Member at Sills Cummis & Gross P.C.
Navigating the commercial real estate market requires foresight and due diligence, especially when it comes to properties comprised of environmentally sensitive tenants; for example, a dry cleaner and/or auto repair center within a retail shopping center could immediately indicate potential environmental issues.
As a legal professional well-versed in these matters, I offer the following three tips on how to approach environmental issues during commercial real estate transactions.
1. Understand the tenant roster and its implications.
The first tip as a prospective buyer is to understand the tenant mix and potential environmental liabilities associated with them. You need to anticipate that there will likely be some type of contamination due to the presence of environmentally sensitive tenants.
In a situation like this, the seller may want to negotiate terms whereby the cost, either a specific dollar amount or a percentage of the total remediation cost, is borne by the buyer rather than the seller. The question might then arise: Why isn’t the seller completely responsible for the cost of remediation, considering that they permitted the alleged contamination to occur during its period of ownership?
The reason is that sometimes a seller is not financially capable of undertaking an environmental cleanup, so they will attempt to shift some of the cost to the buyer in exchange for a lower purchase price or some other type of monetary concession.
This is usually the first negotiation point; often, the buyer’s counsel will not permit the seller to shift the burden to the buyer at all. Either that or the parties will agree to cap the buyer’s responsibility at either a certain percentage or dollar amount of the remediation cost. Understanding the tenant mix and its implications upfront can give a buyer the ability to anticipate any potential remediation costs.
2. Request for environmental studies and assessments.
Secondly, a buyer should request all historical environmental studies or assessments that the seller has on hand. Typically, this includes a Phase 1 Environmental Assessment, which is required by lenders for financing. Regardless of whether a seller provides of a copy of its Phase 1 Environmental Assessment, a buyer will need to perform their own assessment to determine whether anything has changed between the time the seller performed its assessment and the commencement of the subject transaction.
This assessment, conducted by an environmental consultant, includes database searches for known environmental issues on the property and adjacent properties as well as visual, nonintrusive inspections of the subject property.
If the Phase 1 Environmental Assessment indicates potential issues, a Phase 2 Environmental Assessment might be necessary. This is a more invasive investigation that may include soil borings, water well monitoring and other types of monitoring to determine the level and spread of contamination—especially whether it can travel to water sources.
A critical discussion point is the use of a licensed site remediation professional (LSRP). In New Jersey, under the Site Remediation Reform Act of 2009, if contamination is discovered by an LSRP, the LSRP is legally required to disclose it to the New Jersey Department of Environmental Protection. This could lead to a reluctance on the part of the seller to use an LSRP in an attempt to keep the findings confidential. This situation calls for careful negotiation and possibly a confidentiality agreement between the buyer, seller and environmental consultant.
3. Ensure enough time for due diligence.
During the negotiation process, ensuring that the buyer has enough time during the due diligence period is vital. This time is necessary for environmental and structural inspections, reviewing the seller’s financial and operating documents and assessing potential remediation costs if contamination is discovered. It is common for sellers to request a short due diligence period, so consider negotiating for extensions or termination rights if the period is not sufficient.
From a practical standpoint, a seller is just as eager to sell as a buyer is eager to purchase. If environmental issues arise, it creates more leverage for the buyer since the seller is now concerned that the buyer may terminate the transaction. I recommend that buyers confirm a right to cancel the transaction during the due diligence period “for any reason or no reason at all.” However, if this is not a negotiated provision in the purchase and sale agreement, then the buyer should at least negotiate for the ability to terminate based on the non-satisfactory results of environmental testing.
In conclusion, environmental issues in commercial real estate transactions can be complex and challenging, but I find that they are manageable with knowledgeable legal counsel and a proactive approach. By following a process of due diligence, understanding the tenant roster and conducting thorough environmental assessments, you are more likely to have a successful transaction.
This article is for informational purposes only and should not be used or taken as legal advice. The views and opinions expressed in this article are those of the author, Matthew L. Holden, Esq., and do not necessarily reflect those of Sills Cummis & Gross P.C.
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