Environmental issues are often blamed when commercial real estate transactions are delayed. In many cases, however, the issue is not the environmental condition itself. The delay occurs because the parties have not anticipated how they will respond if environmental concerns are identified during due diligence.
Most environmental issues can be managed when they are identified early, and expectations are established before closing deadlines begin to approach.
Here are five environmental issues that commonly delay commercial real estate transactions and several practical steps buyers and sellers can take to reduce the likelihood of unexpected delays.
1. Recognized Environmental Conditions (RECs) Identified During the Phase I ESA
One of the most common causes of environmental delays is the identification of a Recognized Environmental Condition (REC) during the Phase I Environmental Site Assessment.
Examples may include:
- Former gas stations
- Dry cleaners
- Industrial operations
- Chemical storage areas
- Historical underground storage tanks
The presence of a REC does not necessarily indicate that contamination exists. It does, however, often raise questions that require additional investigation before a buyer, lender, or attorney is comfortable proceeding.
2. Soil or Groundwater Impacts Identified During Due Diligence
When environmental sampling identifies contamination, additional work may be necessary to understand the nature and extent of the impact.
This can involve:
- Additional soil borings
- Groundwater monitoring wells
- Delineation of contamination
- Evaluation of regulatory obligations
The challenge is often not the discovery itself but the additional time required to make informed business decisions.
3. Incomplete Historical Property Information
Environmental professionals frequently encounter properties with incomplete records regarding historical uses.
Examples include:
- Former industrial operations
- Historic fill areas
- Underground storage tanks
- Demolished structures
- Poorly documented waste handling practices
When historical information is limited, additional research or investigation may be required before environmental risk can be adequately evaluated.
4. Regulatory Requirements Identified Late in the Process
Certain environmental conditions may trigger regulatory considerations that were not initially anticipated.
Depending on the property and intended use, buyers may need to evaluate:
- State-specific remediation programs (PA Act 2, NJ SRP, NJ ISRA, DE HSCA)
- EPA Superfund Site acquisition steps with regulators
- Environmental covenants and deed notices
- Environmental obligations associated with redevelopment
When these issues are identified late in the transaction process, schedules can become compressed, and decision-making becomes more difficult.
5. Environmental Responsibilities Not Clearly Allocated
This is one of the most preventable causes of transaction delays.
When environmental concerns are identified, important questions immediately arise:
- Who pays for additional investigation?
- Who pays for remediation if contamination is discovered?
- What cleanup standard (e.g., residential, non-residential, restricted use, and unrestricted use) is acceptable?
- At what point can a buyer terminate the agreement?
- How much time is available to complete the additional investigation and/or remediation?
If these issues have not been addressed in advance, negotiations often occur under significant time pressure.
Practical Purchase and Sale Agreement Considerations
While every transaction is different, parties may wish to consider addressing environmental contingencies before due diligence begins.
Potential considerations include:
Automatic Due Diligence Extensions
If a Phase I ESA identifies a REC, buyers should have adequate time to determine whether a Phase II ESA is warranted and, if necessary, complete the investigation.
In many situations, a 45- to 60-day extension may be more realistic than a short extension period.
Investigation Responsibilities
The agreement should clearly identify who is responsible for the cost of additional environmental investigation and under what circumstances that investigation may occur.
Remediation Responsibilities
If contamination is discovered, the parties should understand how remediation responsibilities will be allocated and whether cost-sharing mechanisms or other solutions may be available.
Cleanup Objectives
The appropriate remediation endpoint may depend on future property use, regulatory requirements, and redevelopment objectives. Establishing expectations early can reduce future disputes.
Termination Rights
Parties may wish to establish environmental thresholds that permit renegotiation or termination if conditions exceed agreed-upon levels of risk, cost, or schedule.
Final Thoughts
Environmental issues do not automatically derail commercial real estate transactions. In many cases, delays occur because expectations regarding investigation, remediation, and environmental risk allocation have not been established before issues are discovered.
The best time to address environmental concerns is before they arise. Thoughtful environmental provisions in a Purchase and Sale Agreement can help buyers and sellers manage uncertainty, maintain transaction momentum, and make informed decisions when environmental issues are encountered.