Property buyers and sellers must understand the impact of environmental regulations when trading in real property, whether for residential or commercial use.
Regulations have the force of law and must be followed. Failure to do so sometimes puts a deal in jeopardy and often has expensive consequences. Buyers should put a regulatory analysis on their pre-closing checklist, ideally during the time permitted under an earnest money contract to back out of the deal without penalty. Even a buyer purchasing property “as-is” should consider environmental matters because unexpected costs might make a deal unworkable.
Due diligence should identify environmental issues
Effective environmental due diligence involves the assessment of known, potential, and contingent environmental liabilities and obligations associated with a property to be acquired. If environmental issues come to light, the buyer may have a contractual right to back out, and sometimes might want to back out even if it means breaching a contract.
Common concerns discovered during diligence include:
- Proof or a likelihood of groundwater or soil contamination due to current or past use
- Proof or likelihood of contamination from offsite locations
- Risk of hazardous soil vapors rising from subsurface contamination
- The presence of asbestos, lead-based paint or other hazardous building materials in existing structures
- The existence of existence endangered species
- Other non-compliance with environmental requirements
The bottom line
Real property with compliance issues or the potential for them is harder to sell at the desired price. Of course, a seller can make a sale more appealing by lowering the price or otherwise acknowledging likely clean-up costs or other related expenses. Occasionally, a risk transfer product like insurance can be helpful to bridge a value gap.
Other parties likely to have a stake in the process include the buyer’s lender or underwriters who weigh the details when determining whether they will financially support the acquisition.
These are complicated transactions
Any real estate deal involves a certain amount of risk. Commercial property and development transactions can become complicated as the buyer proceeds with due diligence and discovers concerns.
It is essential to work with advisors who understand the process. The right team can help take clients through the process, including identifying potential diligence and regulatory issues, drafting and revising agreements, and negotiating the deal’s terms.