Understanding Environmental Due Diligence in Commercial Real Estate Transactions
Commercial real estate transactions often involve multiple legal and financial questions that shape how deals are finalized in Texas. One essential consideration is environmental due diligence, a process that checks for contamination or ecological risks affecting a commercial property.
Buyers, sellers, and lenders usually share an interest in making sure a property meets the required standards before closing. Identifying environmental hazards upfront can save money, avoid legal penalties, and protect property values in the long run.
At The Law Offices of Thomas H. Keen, PLLC in Texas, I have observed how environmental problems can derail a sale if they’re left unaddressed. I proudly serve clients throughout North Texas, including Plano and Dallas, Texas.
The Significance of Environmental Due Diligence in Real Estate
Environmental due diligence examines a property’s past and present conditions to spot contamination that might trigger liability. Purchasers who skip or shorten this process risk inheriting issues that could lead to steep cleanup costs under federal, state, or local regulations.
Real estate deals in Texas commonly revolve around a property’s potential for development or immediate use. Any contamination found after closing could slow down projects or even block them entirely.
Since environmental regulations can impose liability on current owners, regardless of who caused the contamination, it’s wise for prospective buyers to confirm that no hidden hazards exist.
Buyers who take environmental due diligence seriously often have stronger bargaining power. They can ask sellers to handle certain problems or reduce the purchase price to compensate for cleanup. Sellers also benefit from a transparent process, as addressing known issues can help prevent lawsuits or disputes after the deal is finalized.
Understanding Environmental Site Assessments
A common and respected method of performing environmental due diligence is conducting an environmental site assessment (ESA). Lenders frequently require an ESA if the buyer is using financing; however, many cash purchasers also value a thorough review. The ESA generally unfolds in two phases.
Phase I ESA
The Phase I ESA involves a visual inspection of the property and a detailed review of historical records. Investigators look for any indications of past industrial operations or spills, along with possible signs of underground storage tanks or improper waste disposal. Some aspects that are considered under Phase I include the following:
Reviewing historical land use: Checking old maps, permits, or ownership documents to see whether the site housed factories or gas stations
Conducting interviews: Speaking with current owners, occupants, or local officials about any known contamination
Examining relevant databases: Searching government records to see if the site is listed for contamination incidents
If no red flags appear, the buyer can typically move forward, confident that no major issues are lurking. If suspicious conditions surface, a Phase II ESA may be recommended.
Phase II ESA
In Phase II, environmental professionals will collect soil, water, or air samples to test for the presence of hazardous substances. Some activities that may be conducted during Phase II include:
Drilling monitoring wells: Installing wells to gather groundwater samples for lab analysis
Soil sampling: Testing the soil to check for contaminants like petroleum hydrocarbons or heavy metals
Lab testing and reports: Reviewing lab data to determine if contamination exceeds regulatory limits
Phase II provides a clearer picture of what’s happening beneath the surface. When contamination is found, the parties can either address remediation or adjust the transaction terms. Real estate buyers who complete this process have more information about a property’s true state and can make decisions accordingly.
Common Environmental Concerns
Certain hazards tend to appear more often in commercial real estate, especially properties with an industrial or agricultural history. Potential buyers should know which contaminants could be lurking on the property, as each one poses unique risks. Some common environmental concerns include:
Underground storage tanks: Tanks from previous gas stations or agricultural facilities might still contain fuel or chemicals. Leakage from corroded tanks can pollute the soil and groundwater.
Asbestos-containing materials: Older buildings sometimes have asbestos in insulation or flooring. Disturbing asbestos can release harmful fibers that affect human health.
Lead-based paint: Structures built before 1978 can contain lead-based paint, which is dangerous when it chips or peels.
Mold and water damage: Poor ventilation or moisture problems can lead to mold growth, impacting indoor air quality and structural integrity.
These concerns may require specific inspections or tests. If a Phase I ESA suggests any of these risks are present, the buyer might choose to explore the issue further or renegotiate certain contract terms.
Key Environmental Regulations in Texas
Texas has a range of regulations that govern environmental compliance, and some of these rules mirror federal laws like the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Buyers who avoid conducting due diligence can be exposed to responsibility for contamination, even if they weren’t the ones who caused it.
Many properties in Texas fall under state oversight for storage tanks, air emissions, or hazardous waste management. The Texas Commission on Environmental Quality (TCEQ) enforces various standards that sellers and buyers should keep in mind. Exploring a property’s background can avoid unwanted liabilities.
Although thorough due diligence can take time, it can reveal whether a site is already under a TCEQ enforcement action or if there’s an open remediation case. That information allows buyers and sellers to work out solutions before title transfers.
Manage Liability Through Contract Terms
Even if an ESA suggests there might be problems with the property, there are ways to handle liability in the purchase contract. Buyers and sellers often discuss who will pay for any needed cleanup or whether the seller will handle it before closing.
It’s common to include representations and warranties about the property’s environmental status, as well as clauses stating who will be responsible if new issues surface later. Both buyers and sellers might want to address the following:
Clear definitions: Outline what constitutes an environmental defect and which tests will be performed under an ESA.
Disclosure requirements: Specify what documentation and records the seller will provide, such as any past environmental reports.
Right to terminate: Allow the buyer to exit the contract if any contamination is found above the agreed-upon thresholds.
Indemnification clauses: State who will pay the applicable damages if a third party sues over pre-existing contamination.
These contract provisions can offer peace of mind, but they don’t always protect a new owner from state or federal enforcement. Texas authorities can hold the current owner liable, regardless of private agreements. Therefore, it's important to set clear expectations in the contract to smooth the transaction and reduce disputes after closing.
Practical Tips for Buyers and Sellers
Since commercial real estate deals can move quickly, having a checklist for environmental due diligence can prevent delays and surprises. Some practical tips both buyers and sellers can use include:
Start assessments early: Phase I ESA reports take time, especially if you need a Phase II ESA. Initiate the process as soon as you decide to pursue a property.
Review historical records thoroughly: Sometimes older documents reveal surprising past uses. The more you know about previous occupants, the easier it is to identify possible contamination.
Communicate with lenders: If financing is involved, lenders might have specific requirements for environmental reports.
Negotiate contract provisions wisely: Clear language about who handles remediation or other environmental liabilities can help avoid conflicts down the road.
Keep documentation: Maintaining all environmental reports and correspondence provides a record of what was investigated, discovered, and addressed.
These steps can help both sides reach a smoother closing. Sellers who can demonstrate they’ve addressed known contamination often get stronger offers, while buyers who’ve done their homework can move forward with more confidence.
Contact an Experienced Attorney Today
At The Law Offices of Thomas H. Keen, PLLC, I strive to assist clients throughout North Texas, including Plano and Dallas, Texas, with environmental compliance during real estate dealings. I’m here to help you understand your responsibilities when buying or selling commercial real estate.
A careful approach to environmental due diligence can save you from unexpected cleanup costs or legal trouble. Contact me today to discuss your real estate concerns and learn how thorough investigations can strengthen your transaction.