Today, when a business contemplates the purchase of an industrial site, vacant warehouse, or other commercial property, it is faced with the prospect of acquiring land potentially tainted with environmental hazards. Such hazards may include lead paint, asbestos, or other air quality problems, abandoned underground storage tanks ("USTs"), and/or potential groundsoil and groundwater contamination. Even to the private purchaser of a residential property or small business location, these environmental hazards, and many more, are crucial factors to consider before executing a real estate transaction. No one, whether you are a small business owner or the property acquisitions manager of a corporation, should contemplate such a transaction without first conducting an appropriate environmental site assessment.

The Purpose Of An Environmental Site Assessment

From the buyer's perspective, the purpose of an environmental site assessment is to identify environmental hazards in order to reduce immediate financial risks, limit potential future liability, and ensure that the property transfer proceeds as smoothly as possible. Initially, an assessment will determine whether the asking price is in keeping with the environmental quality of the property and, consequently, may give the buyer additional leverage with which to negotiate the financial terms of the transaction. In addition, knowing the true condition of the property gives the buyer the option of either not purchasing the property, or insisting on the inclusion of an indemnification provision in the sales contract, the purpose of which is to clarify the seller's obligations to bear risk of claims arising from prior environmental contamination. Further, it alerts the buyer to the possible need to obtain or upgrade his environmental insurance in light of the condition of the property. Moreover, with regard to commercial property acquisitions, an assessment also establishes the due diligence requirement of an "innocent landowner" defense to a claim brought under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. sections 9601-9675, and certain state statutes. However, it is important to recognize that the value of a site assessment depends greatly upon the quality of the environmental firm hired to perform it.

Selecting A Consultant

Engaging a consultant should be done only after a careful review of the consultant's expertise, experience and reputation. Specifically, it is important to select a consultant with sufficient experience with the particular type of property at issue, in order to have the evaluation performed competently and successfully. A well-established firm is more likely to have fully qualified personnel, solid financial status and comprehensive insurance coverage. A good starting point is to request a proposal from the consultant, which should include the following:

• An exemplar list of real estate assessments conducted by the consultant and a description of the type of facilities covered by such assessments;
• A copy of the firm's standard contract;
• A copy of the typical disclaimer language that the consulting firm includes in its reports; and
• A list of references.

The Importance Of A Contract

In addition to the careful selection of a consulting firm, a concise written contract can limit the risk of claims and lawsuits. The contract should be a clear statement of what the parties have agreed upon and include a comprehensive description of the scope and limit of services to be provided. Since a proposed agreement may include provisions that redefine the buyer's liability or allocate the liability of others to the buyer or his firm through indemnification or hold-harmless provisions, it is advisable to have an attorney or insurance advisor review the agreement before it is executed. The possibility of claims should be recognized at the outset, and provisions for their handling should be included in the contract.

The Role Of Insurance

Another crucial factor when employing the services of a consultant is to require that the consultant carry the appropriate insurance to protect against claims arising from the performance of the consultant's services. At a minimum, its insurance policy or policies should include professional liability, general liability and auto coverage, as well as workers' compensation insurance. Depending upon the nature of services provided, pollution liability coverage also should be given strong consideration. It is also especially important that the firm carry professional liability insurance to cover claims that arise from acts, errors or omissions or other professional negligence of the consultant.

Limitations Of Phase I Assessments

Even with the most reputable firms, it is important to recognize that site assessments have clear limitations. By its very nature, a "Phase I" assessment, which is usually all that is required by financial institutions and statutory guidelines, is not intrusive - there is no sampling of groundsoil, drilling of monitoring wells or other underground examination. In addition to a property walkthrough, the consultant generally relies on record searches, aerial photographs and interviews with prior owners and neighbors. A common oversight involves reviewing aerial photographs dated before the property's most recent development or failing to review earlier aerial photos to check for old disposal activities, oil and gas operations, or other industrial activities. Additionally, errors can be made as a result of inadequate review of the property's historical records and failure to interview individuals with knowledge of the parcel. Moreover, not long ago, USTs were unregulated. As a result, there are thousands of USTs across the United States which were never recorded in property records and are frequently missed during site assessment. Finally, the consultant's report itself may be flawed; it may contain unsubstantiated conclusions or simply incorrect or misleading information provided by prior owners or obtained from inaccurate records.

