Hidden environmental liabilities in a commercial real estate transaction can be devastating, costing millions of dollars in some cases. If you’re about to make a major property transaction, including a purchase, sale, lease, or refinancing, then environmental due diligence will be a key tool for managing unacceptable risks and avoiding liabilities.
Environmental due diligence gives you the information you need to make smart decisions and avoid costly surprises. Whether you’re buying, selling, or financing property, early detection of contamination and compliance risks can save years of legal and financial trouble down the line. In many cases, it can also preserve the value of your investment and support a smoother closing process.
What Is Environmental Due Diligence?
Environmental due diligence is a formal process that assesses real estate for potential risk of environmental contamination, such as contaminated soil or groundwater. Standards for conducting environmental due diligence are set forth by the Environmental Protection Agency (EPA). Environmental professionals determine the extent and type of assessment warranted, which varies based on the property and adjoining properties.
The risk assessment process is typically guided by the property’s history, location, and intended use. For example, a site that once housed industrial activity or sits near a gas station or dry cleaner may trigger a more in-depth review. Environmental consultants use past records, site visits, interviews, and agency databases to assess the likelihood of environmental issues and determine the appropriate level of investigation. This may include everything from visual inspection to testing for hazardous substances, depending on what they find.
The High Cost of Overlooking Environmental Risks
The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) establishes a process to determine who is liable for hazardous substances. The act authorizes regulators to fine property owners and require the removal of hazardous materials at the owner’s expense, even if the owner is not responsible for the contamination. This means that the owner may be held liable simply by owning the property. From site cleanup to regulatory compliance obligations and even third-party legal actions, remediation costs for this process can easily run into the millions for the liable party.
These liabilities often catch property owners off guard. A building that appears clean and well-maintained today may sit atop a contaminated site left behind by prior owners or tenants. Common high-risk properties include former gas stations, dry cleaners, auto repair shops, and sites with industrial or manufacturing histories, many of which may have used underground storage tanks that were improperly decommissioned or undocumented. Even if the business responsible for the contamination is long gone, the burden of cleanup can still fall squarely on the current owner.
In some regions, local and state environmental regulators enforce cleanup obligations more aggressively than federal agencies, adding additional pressure and cost. Without proper environmental due diligence, you may not only inherit a polluted site but also a multimillion-dollar problem with no warning.
How Environmental Due Diligence Protects You
Environmental due diligence isn’t just about uncovering problems. It’s about protecting yourself. With the right process, conducted at the right time, due diligence can shield buyers, sellers, and investors from environmental liability, regulatory penalties, and financial loss. Here’s how it works.
It Qualifies You for Liability Protection Under CERCLA
Proper assessments made through environmental due diligence can protect you from the potentially crippling environmental liabilities and environmental cleanup liens under CERCLA, even if contamination is found after the purchase is made. Protection under CERCLA is for owners, innocent landowners, contiguous property owners, and bona fide prospective purchasers. To demonstrate qualification for one of these parties, All Appropriate Inquiries (AAI) must be conducted before acquiring the property. This means conducting environmental due diligence through a Phase I Environmental Site Assessment process, which is where most due diligence investigations begin. Most Phase I ESAs are performed as part of environmental due diligence services provided by qualified consultants who follow EPA guidelines.
It Reveals Risks
A Phase I ESA investigates the current and historical uses of a property to identify recognized environmental conditions (RECs), which indicate the presence or likely presence of hazardous substances due to a release or threat of release into the environment. In addition to demonstrating that AAI was taken, continuing obligations must be followed during property ownership, like exercising appropriate care concerning hazardous substances and complying with land use restrictions.
It Keeps You Compliant with Other Environmental Regulations
Aside from CERCLA, be sure to follow any laws set forth by state, local, or federal regulatory requirements for assessment requirements and liability protection. It is worth noting that hiring a well-qualified environmental consultant and carefully defining your goals with the consultant is crucial for ensuring a proper assessment. Additionally, conducting due diligence early during the acquisition process is necessary because the discovery of post-acquisition liabilities holds the current owner responsible for remediation.
It Provides Deeper Insights Through Phase II Testing
If a Phase I ESA uncovers signs of potential environmental contamination, the process may continue with a Phase II ESA. This more detailed investigation typically involves soil, groundwater, and vapor sampling, as well as laboratory testing. While more involved, Phase II assessments provide the data needed to determine the true extent of the problem and whether remediation is required before proceeding with the transaction.
It Helps You Plan Around Land Use Restrictions
Land use restrictions are another important consideration. If environmental concerns are present, regulators may impose conditions that limit how the property can be used. For example, a parcel might be approved for industrial use but prohibited from future residential development due to elevated groundwater toxins. Understanding these restrictions early gives owners the chance to plan accordingly and avoid violations.
How Buyers Can Make the Most of Environmental Due Diligence Assessments
Alongside liability protection, environmental due diligence is a useful tool for buyers. Buyers can ensure they are getting the best investment value for a property and structure their acquisition based on what the assessment reveals. For instance, if contamination is found on the property, a buyer can negotiate a commensurate reduction in the price of the real estate or decide not to purchase.
A seller facing the realization that their property is contaminated may be able to mitigate the potential reduced value of their sale, as well as the financial cost of remediation, by locating old insurance policies that do not contain an effective pollution exclusion.
In addition to negotiations between buyers and sellers, environmental due diligence often plays a deciding role for lenders and investors. Financial institutions typically require a clean Phase I ESA or a clear path to remediation before approving financing. By conducting due diligence early and thoroughly, buyers can move through closing with greater confidence, sellers can present a more transparent offering, and all parties can avoid delays or costly surprises late in the deal.
When to Start the Environmental Due Diligence Process
Environmental due diligence should begin as early as possible—ideally before you sign a letter of intent (LOI) or finalize any financing terms. This includes checking the state environmental status of the property to see if it is listed on any active cleanup rosters, UST databases, or environmental enforcement watchlists. Waiting until the closing phase increases your risk of discovering contamination too late to adjust the deal, negotiate cleanup responsibilities, or qualify for liability protections under CERCLA.
Starting early gives buyers time to complete a Phase I ESA, respond to red flags, conduct additional testing, and line up insurance archaeology or remediation strategies. It also helps sellers prepare a stronger case for their property’s value and avoid last-minute surprises that could derail the transaction.
In many cases, early due diligence can also be used to build trust between buyers, sellers, lenders, and legal teams, creating a smoother path to closing and long-term peace of mind.
Work With the Right Experts to Maximize Value and Minimize Risk
Environmental due diligence is a strategic safeguard against long-term liability and financial risks. Whether you’re buying, selling, or managing contaminated property, starting early and surrounding yourself with the right experts can make all the difference.
Environmental due diligence is most effective when supported by a team of professionals, including environmental consultants, attorneys, and insurance archaeologists who understand how to manage legacy risk.
If you are faced with an environmental liability, there may be a hidden asset to fund these unforeseen costs in the form of decades-old Commercial General Liability (CGL) insurance policies. These policies may have been forgotten, lost, or simply ignored. The good news is that the Insurance archaeologists at Restorical Research can help you locate these historical records or evidence that they existed, which can provide coverage to clean up your contaminated property and preserve the value of your real estate.
Restorical works alongside legal and environmental experts to uncover lost or misplaced policies, broker correspondence, premium records, and other documentation that may establish coverage. With the right team in place, property owners can minimize risk, maximize value, and move forward with confidence.
Disclaimer: This blog is not a legal opinion. Restorical is not a law firm and is unable to provide legal advice. We are not attorneys, and this is not legal advice.
