Guard Against De-emphasizing Environmental Due Diligence in Commercial Real Estate Transactions



Five years ago, the legislature amended Michigan.s environmental cleanup statute to facilitate the purchase and development of contaminated real estate. The legislature accomplished this by providing potential purchasers of contaminated property with a mechanism to avoid cleanup liability, and by eliminating strict liability for those who owned or operated contaminated property at the time of the amendments (June 5, 1995), but who were not responsible for creating the contamination. In addition, the legislature established use-based cleanup standards to reduce cleanup costs. These legislative changes have aided development throughout the state, particularly in urban industrial areas known as .brownfields.. However, these changes have also led some real estate professionals to de-emphasize environmental due diligence in conjunction with real estate purchase transactions. As explained below, some level of environmental due diligence should be conducted in almost all such transactions, notwithstanding changes in Michigan.s environmental cleanup requirements.

The generally accepted standard of basic environmental due diligence is known as a .Phase I Environmental Site Assessment. (.Phase I ESA.), conducted in accordance with the American Society for Testing and Materials (.ASTM.) Standard Practice No. E-1527. Phase I ESAs include inspection of the subject property, interviews with the current owners and/or operators of the property and review of public records to determine whether there are any .recognized environmental conditions. (.RECs.) associated with the property. (Examples of RECs are evidence of an underground storage tank or stained soils or stressed vegetation.) For properties where circumstances suggest a low risk of any RECs associated with the property, a Phase I .Transaction Screen. conducted in accordance with ASTM Standard Practice E-1528 may be appropriate instead of a Phase I ESA. The Transaction Screen is an abbreviated (and usually cheaper) version of the Phase I ESA. Typically, a Phase I ESA or a Transaction Screen costs between $1,500 and $3,000 per property.

Foregoing Phase I due diligence on a commercial or industrial property based on the belief that environmental liabilities are no longer as much of a concern due to changes to Michigan.s cleanup laws can be risky and should only be done after consultation with experienced environmental counsel. The legislature.s elimination of cleanup liability for those not responsible for environmental contamination on a property generally applies only to those who owned or operated the property on or before June 5, 1995 (the effective date of the legislation). For those purchasing contaminated property after that date, a baseline environmental assessment (.BEA.) of the property must be completed by the new property owner or operator and filed with the state in order to exempt the new owner or operator from cleanup liability, assuming that the new owner or operator is not responsible for the contamination. Phase I (and follow-up) due diligence is what typically enables the purchaser to determine whether contamination may be present and take advantage of the BEA exemption from cleanup liability. If a BEA is not completed, the purchaser may be liable for the cleanup of contamination, even if the purchaser did not cause the contamination.

Foregoing Phase I due diligence may also deprive the purchaser of the ability to take advantage of the .innocent purchaser. defense to cleanup liability provided for in both the Michigan and federal cleanup laws. If the Phase I due diligence divulges no RECs associated with the property, and contamination is subsequently discovered after purchase, the purchaser can claim .innocent purchaser. status and avoid cleanup liability. If no Phase I due diligence was conducted prior to the purchase, it would be exceedingly difficult for the purchaser to claim innocent purchaser status. This is because federal and state laws require the purchaser to have conducted .all appropriate inquiry. consistent with good commercial or customary practice into environmental conditions on the property prior to purchase in order to claim innocent purchaser status.

Changes to Michigan.s cleanup laws have gone a long way to facilitate real estate transactions involving contaminated property. However, these changes have also created the illusion among some in development circles that rigorous environmental due diligence is no longer needed in real estate transactions. As summarized above, this is an erroneous (and potentially very costly) belief. As in all matters where complicated regulatory considerations are involved, it is imperative that the question of whether and to what extent environmental due diligence is performed in a given transaction be discussed with experienced environmental counsel before committing to a course of action.

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