Environmental due diligence

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Environmental due diligence

Business transactions must now include consideration of environmental issues. Complex laws can impose significant environmental liabilities on buyers, sellers, and lenders involved in a transaction, whether or not they caused the problem, and whether or not they still own the property.

All parties to a transaction have an interest in environmental due diligence: Whether you are a purchaser or a lender, a full range environmental assessment should be completed before a transaction is consummated. An assessment will help to identify current environmental problems, if any, facilitate the transaction, and establish a baseline to help distinguish between current problems and those caused by future owners.

Site Assessments

A site assessment is an assessment of the likelihood of an environmental contamination issue. Typical elements of an Assessment include:

• Site history, based on personal interviews, review of aerial photographs, and historical research.

• Site reconnaissance, to identify visible signs of hazardous substances management or contamination.

• Regulatory compliance history and permits issued to the site such as water discharge, or air discharge permits, hazmat (hazardous materials) handling permits, hazmat storage permits, etc.

• Specific review of more common issues such as asbestos, lead paint, and radon contamination.

Site Investigations

If an assessment concludes that an environmental problem may exist, an investigation is needed to confirm or refute the presence of a problem, and to help determine its scope. An investigation typically will include samples of soil, surface water and ground water, chemical analysis of the samples, and evaluation of the data. Sampling may also have to be done on the inside and outside surfaces of structures, and even of air handling equipment. Part of the investigation is also to determine the sources of the contaminants in order to identify responsible parties, and potential additional sources of funds for remediation if so required.

Site Remediation

When warranted, one must implement a practical site remediation program to meet regulatory and other criteria. The remediation should not only be consistent with the rules and regulations but it is suggested that the entity responsible for remediation work in concert with the remediation contractor and the regulatory authorities. This allows for a solid foundation if any future claims are brought against the entity owning the property for improper or incomplete remediation.

Some General Comments

An appropriate inquiry should always be made. It should be appropriate to the site’s history and previous uses. While, unheard of 20 years ago, it is now common for a home purchaser to have a check made for lead paint, radon, and asbestos as a condition of a purchase contract. These are inexpensive tests and shield purchasers from undisclosed issues, and sellers from responsibility for any unrealized or undisclosed liabilities.

The innocent purchaser defense may shield you from criminal liability, but it may not shield you from civil liability. Successor liability is a big problem, especially for banks that wish to foreclose on a property. Environmental contamination has been used as a threat, both real and concocted, to keep a bank from foreclosing on a property. (See the December 1999 e-Journal article on Slum Lords). If a bank finds its self in the chain of title for a property and they are the only deep pocket, it is they who will pay for the clean up, even if they were only in the chain of title for a few minutes.

Due diligence is about risk management and reducing liability from negligent actions. Environmental contamination produces real and on-going risks. Thus, environmental due diligence should be exercised at the appropriate level to identify, transfer, management or ameliorate risks. Spend the money and get the answers, or pay three to five times as much in litigation support.

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