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Environmental issues commonly arise in all real estate transactions, ranging from the sale of individual residences to the transfer of extensive commercial and industrial facilities. Managing the associated risks is generally possible, but the real challenge is identifying environmental issues at the outset. Failing to recognize and address such issues may result in parties unknowingly taking on significant liabilities.

Ultimately, the keys to addressing these environmental concerns are obtaining reliable information about the property, understanding its implications, and managing the issues correctly and efficiently.

In New Jersey, commercial property buyers must perform thorough environmental due diligence and conduct a Preliminary Assessment to qualify for protection under the New Jersey Spill Compensation and Control Act (Spill Act). 

If you’re considering buying commercial property in New Jersey, it’s crucial to take the necessary steps to protect your purchase. 

WHAT PROPERTY OWNERS SHOULD KNOW ABOUT ENVIRONMENTAL LIABILITY

When buying a new property, you must be aware that you may also be purchasing any environmental liabilities that come with it. Failing to take necessary precautions and comply with environmental laws could lead to serious legal consequences, including civil and criminal penalties and potential liability. To avoid such risks, it is recommended that any property owner consults with a qualified environmental attorney knowledgeable about federal, state, and local environmental statutes and regulations.

Bases for Environmental Liability

As a property purchaser, you may not be aware of any environmental problems. However, the prior use of the land and its physical features can give you clues about potential environmental liability. 

For instance, understanding how the property was used before purchase is a good indication of the need for a thorough inspection. Potential signs could also be revealed by looking at the physical characteristics of the land, such as dead or distressed vegetation, depressions, disturbed soil, and storage containers such as drums. 

However, even if these characteristics are absent, property buyers and attorneys should remain cautious of hidden environmental problems due to the high costs associated with environmental cleanup and litigation. 

Avoiding Environmental Liability

Federal vs. State Regulations

According to the Spill Act in New Jersey, any individual who has released a hazardous substance, or is responsible for it in any way, is strictly liable for all costs associated with cleaning up and removing that substance, regardless of fault, and will be held jointly and severally liable for those costs, regardless of who incurs them.

Commercial property purchases In New Jersey, you must satisfy both the Phase I ESA and a Preliminary Assessment to receive protection under the Spill Act. 

The Phase I ESA is designed to identify three environmental conditions: Recognized Environmental Conditions, Historical Recognized Environmental Conditions, and Controlled Recognized Environmental Conditions. 

On the other hand, a Preliminary Assessment requires the assessor to review certain documents, such as tax records, deeds, historical chain of title, and business directories. The assessor also needs to determine if any remedial actions were taken on the property, how they were protected, and if there have been any changes in site conditions since the last Preliminary Assessment of the property.

IS ENVIRONMENTAL DUE DILIGENCE IMPERATIVE FOR PROPERTY PURCHASES?

When considering a property purchase, it is crucial to conduct due diligence to minimize risks and ensure that the property is a sound investment. The standard due diligence process typically involves the following:

  • Assessing the property’s physical condition.
  • Researching any liens and obligations.
  • Reviewing prior insurance claims.
  • Conducting surveys and improvements.
  • Evaluating current tenants in some cases.

Moreover, it is also crucial to evaluate the property’s environmental condition in many cases. Numerous properties have environmental issues, and conducting environmental due diligence is necessary for parties to the transaction to avoid losing the property’s value or being liable for remediation costs. An environmental review helps to protect the buyer, the seller, and the lender from any unexpected surprises. Additionally, in some states, title companies may also require a certain level of due diligence.

The scope of environmental due diligence may vary.

Environmental due diligence is a crucial factor to consider when engaging in a property transaction. The property’s characteristics and the transaction’s nature will usually determine whether such diligence is necessary. Properly designed and executed environmental due diligence allows all parties involved in the transaction to identify and evaluate environmental concerns and make mutually acceptable risk-based decisions. 

The purchaser must tailor the environmental due diligence to address operational and liability concerns, ensuring all risks are identified and appropriately managed.

Some entities are more likely to be at risk than others.

Not all commercial transactions require environmental due diligence. The decision to conduct due diligence can depend on several factors, such as the characteristics of the real property, the type of transaction, past uses of the land, the buyer’s planned use of the property, and a lender’s risk tolerance. In connection with a commercial real estate loan, lenders may require an ESA and other environmental due diligence to properly evaluate the property’s loan-to-value ratio and assess any risks involved with using the property as collateral.

Real estate entities typically encounter a variety of environmental and regulatory exposures. These can include contaminants from known and unknown historical usage or neighboring properties, such as illegal drug manufacture and distribution, regional soil and groundwater contamination, air emissions, construction debris containing hazardous materials, and hazardous chemical storage, including laboratory chemicals, medical wastes, and pesticides and herbicides used indoors and outdoors.

EPA Superfund exemption 

If you purchase a property and later find out it’s contaminated, you may not be held liable if you didn’t know about the contamination at the time of purchase. This is called the “innocent landowner” defense. However, to qualify for this defense, you must have conducted all appropriate inquiries (AAI) prior to the purchase and complied with pre- and post-purchase requirements.

Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund Act), a purchaser who “did not know or had no reason to know” of contamination would not be liable as a CERCLA owner or operator. To establish that you had no reason to know of the contamination, you must demonstrate that you took “all appropriate inquiries into the previous ownership and uses of the facility in accordance with generally accepted good commercial and customary standards and practices.” Remember that there are exceptions, and it can be challenging to qualify for this exemption.

Typically, a buyer includes an environmental inspection contingency in their purchase agreement since contamination or hazardous substances on the property can significantly affect its value, which allows the buyer to terminate the contract or renegotiate certain terms if the environmental conditions are unacceptable. Additionally, a lender may make its loan commitment letter contingent on the acceptability of environmental findings from the due diligence period since a cleanup operation may interfere with the purchaser’s business or operations on the property and its income stream, potentially impairing its ability to repay the loan.

Environmental Factors and Buying Commercial Property

Reviewing potential environmental hazards and performing a property condition assessment when considering a property purchase is important. Both state and federal governments have passed strict environmental laws that require commercial property owners to do their due diligence before purchasing. These laws aim to check for potential environmental hazards.

Real estate property owners should be mindful of their liability under the state and federal environmental laws. Real estate attorneys can assist clients in avoiding expensive litigation and cleanup costs by examining the risks associated with a particular piece of land and identifying the defenses available under state and federal law.

Before purchasing a commercial property, it’s essential to consider environmental factors to minimize risk.

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