Recent State Regulations

Fortunately, states have begun to recognize the need to regulate property transactions in terms of reducing the risk of environmental liability to buyers of property. These regulations often require that the seller disclose any contamination and impose sanctions for failure to comply, providing a safety net where the buyer's site assessment proves inadequate. The New Jersey Industrial Site Recovery Act ("ISRA"), N.J. REV. STAT. § 13:1K-6 et seq. (1993), for instance, imposes a duty on the seller of commercial/industrial property to perform an environmental site assessment, disclose environmental hazards to the buyer, and take remedial action prior to the property sale. Like ISRA, the Connecticut Transfer Act, CONN. GEN. STAT. ANN. Sections 22a-134 to 134d, applies to any industrial or commercial property exposed to hazardous substances, and demands disclosure of hazardous waste contamination prior to a property transfer. Implicit in the language of the Transfer Act is the requirement that the seller perform a site assessment. The Indiana Responsible Party Transfer Law, IND. CODE § 13-7-22.5-1 to 13-7-22.5-22 (1994), requires that anyone selling real property that may contain hazardous contaminants must disclose and identify the property's characteristics, any potential environmental liability, the uses of the property by the seller, as well as by previous owners, and any release of hazardous substances or petroleum. Inherent in the statute, therefore, is the implicit requirement that the seller perform a site assessment. A more thorough discussion of the seller's disclosure requirements and consequences for failure to comply can be found in the companion article which specifically addresses that topic, "Disclosure Requirements For Sellers Of Real Property And Consequences For Failure To Comply," page X.

Avenues Of Recourse

Despite having carefully selected a reputable environmental consulting firm to perform the site assessment and recent state regulations requiring sellers to perform site assessments, buyers continue to find themselves in the unfortunate position of having acquired property tainted with environmental hazards. Fortunately, purchasers of real property have several avenues of recourse when their site assessment or that of the seller proves inadequate. With respect to recourse against the seller, the buyer has the option of implementing the remedial provisions of the above-mentioned property transfer statutes. However, state regulations may not necessarily provide adequate relief to an aggrieved buyer. Consequently, buyers also continue to exercise their common law right of protection under contract, tort, and other doctrines applicable to real estate sale transactions. Essentially, the common law provides an aggrieved buyer with a cause of action against the seller for breach of provisions contained in and surviving the underlying agreement of a sale, and for fraudulent misrepresentation or fraudulent concealment of known material defects. The buyer can also initiate a cause of action based in negligence or breach of contract against the consultant retained to conduct the site assessment.

Minimizing Risk

In summary, the value of performing an environmental site assessment before the buyer executes a property sale contract cannot be underestimated. While the basic purpose of an environmental assessment, as previously noted, is to quantify environmental hazards and, thus, resolve financial uncertainties in the transaction, at the very least, the buyer can be assured that the price paid for the asset is in keeping with the property's environmental quality. Never assume, however, that an environmental assessment, whether undertaken by the seller pursuant to state or federal regulation, or commissioned by a prudent buyer, will detect all hazardous conditions, regardless of the care, time and money spent on the investigation. Therefore, it is especially important to insist always that the consultant hired to perform the assessment includes proper indemnification provisions in the contract and carries necessary insurance to protect against claims arising from the performance of the consultant's services. Of equal importance, it is essential that the buyer minimize its own risk through careful review of the consultant's contract and applicable state statutes relevant to property transfers, and by ensuring that the firm's environmental insurance products are updated and fully cover all contingencies of the pending transaction.