Should Commercial Tenants Perform an Environmental Assessment?

hand holding plant

In my real estate practice, many clients that are about to lease commercial property for their business ask whether or not an environmental assessment should be performed on the property to determine if there are environmental issues. It is fairly clear that if the client purchases the property, there is a high likelihood that an environmental assessment will be required by the lender, but the question is whether a prospective lessee of the property should perform an environmental assessment.

At the end of the day, the issue is one of liability. For example, if at one point the property is found to be contaminated, the question is who was the responsible party? If a commercial tenant cannot document the property condition at the time that the tenant entered and/or vacated the property, there may be significant environmental liability under the environmental laws. See the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.A. §§ 9601 et seq. (“CERCLA”), which imposes significant liability on owners and operators of properties with environmental contamination.

However, under CERCLA, a properly conducted environmental due diligence can help a lessee qualify for an important defense to liability, known as the “bona fide prospective purchaser” defense. Under this defense, if a new lessee can establish that all releases of hazardous substances occurred prior to the commencement of its operation of the property, then it will not be held liable for remediation costs. Yet, in order to be deemed a “bona fide prospective purchaser” pursuant to CERCLA, the new lessee must have conducted “all appropriate inquiries” into the previous ownership and uses of the property. Effective November 1, 2006, a Phase I Environmental Site Assessment prepared in compliance with ASTM Standard E1527-05 constitutes “all appropriate inquiries” for properties acquired after this date. See 42 U.S.C.A. § 9601(35)(B); 40 C.F.R. Part 312.

Therefore, while it also depends upon the type of property being leased (e.g., restaurant premises, gas station, bakery, manufacturing plant, retail store, sports facility, etc.), we generally advise that a limited Phase I Environmental Site Assessment be prepared when a client is seeking to lease commercial property because of the significant protection that the assessment can provide.

If you have any questions regarding real estate law or commercial transactions, please contact me, Santiago J. Padilla, Esq., at (305) 824-2400 or contact us online

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