You’re about to purchase a piece of property or buy a business, and you’ve done your research. But have you remembered to do your environmental due diligence to uncover any environmental conditions attached to the property?
These conditions can be big or small, but you need to make sure that you know about them before completing the transaction. Doing so can help protect you from any liabilities associated with the conditions and allow you to address or minimize these issues from the outset.
“You can run into project delays if you find an environmental issue that you hadn’t planned for,” says Eugene P. Schmittgens Jr., of counsel with the litigation and environmental practice groups at Greensfelder, Hemker & Gale, PC. “If that happens, that’s going to result in a delay. You need to take time for this due diligence to find any problems and determine if a deal still makes sense or if you need to walk away from it.”
Smart Business spoke with Schmittgens about doing environmental due diligence in transactions and why environmental conditions may not mean the end of the road for your deal.
What environmental due diligence do you need to do before completing a transaction?
The first step in performing proper due diligence is a Phase I, which is a study of the property by an environmental professional. This helps identify conditions that may exist on the property that could lead to liabilities. No business or property is the same, but the requirements for performing a Phase I are specifically spelled out. While a proper Phase I contains the same elements, every approach to an environmental condition is different, based on what you’re trying to accomplish in the deal.
The Phase I is also very limited in scope and only addresses whether there’s been a potential release of a contaminant or petroleum product on the property. It won’t address if there’s asbestos, mold or lead paint in the building, which you also need to know about before a renovation project. The Phase I also won’t identify whether someone has a proper air or water permit or if the waste operation is handled properly. If you are purchasing an ongoing business that may require permits, you must request this additional review because it is outside the scope of a Phase I but still can impose liability on the purchaser.
If you do find an environmental condition, you may need to perform a Phase II investigation. This is invasive sampling of the property to figure out whether contamination exists. This is like throwing a dart at a dartboard — you may or may not hit your target. So just because you didn’t find anything during sampling doesn’t mean there isn’t any contamination; you might have to do several iterations to find it.