Assessing Emerging Contaminant Risks in Real Estate and Other Purchase Transactions
This blog frequently addresses emerging contaminants, most prominently the PFAS compounds and 1,4-dioxane. As these chemicals become more notorious through testing, regulation, and public scrutiny, they’ll likely become more prolific factors in the purchase and sale of real estate. As our readers know, PFAS is almost ubiquitous: it is nearly everywhere (in varying concentrations). As we continue to report on other contaminants, like 1,4-dioxane, it appears the trend is to continue to elevate the focus on these chemicals. So, how should a prospective purchaser, and other important players, prepare for a transaction involving property with a history of emerging contaminants?
The answer is due diligence. Due diligence assessments are used for multiple reasons and by different parties in a transaction. A buyer will use an assessment to determine whether a piece of property (or property connected to an entity being acquired) has potential environmental contamination concerns and whether any issues may require remedial action in the future. Thus, such an investigation might alter the purchase price or it might dissuade a buyer from going through with a closing. A seller might conduct due diligence on their property to better determine value. Lenders will use due diligence investigations — conducted by the buyer or purchaser or itself — to determine environmental liabilities that might follow a borrower and their ability to pay back a loan, affecting the lender’s ability to securitize a loan. It also allows the lender to identify contamination that might take precedent over its lien against the property and assist it to better decide on whether foreclosing on a property is desirable. Lastly, due diligence findings can also determine how the parties allocate environmental liabilities, which can influence the contract drafting process. (Some provisions may be needed less, influencing bargaining positions.)
In executing the purchasing process, a buyer will want to ensure that its interests are protected down the road. As this blog has previously discussed, one way of limiting future liability is to follow the all appropriate inquiry rule (AAI), which may entitle a purchaser to the bona fide purchaser defense, and also provide beneficial facts and development to defend against future disputes. But how might dealing with an emerging contaminant, such as 1,4-dioxane or PFAS, complicate matters? How should a prospective buyer navigate a real estate transaction that concerns property that has been affected by these chemicals?
There are a number of considerations that should be evaluated. Although we mention the AAI generally, it is important to remember that there is no ASTM requirement that includes, e.g., PFAS, as part of a Phase I Environmental Site Assessment (i.e., PFAS is not a “hazardous substance” under CERCLA…yet). Therefore, it’s critical that purchasers understand the law of the jurisdiction where the property is located, especially those jurisdictions that have adopted maximum contaminant levels (MCLs). For example, New Jersey has adopted this law. It’s important to understand the law of the applicable jurisdiction to help ensure that future defenses are solidified. In addition to assessing the regulatory landscape, also consider the direction that the applicable regulations are trending — what is the legislature saying about the contaminant and are there any impactful legislative plans?
As we concentrate on PFAS and 1,4-dioxane issues, problem sites and locations continue to be examined and uncovered. For example, if a buyer is purchasing property that is or is near an airport, a port, a former Department of Defense site, a municipal or industrial landfill, an industrial facility that manufactured the chemical, an industrial wastewater impoundment or landfill, or property that is in an area with PFAS or 1,4-dioxane regional issues it’s important to understand the connection these sites may have with the emerging contaminant. Two examples of this is 1,4-dioxane issues in Long Island and PFAS contamination in Hoosick Falls, NY. In this regard, you want to incorporate the emerging contaminant into the due diligence plan and the Phase I Assessment (always to be conducted by a reputable and qualified consultant). Also consider assessing the seller’s site history; does it have the potential to be a source site or the potential to be impacted by the emerging contaminant released elsewhere?
Some examples of inquiries that a purchaser might consider:
- A product review of the seller (if the seller is a manufacturer or distributor). This could include a review of available safety data sheets and other information to identify any products that might include PFAS or create 1,4-dioxane.
- An inquiry about injury claims or litigation involving the emerging contaminant and the seller. if a seller has used or produced the emerging contaminant, inquire into the company’s disposal practices such as a landfill or wastewater discharge.
- An inquiry into the seller’s customers or suppliers to see if they have been engaged in emerging contaminant litigation. Review any contracts between the seller and its customers, suppliers, or distributors and review prior transactional documents and existing insurance policies for contractual protections, assumptions of risk, and other relevant information.
At the least, if red flags are raised during due diligence, the parties can have educated negotiations about the allocation of risk, how best to protect the parties involved in the transaction, and to ensure the transaction gets completed.
On that final point, negotiate good indemnity language to lower risk and shift liability. Beware of as-is sale provisions. And evaluate the availability of insurance to, again, shift risk. Of course, concerns with emerging contaminants might also involve negotiations on remediation and clean-up as part of the sale transaction. As our readers know, when environmental liabilities manifest themselves they can often be quite expensive and burdensome, as well as public — which can affect other business dynamics like customer base and future revenue generation.