The availability of large tracts of land on which to build new projects in advantageous locations is shrinking. As a result, there is a growing trend of buyers considering the purchase of properties with unresolved environmental issues that they never would have considered in the past due to, among other things, potential liability, internal risk management protocols, and the inability to obtain financing for property with environmental issues.
A case in point is the Land Development Agency (LDA) – launched in September 2018 by the Department of Housing, Planning and Local Government to build 150,000 new homes over the next 20 years, the next step of Project Ireland 2040. Speaking at the Construction Industry Federation (CIF) conference at Croke Park in early October, Minister for Housing Eoghan Murphy said “We already have eight sites across the country, large State sites that will come in now to the Land Development Agency’s portfolio to deliver initially at least 3,000 homes but building very quickly the 10,000 homes in terms of negotiations that are already under way. “
There are various properties which may be great development sites which had previous industry on them. Evaluating and addressing the risks associated with a site which has not yet been remediated can be a daunting process. However, buyers and lenders frequently misperceive environmental liability risk in acquisitions and finance.
While each property will have its own unique issues and set of challenges, below is a sample of the types of risk management and environmental due diligence tools that can be utilised in connection with assessing the viability of such an acquisition.
- Conduct thorough environmental due diligence and gain a comprehensive understanding of the nature of the property and any contamination. This includes a review of environmental documents, as well as retaining a reputable environmental consulting company to perform a thorough review of the property including a Phase I, and possibly a Phase II investigation. Even if the seller of the property has performed or is currently performing its own investigation or remediation of the property, the buyer needs to perform its own due diligence and obtain an independent evaluation as to the environmental status of the property.
- Use the purchase and sale agreement to mitigate risks. Contractual provisions can be used as a mechanism to allocate environmental liability and/or clean-up costs, including representations and warranties, escrows and hold-backs, releases, and indemnities. Parties may allocate liability for known and specifically identified environmental conditions, but it can be challenging to allocate liability for unknown environmental conditions that may be discovered after closing. In addition, while parties to a real estate transaction can allocate risks and liability, they cannot contractually limit liability to governmental agencies.
- Purchase an environmental liability insurance policy. In the right situations, an environmental insurance policy can protect against situations that might otherwise have made the deal unprofitable or too risky. These policies have several different types of coverage that might be available in connection with the purchase of a contaminated property including: bodily injury and property damage coverage for pre-existing and new conditions; cleanup cost coverage and environmental cost cap coverage; coverage for off-site transportation and disposal of pollution conditions; defence cost coverage; and business interruption coverage. Coverage may also be available to protect against the possibility that a diligent investigation did not identify contamination that was in fact present. A purchaser should obtain coverage to help address the specified risks associated with the transaction.
Environmental issues should not immediately discourage a buyer and deter the possible acquisition and development of property. Many environmental issues can be mitigated and overcome. While there are certainly risks associated with purchasing a contaminated property, by utilising environmental risk management tools such as those described above, a buyer may gain sufficient comfort to move forward with the purchase.