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The Importance of Earnest Investigation of Industrial Properties

Those acquiring industrial properties need to assess their environmental risks early on and put in place plans for remediation of any problems that surface.

Q3 2015
The acquisition of real property for industrial development shares many of the same environmental risks and considerations as other types of development. However, industrial development also presents unique concerns that should be taken into account early in the acquisition process so that the buyer does not unknowingly inherit and become entangled with a property’s problematic environmental legacy. Close and early attention to environmental risks prior to a property’s acquisition affords the parties an opportunity to clearly address such concerns up front, which can result in a beneficial outcome for both buyer and seller alike.

Properties acquired for industrial use often carry a higher risk of environmental impairment. These properties are typically located in industrial areas and can themselves have a history of industrial activity. While current industrial practices and regulatory requirements lessen the risk of releases of hazardous materials, today’s safeguards were not in place in the not so distant past. Sloppy practices and accidental releases, although not as prevalent as they once were, still occur.
The need to assemble the right team of consultants and counsel, while important in connection with any real property acquisition, is even more critical for the industrial user for a site with a legacy of industrial use.
Regardless of a lack of involvement, a new property owner can be tarred with liability for such releases from past industrial operations. As a result, to effectively manage potential environmental liability risk for industrial property, a prospective purchaser should conduct thorough environmental due diligence and use the information obtained either to cease pursuing the site or to negotiate purchase terms that clearly allocate the risk and responsibilities for contamination in a manner acceptable to the purchaser.

As a general rule, in most jurisdictions a property owner is liable for cleaning up its property regardless of whether the owner caused the contamination. In addition to burdening the owner with the risk of cleanup liability, environmentally impaired property can interfere with development plans by delaying schedules, increasing costs, limiting uses and sometimes even thwarting development altogether.

Although a property owner may have recourse against those responsible for causing the contamination, pursuing responsible parties (provided they still exist and are financially worthwhile to pursue) may involve spending a great deal of time and incurring significant expense. Complicating matters, it may not be easy establishing the culpable party where there is a history of multiple operators, particularly if similar industrial operations were conducted under different ownership. If the responsible party turns out to be the seller, without proper planning, a buyer’s recourse against the seller may unwittingly be precluded under the purchase and sale agreement, which commonly provides that the property is conveyed “as is,” releasing the seller from liability even for its own acts causing contamination of the site.
A cleanup agreement negotiated as part of the purchase and sale of an industrial property may be warranted and may further aid the prospective purchaser in managing environmental liability.
Phase I & II Assessments
As with most real estate transactions, a Phase I environmental site assessment is a critical first step for environmental diligence. This nonintrusive exercise is primarily based upon a review of historical records, interviews, and an inspection by a qualified environmental consultant, with an objective of identifying potential releases of hazardous materials on or at the property, known as “recognized environmental conditions.” The performance of a Phase I prior to the acquisition of real property can also serve as a basis for limiting cleanup liability under federal law. A Phase I that meets the ASTM E1527-13 — Standard Practice for Environmental Assessments: Phase I Environmental Site Assessment Process — may be used to comply with the U.S. Environmental Protection Agency All Appropriate Inquiry Rule to ascertain landowner liability protections under the U.S. Comprehensive Environmental Response, Compensation and Liability Act. Nonetheless, such protections on their own rarely prove sufficient to manage the risk, since a new property owner can still face cleanup liability under state law, additional obligations under federal law, and other barriers to developing the property as a result of preexisting contamination.

If recognized environmental conditions are identified, additional diligence in the form of testing soil, soil gas, and groundwater, commonly referred to as a “Phase II environmental site assessment,” may be necessary to determine whether releases have impacted the property. Although the detection of contamination in some situations may lead to the prospective purchaser walking away, the results of a Phase II can also enable the purchaser to weigh the potential costs and liability risks, which do not always prove insurmountable.

In some circumstances, the parties may choose to negotiate terms to allocate the responsibility for remediating contamination after the closing. To effectively address cleanup responsibly as part of a real estate transaction, establishing a baseline of the environmental conditions existing at the time of the sale based upon the Phase II and other available data can play an important role. A baseline can avoid confusion between what may have existed prior to the sale with what may occur afterwards from new industrial operations. This can prove especially useful where the subsequent industrial use involves the same hazardous materials and utilizes preexisting equipment on the property, such as tanks. A baseline can also be used to define the scope of indemnification obligations and cleanup agreements, as discussed below.
The performance of a Phase I environmental site assessment prior to the acquisition of real property can serve as a basis for limiting cleanup liability under federal law.
Cleanup Agreements
A cleanup agreement negotiated as part of the purchase and sale of an industrial property may be warranted and may further aid the prospective purchaser in managing environmental liability. Such agreements can allow the cleanup to occur after the closing. Cleanup agreements should clearly articulate the responsibilities of each of the parties, including identifying who will actively manage the work, who will pay for it, how the contractors will be selected, and how the parties will communicate with the regulatory authorities.

It is important for the parties to define the scope of the cleanup and the cleanup standard. The parties will also want to consider how the remediation will be coordinated with the planned use and development of the property to not only minimize interference, but to also allow for more cost-effective remediation, such as potentially excavating contaminated soil in the course of development.

Parties to cleanup agreements who do not play an active role in the cleanup will want to consider rights for overseeing the work, including input into the preparation of cleanup plans and communications with the regulatory authorities. With regard to addressing who will pay for the cleanup, consideration should be given for securing assurances that adequate funds will be available, such as by establishing an escrow account or letter of credit. On the other hand, the party responsible for payment will want to consider the criteria for acceptable costs and approving payments. Where the seller retains responsibility for performing the cleanup after the sale, access rights to the property and appropriate insurance and indemnification obligations in favor of the new owner will need to be worked out.
Environmentally impaired property can interfere with development plans by delaying schedules, increasing costs, limiting uses and sometimes even thwarting development altogether.
In addition to addressing contamination, purchasers of industrial properties need to evaluate whether industrial equipment that remains on-site should be removed prior to the transfer of ownership. This can help the buyer avoid surprises, save costs, and limit liability arising from off-site disposal of contaminated equipment, hazardous materials, and soil.

Some equipment and improvements may be subject to permit terms that require agency approval for its removal and closure, such as underground storage tanks or hazardous waste management units. Where this is the case, it is important that the responsibility for achieving closure be delineated and factored into the closing schedule or post-closing agreement.

An Early, Proactive Approach
As companies grow, expansion and the acquisition of industrial property and new facilities may not only be inevitable but should also certainly be a welcomed opportunity. Nonetheless, such opportunities should be seized with the right planning and forethought as to environmental risks. The need to assemble the right team of consultants and counsel, while important in connection with any real property acquisition, is even more critical for the industrial user for a site with a legacy of industrial use. An early proactive approach is an important risk management tool that will not only lessen the chances that the prospective property buyer will unknowingly bite off something it does not want to chew, but will also afford the parties an opportunity to tackle environmental impacts and appropriate sales terms head-on to pave the way for a fair transaction.
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