New Standard for Environmental Due Diligence Impacts Property Purchase and Lease Transactions

New federal environmental rules now in effect may impact your next property purchase or leasing decision. These laws now require a buyer or lessee to conduct a higher standard of environmental due diligence to avoid liability for contamination on the new property they plan to occupy. As a result, prospective purchasers and lessees are well advised to obtain the assistance of qualified environmental professionals to provide a detailed report on the subject property before entering into a purchase or lease transaction. Business owners should anticipate that it will take more time and cost more money than before to conduct the required due diligence and to complete a purchase or lease.

Who is Impacted?
Under federal law, a person who acquires an interest in contaminated property - whether the contamination is known of or not - can be liable for remediation costs for the property. These costs can be extensive and are generally not covered by insurance.

Purchasers and tenants can avoid this liability by qualifying for certain exceptions or "defenses" provided by federal law. However, these defenses are available only to those who undertake a particular level of inquiry prior to purchasing or leasing the contaminated property. The new federal regulations have heightened the required level of inquiry or "due diligence."

Available Defenses
Purchasers and tenants may avoid liability for remediation costs if they can establish an "innocent purchaser" or "bona fide purchaser" defense. Both of these defenses require that the new owner or lessee demonstrate that they did not know or have reason to know, when they acquired an interest in the property, of contamination later found on the property. This standard is met by making all appropriate inquiries into the condition of the property prior to purchase or lease.

"All Appropriate Inquiry" Requirement
Traditionally, purchasers and lessees have sought the protections of the innocent or bona fide purchaser defenses by performing a reasonable level of inquiry in what has been called a Phase I Environmental Assessment. Now, however, these defenses are available only upon a more extensive inquiry into the condition of the property at issue. Environmental consultants who prepare these reports continue to refer to them as Phase I Environmental Assessments. In order to ensure that these reports meet the new standards however, prospective purchasers or tenants are well advised to seek legal counsel to review the Phase I report and to confirm that it incorporates the higher level of inquiry required by the new standards.

The following list highlights a few key activities that must be performed under the heightened inquiry standard:

• Interviews of past and present owners, operators, and occupants of the property
• Review of historical sources of information since the property was first developed or used (previous standards only required information back to 1940)
• Searches for environmental liens and implemented environmental controls on the property
• Review of federal, state, and local governmental records to determine what information is available on the property
• Visual inspection of the property and a visual inspection of adjoining properties from the property line, rights of ways, or other vantage points; documentation of any limitations to inspection
• Documentation of any specialized knowledge held by the person or entity seeking to acquire a lease or ownership interest in the property
• Consideration of how the purchase price reflects on the condition of the property
• Collection of other commonly known or reasonably ascertainable information about the property

Once the required inquiry is complete, the professional preparing the report must assess the degree to which the presence or likely presence of contamination is obvious at the property. The resulting environmental analysis report must also detail conditions on the property that indicate whether it is likely that there is a release or threatened release of contaminated materials, and identify any data gaps in the relevant information.

Implications
This new level of inquiry will require more research, more time, and more documentation by the purchaser or lessee. Given the heightened standard of review and the implications of these changes on the ability to establish a defense to liability, we recommend that prospective purchasers and lessees build more time into their due diligence period and anticipate a higher cost to complete it. In addition, we recommend that you seek legal assistance and input from an environmental consultant at a very early stage in your property lease or purchase negotiations.

Dunn Carney has the expertise to assist you with negotiating these new rules as well as other state and federal regulations applicable to contaminated properties. If you would like more information about the new regulations and their effect on business owners and other parties, please contact Randall L. Duncan, Chair of our Closely Held Business Team, or Elizabeth Howard, Chair of our Environmental and Agriculture/Natural Resources Teams.

Closely Held
Business Team

The Closely Held Business Team - Dunn Carney is dedicated to assisting business owners in navigating through the opportunities and challenges the law presents to advance each owner’s success in business. They understand the multifaceted issues business owners face each day and the need for responsive and proactive legal counsel.

Team members include:
Randy Duncan, Team leader
Bob Allen
Shane Antholz
Ric Ashe
John Barhoum
Merrill Baumann
David Buono
Brian Cable
Jack Cooper
Ken Davis
Tim Hering
Frank Hilton
Elizabeth Howard
Scott Jonsson
Robert Kerr
JoDee Keegan
Kelly Martin
David Rossmiller
Eric Smith
Kyle Stinchfield
Dan Vidas
Matt Wilmot
Bob Winger
David Zehntbauer