Environmental Issues in Business Transactions – Problems and Practical Problem Solving
MEREDA hosted its “Morning Menu” breakfast event on November 13th, with Ken Gray from Pierce Atwood and Nick Hodgkins of the Maine Department of Environmental Protection (DEP). Missed the breakfast? Here’s the recap.
You’re thinking of buying a property and are advised to do some environmental due diligence. Why is environmental due diligence important? Simple: you can save money and multiple headaches later, preserve the value of the property, and limit your liability under federal and state cleanup programs. Below is a quick look at some of the recent environmental issues involved in real estate transactions, and some of the practical solutions.
Phase I
The first step of environmental due diligence is often having a Phase I Environmental Site Assessment conducted. Here are some typical Phase I problems:
- Many Phase I reports don’t meet minimum legal standards;
- A Bank’s or Seller’s Phase I isn’t adequate for a Buyer;
- Tenants may or may not be able to relay on a landlord’s Phase I – if the landlord even did one at the time of acquisition;
- “Vapor intrusion” is a recent issue that is leading to more investigation; and
- Outside review of a Phase I is strongly recommended.
Hazardous Waste Closure
Lack of hazardous waste “closure” can bring a transaction to a screeching halt or pose issues after taking position. Conducting a hazardous waste closure is required by law for certain generators. If the prior owner didn’t conduct and file hazardous waste closure, the new owner may have an obligation to do so.
Lenders
When working with a bank or financial institution lender, you should know that lenders typically have their own environmental due diligence requirements. Failing to address those in a timely manner can slow a transaction or cause unexpected surprises.
First Things First, Then Second, Then Third…
When buying a property or business, there are a number of due diligence decisions that should be made as early in the process as possible. Determining the scope of the Phase I, selecting an environmental consultant, identifying environmental permits and tank registrations and compliance, addressing those in the drafting of the purchase and sale agreement – well, the list goes on.
Who’s doing what?
In addition to the Buyer, the Seller will have certain duties including answering questions on history, providing documents, and perhaps allowing testing. You’ll (hopefully) have an attorney who will do the property’s title search, draft the contract and conduct the closing, and make sure that the Phase I meets the necessary ASTM standard. Your attorney may also need to determine if an environmental covenant is necessary. And, if you want to obtain liability protections through the Voluntary Response Action Program (VRAP), you better not forget the DEP.
Continuing Obligations
If you buy contaminated property and may need to assert a liability defense in the future, or defend against a legal claim, you will have to explain how you are addressing the “continuing obligations” that come with owning contaminated property. Those are listed in law and include taking “reasonable steps” to stop releases and prevent or limit exposure. And, of course, that includes cooperation with any government response actions and compliance with any land use restrictions.
VRAP
The VRAP program allows buyers/applicants to voluntarily assess and remediate properties (or not) and obtain DEP review and approval, with corresponding liability protections. The buyer/applicant is responsible for all assessment and remediation costs, including the VRAP application fee. Those fees are sometimes shared where the seller joins in the application for liability protection. However, VRAP protection is limited; it applies only to the information submitted and only to state liabilities. If you think U.S. EPA involvement is possible, there are additional considerations!
