this information. If you discover any “forgotten” risks, you should seek historical records and any evidence that these problems previously existed, which can help you claim the actual value of your property.
Conducting Interviews with the Workers and Contractors on Site
On-site workers may have information about existing liabilities. As a buyer, you should contact the people in charge and find out if anything is worth bringing to your attention.
Determining Whether You’re at Risk
The Comprehensive Environmental Response Compensation and Liability Act sets rules to decide who should pay for hazardous waste removal. Before the transaction, ensure the site is clean; otherwise, you’ll be held accountable for the cleanup costs.
Fortunately, protection under CERCLA safeguards owners from environmental liability costs. Qualifying for this protection comes after all appropriate inquiries have been conducted (with a particular interest in Phase I Environmental Site Assessment results).
Purchasers of real property in New Jersey have two standards to satisfy to qualify for an innocent purchaser defense under State and Federal environmental laws and need to have thoroughly investigated the property’s past to verify that they are a legitimate, unknowing buyer. To meet both legal standards, you need your environmental consultant to certify that the due diligence meets both standards.
History of Environmental Regulations
In 1997, the NJ Spill Act was amended to add an “innocent purchaser” defense. But that defense is only applicable if the AAI started with a Preliminary Assessment conducted in accordance with the technical requirements for site remediation and any additional requirements triggered by the PA, such as further investigation of soil and or groundwater.
In 2002, Congress amended CERCLA and added a bona fide prospective purchaser (BFPP) defense, making it possible for the purchaser of contaminated property to avoid liability for the first time. However, a BFPP must show that AAI was undertaken prior to the acquisition. This is typically done by showing that the purchaser conducted a Phase I Environmental Site Assessment and, where appropriate, a Phase II Environmental Site Assessment.
The purpose of the PA is to locate, evaluate, and assess the potential environmental risk associated with past and current uses of the property. The assessment will summarize any areas of concern (AOCs) and potential environmental liabilities.
Environmental due diligence ensures that you get real value for your investment. However, there are a lot of risks associated with purchasing property, and you must understand the areas to cover to protect your assets.