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Commercial Real Estate – Environmental Issues on Sale

Case Study | Mar 18, 2015

The Problem

Our client sought to sell his commercial property, where he had formerly operated a car dealership business. His own environmental assessment of the property revealed underground storage tanks from the dealership’s car servicing operations and some environmental contamination present in the soil. Meanwhile, he received a broadly-worded Letter of Intent from an interested purchaser.

Our approach

The Letter of Intent contained no settled purchase price and imposed a 90-day restriction preventing our client from negotiating with other parties for the sale of his property while the proposed purchaser conducted due diligence reviews and testing. It also included a purchase price that could be significantly reduced depending upon the results of its own environmental studies. We advised our client that under the provisions of the Environmental Protection Act, any owner who has ever had the “charge, control and management” of a property can have ongoing responsibility for the costs of an environmental cleanup as far as the government is concerned, even after a sale, so our client should ensure that the property was remediated to the standards of its current permitted use as a car dealership, while controlling that process and cost. We also recommended that our client’s bargaining strength in the sale would be improved if he could present a “clean” environmental report to a future purchaser. Since basic business terms in the Letter of Intent were undetermined and restricted our client from seeking other prospective buyers, our client did not enter into an arrangement with the first prospective purchaser.

Our client contracted with an environmental remediation company to undertake the work to his satisfaction, at his cost. On completion of the work, we negotiated a formal Agreement of Purchase and Sale (not a Letter of Intent) with a new purchaser at a higher price, conditional only upon certain limited due diligence being conducted by a new purchaser within a specific time frame. A negotiation ensued about the cost of any further environmental cleanup that might be required before the purchaser could change the use to a medical clinic. This change in use required a “Record of Site Condition” under the provisions of the Environmental Protection Act, necessitating a much higher standard of remediation and soil removal than if the property continued to be used for the same purpose. The purchaser also sought from our client ongoing representations, warranties, and indemnities for the environmental condition of the property beyond the closing date.

The Result

 We successfully closed the sale transaction with the purchaser whereby it would assume full responsibility for the ongoing environmental condition of the property and any further remediation it needed to do due to its own plans to change the use of the property. Our client provided no ongoing representations, warranties, or indemnities and received a significantly higher price than that offered from the first prospective purchaser.

© 2015 Lawrence, Lawrence, Stevenson LLP

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