Environmental Issues in Sales of Commercial Real Estate in the U.S

Environmental Issues in Sales of Commercial Real Estate in the U.S

Environmental Issues in Sales of Commercial Real Estate

Addressing environmental issues has emerged as one of the most significant concerns in commercial real estate transactions today. The strict liability nature of environmental laws has resulted in a heightened awareness of environmental issues in real estate transactions for decades now. Dealing with environmental concerns, however, has become increasingly important in recent years, due to rigid state and federal environmental requirements and the fact that many New Jersey developers, investors and property owners are now acquiring existing and/or redeveloping abandoned or underutilized sites. Because environmental law has become a specialty practice area, provisions in real estate deals regarding environmental matters seem to be managed either so intensely that the environmental concerns smother the transaction, or are virtually ignored. While it is not practical to include provisions in an agreement that address every potential environmental issue that may arise, it is crucial that parties to a real estate transaction understand the representations and warranties that are made and the due diligence that is performed regarding environmental issues, along with the fiscal and legal implications of such information.

Environmental Due Diligence

From a buyer's perspective, assuring that you are entitled to perform environmental testing, including a Phase I Environmental Site Assessment (“Phase I”) and/or Preliminary Assessment (“PA”) and, if necessary, a Phase II Environmental Site Assessment (“Phase II”) or Site Investigation (“SI”) is critical to any agreement. Sellers may be reluctant, however, to permit such testing because of the legal obligations that arise from learning that owned property is contaminated, and due to the intrusive nature of the testing. Traditionally, prospective purchasers have relied on general due diligence provisions affording them the right to investigate the real property as a source for permitting environmental testing. Because of the growing implications of environmental due diligence, however, it is now necessary to determine and provide for what testing may be performed and by who, how it is performed, how results are handled, and how the costs of such testing is allocated.

In most instances, it is in the both the buyer's and seller's best interests for the buyer to conduct adequate environmental due diligence. The buyer needs to be able to conduct sufficient investigation to determine whether there are environmental risks associated with the property and perhaps, more importantly, to satisfy the requirements of the innocent landowner defense under the New Jersey Spill Compensation and Control Act, and CERCLA. Sellers benefit from allowing prospective purchasers to conduct appropriate environmental due diligence because many times such investigation serves as a basis for the seller to limit its representations and warranties to the buyer. Sellers should include protections in the agreement of sale, including requiring evidence of liability insurance covering liability arising from any due diligence work performed by or on behalf of buyer and an indemnification from buyer for any loss, damage to the property, or death or injury as a result ...