Date: June 24, 2020Attorney: Douglas I. Eilender

The past few months have been a very challenging time on many different levels. However, one of the themes I am seeing is that lenders are ignoring the tried and true environmental due diligence protocols at a higher rate than I have ever seen before. This is very perplexing. At a minimum, adequate environment due diligence on commercial real estate typically consists of conducting a Phase I Environmental Site Assessment/Preliminary Site Assessment report – assuming the property is in NJ (“Phase I/PAR”). This includes a visual site inspection and review of aerial photographs, Sanborn Maps, historical regulatory records and databases. The Phase I/PAR identifies what one would consider routine environmental issues such as past manufacturing operations, former gas stations with underground storage tanks or other features that could adversely impact the subsurface or air quality of the property in question.

We see lenders providing environmental questionnaires to borrowers asking detailed questions with respect to various environmental conditions at the property. However, as the borrower/buyer, they are not in a position to properly answer those questions as they do not have any knowledge or experience with the property. Regardless, some lenders are making decisions based on those uninformed answers to the questionnaires as to whether or not to even require the borrower to conduct a Phase I/PAR. Again, something is amiss.

The rationale, in general, is that an owner of a property is strictly liable for any contamination that is present on site. That means owners of properties are responsible for any and all environmental issues, irrespective of whether they caused the contamination, identified at the property.  However, certain defenses are available to owners if they perform adequate environment due diligence prior to purchase. That includes the completion of the Phase I/PAR. If a Phase I/PAR is completed and no contamination is identified, the new owner will be eligible to assert the Federal and State Innocent Purchase Defense to environmental liabilities should pre-existing contamination be discovered in the future. While we recognize that in most States, the lender may have its own environmental liability protection under the secured creditor exemptions to liability, those liability protections don’t help the lender in disposing of an asset with environmental issues, if they elect to foreclose. Thus, requiring the borrower to conduct appropriate environmental due diligence benefits both the borrower and the lender. If environmental issues are identified, we can effectively manage the environmental risks associated with the collateral [see our Environmental Blog article: Lending on Environmentally Challenged Real Estate.]

Thus, regardless of the size of the deal, it behooves all interested parties to conduct adequate environmental due diligence with the assistance of counsel and savvy environmental professionals. Taking the ostrich approach does not put the parties in a better position to assess and allocate the environmental risks and responsibilities associated with the collateral to successfully close the current transaction or any disposition in the future.