Environmental Site Assessment
ENVIRONMENTAL SITE ASSESSMENT
Preventive Tool or Deal-breaker?
“We just need an environmental site assessment before we can issue the loan.” You are ready to sell the family business - sales agreement is finally in hand, closing date is set. However, at the last minute that might well be what you hear from the buyer’s bank.
Environmental Site Assessment - what’s that?
Unfortunately for many unknowing business owners, an environmental site assessment could translate into a deal-breaker. That’s because in 1980, Congress signed into law the Comprehensive Environmental Response, Compensation & Liability Act, commonly known as the Superfund act or CERCLA, with emphasis on the ‘Liability” part. One of the purposes of Superfund is to assign financial blame for the cleanup of a chemical spill. But Superfund does not care if the spill occurred prior to 1980. This is known as ‘retroactive liability’. The spill could have happened 30 years ago, but if the spill is discovered while you are the owner, then you may be held financially responsible for the cleanup.
One major defense to becoming financially responsible for an environmental cleanup is known as the ‘innocent landowner’ defense. The essence of the innocent landowner defense is that the prospective buyer makes all appropriate inquiry into the subject property. What exactly is meant by ‘all appropriate inquiry’? By definition it means that the party invoking the innocent landowner defense ‘must take, at the time of acquisition, all appropriate inquiry into the previous ownership and uses of the property with good commercial or customary practice’.
Environmental Issues Are Mission Stoppers For Succession Planning
Phase I Environmental Site Assessment
In practice, all appropriate inquiry begins with what is known as a Phase I Environmental Site Assessment. According to the American Society for Testing & Materials (ASTM), a Phase I Environmental Site Assessment (ESA) consists of obtaining ‘specialized knowledge’ about the property from parties such as present and former owners and managers. Specialized knowledge also consists of reviewing records such as a fifty-year title search, aerial photographs and fire insurance maps. Other records such as regulatory databases are also reviewed. Surrounding properties are also included in the inquiry to determine whether contamination may have migrated onto the subject property from a neighboring property.
How extensive should the inquiry be? That obviously is determined by the historical complexity of the property. A one acre, undeveloped tract of land set in a rural area with no previous development will require much less inquiry than a five acre tract of developed land located in a downtown, urban setting.
Phase II Environmental Site Assessment
Based upon the results of the Phase I ESA, a Phase II Environmental Site Assessment may be recommended. The Phase II Enviromental Site Asseessment is meant to verify the findings of the Phase I through sampling of soil and/or groundwater.
For example, a Phase I ESA that was performed on a property may reveal that, thirty years ago, a gasoline station was located on the property. A Phase II Environmental Site Assessment may then be performed to determine whether gasoline or diesel fuel is still present in the soil and groundwater. The prospective buyer can then assess whether the subject property is contaminated.
Of course, at this point in the real estate negotiations, the prospective buyer may elect to exercise one of three options: 1) the buyer may decide to terminate negotiations altogether; 2) the buyer may re-negotiate a new purchase price based upon the potential devaluation of the assessed property value by the amount of the potential cleanup costs; or 3) the buyer may purchase the property at the asking price but require the seller to assume all responsibility for environmental liability and potential cleanup costs.
The dilemma for many sellers of commercial property comes at the point at which a Phase I ESA has been performed on their property and evidence of previous usage reveals a potential problem. At this point, the potential buyer may request permission to perform a Phase II Environmental Site Assessment. The first question most sellers ask is “What happens if contamination is discovered on my property?” This goes back to the three options that the prospective buyer may exercise. The obvious worse case scenario for the seller is one in which contamination is discovered during the Phase II Enviromental Site Assessment and the buyer elects to walk away from the sales agreement.
Either way, if contamination is discovered, the discovery may become a reportable release to a regulatory agency, in which the property owner, not the potential buyer may be responsible for reporting the release and the subsequent cleanup costs.
How do you avoid such a scenario?
If no previous information is available regarding the environmental condition of your property, it may be wise to have a Phase I Environmental Site Assessment performed. In this way, potential environmental problems may be addressed before they are discovered by a potential buyer.
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