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Who Needs Environmental Coverage During a Real Estate Transaction?

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Of all of the issues that have to be considered when a property is changing ownership, environmental challenges can quickly complicate or derail a transaction. Even when an entity is purchasing properties as part of an asset versus stock transaction, it is evident from case law that complicating legal factors may require the new owner of the property to prove, in court, that they are not liable for environmental liabilities associated with the properties.

In general, exposures for real estate transactions vary somewhat depending on the role of the stakeholder considering coverage. These can include:

  • Seller (which may include sole entity, joint ventures, investors, asset managers, developers, real estate investment trusts, combinations of these, etc.)
  • Purchaser (which may include sole purchasers, joint ventures, investors, asset managers, developers, real estate investment trusts, combinations of these, etc.)
  • Real estate broker (representing seller and purchaser)
  • Mortgage lender
  • Contractor(s)/appraisers performing due diligence on the properties

Environmental Concerns for Each Stakeholder in a Real Estate Transaction

The following are some of the environmental concerns for each stakeholder involved in a real estate transaction:

  • Seller
    • Regardless of environmental indemnity agreements, under environmental regulations, past owners of properties are potentially liable for environmental concerns that are uncovered at the properties after a sale.
    • Counterparty credit risk exposure exists if there is a “failure to perform” environmental indemnity obligations.
    • Unforeseen potential environmental issues may be discovered during due diligence associated with a transaction which may cause it to stall or stop altogether.
  • Purchaser
    • Unforeseen potential environmental issues may be discovered during due diligence associated with the transaction which may cause it to stall or stop altogether.
    • Failure to conduct adequate due diligence of property prior to acquisition. This is particularly an issue when the purchaser acquires a portfolio of properties where there may not be adequate environmental information available for each property, there is no time to review the environmental information, or there are surrounding properties that may impact the purchased property for which there is no environmental information.
    • Accepting indemnity agreements with inadequate time limits for addressing environmental issues, gaps in liability protection, or inadequate costs to address environmental issues.
    • A decrease in the value of a property once environmental concerns are uncovered, whether they are real concerns or create a “stigma” with respect to the property.
    • Changes in environmental regulations that may restrict site use, future development, or require investigating sites that had been contaminated at one time, but were thought to be adequately addressed prior to the acquisition.
    • Future business interruption as a result of environmental concerns.
  • Real Estate Broker
    • Lawsuits against both buyer and seller brokers for non-disclosure of environmental issues including soil/groundwater contamination, vapor intrusion, historical meth lab activities, lead, asbestos, etc.
    • Certain states have laws in place that require that any information related to seller disclosures, such as the lead or asbestos disclosures, either be verified or when transferred to the selling parties be communicated that the information is unverified. In some states, transferring environmental disclosures without a statement with regard to verification is an environmental exposure for real estate brokers.
  • Mortgage Lender
    • The inability of a borrower to pay the loan back to the lender due to environmental issues with the property.
    • A decrease in the collateral value of a property due to environmental concerns.
    • Environmental liability for properties after foreclosing on them.
  • Contractors/Appraisers Performing Due Diligence on the Properties
    • Since most due diligence activities are not “intrusive”, i.e., they do not involve the sampling of soil or building components, environmental conditions may be discovered after the sale and contractors performing due diligence activities may be sued for non-disclosure of environmental issues including soil/groundwater contamination, vapor intrusion, historical meth lab activities, lead, asbestos, etc.
    • Appraisers evaluating the property(s) at a higher value, not realizing there are environmental concerns.

For additional information, please contact Beacon Hill Associates. We are happy to provide you with product information, claim scenarios, and other resources.