Due dilligence necessary when buying commercial property

Joe Johnson and Randell Wallace are attorneys with Lathrop & Gage L.C. in Springfield. Johnson practices intellectual property, environmental law and litigation. Wallace practices real estate, planning and zoning, corporate, public and governmental relations law.

Legislation within the past 35 years has generated a significant amount of environmental regulations that are directly applicable to real estate development, particularly the purchase and sale of commercial property.

Because environmental laws appear intimidating, and as risks are often unknown, many would-be buyers avoid property that is potentially or actively contaminated, regardless of the type of contamination or the intended property use.

Often, buyers shrink from any sign of contamination because, generally, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, an unsuspecting buyer acquiring property containing hazardous substances may be responsible for very expensive clean-up of contamination, even if that contamination occurred many years prior to their acquiring the property and without their knowledge or involvement. CERCLA generally imposes strict liability on the current owner of contaminated property regardless of whether that owner caused or contributed to cause the contamination.

Moreover, CERCLA may impose liability on officers, directors, shareholders and employees of a business entity that owns contaminated property if they would be considered "operators" under that statute.

Even though a buyer should be concerned about contamination of property, it doesn't necessarily mean that the property should be avoided. With sufficient investigation and appropriate contracts, buyers can define the scope of liability from contamination and significantly limit exposure for future clean-up costs. Buyers should consult with environmental specialists and attorneys to determine the best approach to identify and limit liability from purchasing contaminated property.

Buyers can limit liability for future clean-up costs and third-party claims by undertaking precautionary measures, such as establishing an "innocent purchaser defense." This defense gives incentive to undertake a due diligence inspection of the property for environmental contamination.

In determining whether a buyer is entitled to the "innocent purchaser defense," courts will evaluate whether due diligence was undertaken at the time of acquisition of the property. The best method of establishing appropriate due diligence precautions is to obtain a Phase I environmental assessment. Congress has specifically provided that preparation of a Phase I in accordance with the American Society for Testing and Materials Standard E1527 is appropriate due diligence. The Phase I, assessment is a general overview of the prior uses of the property to identify possible contamination. If the Phase I indicates the possibility of environmental contamination, a Phase II may be beneficial as an undertaking of monitoring and testing of suspected contaminated areas.

A Phase II should disclose the presence, nature and quantity of contamination. The determination of the need for clean-up or remediation can then be made. In some instances, a Phase III or clean-up phase may be economically feasible, which supports a buyer in undertaking the risk of purchasing the property without assuming unknown liabilities.

Conducting an environmental assessment certainly helps a buyer establish the innocent purchaser defense in the event of later discovered environmental contamination. However, if a buyer later learns of contamination and then transfers the property without disclosing that information, the original buyer may lose the protection of the innocent purchaser defense.

Another exception to liability is the "Small Business Liability Protection Act," which exempts small contributors (households, small business and nonprofit generators of municipal solid waste of hazardous substances) from liability for Superfund response costs at National Priority List sites. Additionally, this law establishes new exemptions from liability that may lend comfort to buyers of commercial real estate.

Under SBLPA, a Bona Fide Prospective Purchaser defense is established when the owner ascertains that all disposals took place before the date of purchase, an appropriate inquiry was made and appropriate care who taken with regard to any release. The purchaser must agree to cooperate with any response actions, comply with rules and regulations, and provide notice of the releases of hazardous substances. These exceptions may disappear if the purchaser is affiliated with anyone who is potentially liable. The primary difference from the "Innocent Purchaser" defense is that a Bona Fide Prospective Purchaser may buy a known contaminated site, even a Superfund site, and avoid liabilities for clean up. The key to both defenses is an ASTM Phase I.

Keep in mind that it is not only the government that has an interest in environmental problems. If a contaminant migrates to adjoining properties, those property owners may have the right to initiate legal action against an owner to recover costs for damage to their property, to force the owner to clean up the contamination or a combination of both.

Assume that the contaminant migrates to a nearby river used by the public for swimming, fishing and canoeing. The owner is now potentially liable to the public. Obviously, the cost of remediating the environmental harm will be significant. An appropriate environmental assessment likely would have chilled a prospective buyer's desire to purchase the property, established an "innocent purchaser defense" or at least would have identified issues so that remediation cost could be taken into consideration for negotiation.

When shopping for commercial real estate, buyers should be aware that properties may be contaminated regardless of whether located next to an oil refinery or in the middle of a wilderness. Due diligence will allow buyers to enter a deal with a firm grasp on the extent of their future liability for any contamination.