Welcome to this practical guide from The Stejkowski Law Firm. Commercial real estate transactions often involve significant investments, layered risk, and detailed due diligence. Whether you are acquiring an industrial site, retail center, office building, or development land, one critical but sometimes overlooked aspect of the process is environmental compliance.

Environmental laws can significantly affect property value, financing, development potential, and long-term liability. Failing to properly evaluate environmental risks can expose buyers, sellers, and even lenders to substantial cleanup costs, delays, reduced property value, regulatory problems, and legal consequences.

After more than 30 years in practice, I can tell you that environmental issues tend to surface when you least expect them, and often at the worst possible time. Much like title defects, they can delay or derail a transaction entirely. That is why environmental due diligence is not just a box to check. It is a critical component of any commercial real estate deal.

In this article, we’ll explore how environmental laws, particularly CERCLA, impact commercial real estate transactions and how proper due diligence can help manage risk and liability.

Why Environmental Due Diligence Matters

When purchasing commercial property, a buyer is not just acquiring land and improvements. The buyer may also be acquiring environmental conditions tied to the property’s past and present uses.

Environmental due diligence helps determine:

• Whether the property is contaminated or at risk of contamination
• What historical uses may have created environmental concerns
• Whether regulatory compliance issues exist
• What liability risks may transfer to the buyer

Because many commercial properties have long operational histories—especially industrial and manufacturing sites—environmental risks are often not immediately visible.  A property can appear “clean” and still involve serious environmental exposure.

Understanding CERCLA and Environmental Liability

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as the “Superfund” law, is one of the most significant federal statutes affecting commercial real estate transactions.

CERCLA imposes strict liability for environmental contamination, meaning:

• Liability can attach regardless of fault
• Current owners can be responsible for past contamination
• Multiple parties can be held jointly and severally liable

Potentially responsible parties (PRPs) may include:

• Current property owners
• Past owners and operators
• Parties who arranged for disposal of hazardous substances
• Transporters of hazardous materials

This means a buyer can acquire property today and become responsible for contamination that occurred years or even decades earlier. That risk is one reason environmental due diligence has become a standard part of serious commercial real estate transactions.

Phase I Environmental Site Assessments

One of the most important tools in environmental due diligence is the Phase I Environmental Site Assessment, commonly called a “Phase I.”

A Phase I typically includes:

• Review of historical property records and aerial photographs
• Examination of regulatory databases
• Site inspection for evidence of contamination
• Interviews with owners, occupants, or local officials

The goal is to identify “recognized environmental conditions” (RECs), which may indicate potential contamination.

Why does this matter?

A proper Phase I ESA is often necessary if a buyer hopes to preserve certain defenses under CERCLA, including the innocent landowner defense and related protections. Just as importantly, it gives the buyer, lender, and counsel a better picture of whether the property presents an environmental risk that needs to be priced, investigated further, or addressed in the contract.

When a Phase II Assessment Is Needed

If a Phase I identifies potential environmental concerns, a Phase II Environmental Site Assessment may be recommended.

This involves:

• Soil, groundwater, or building material sampling
• Laboratory analysis for hazardous substances
• More detailed investigation of contamination risks

A Phase II moves the analysis from suspicion to data. It helps determine whether contamination actually exists and, if so, how serious the problem may be.

At that point, the issue is no longer theoretical. The parties may need to address remediation cost, timing, deal structure, lender requirements, indemnity obligations, escrow arrangements, or even whether the transaction should proceed at all.

Common Environmental Risks in Commercial Properties

Environmental issues vary depending on the type and history of the property. Some of the more common concerns include:

• Underground storage tanks (USTs)
• Soil or groundwater contamination from chemicals or petroleum
• Asbestos-containing materials in older buildings
• Lead-based paint hazards
• Mold and indoor air quality issues
• Wetlands or protected environmental areas

These issues can affect not only liability, but also redevelopment plans, tenant use, insurance, and the marketability of the property.

Why Lenders Make a Big Deal Out of Environmental Risk

Lenders often make a very big deal out of environmental issues, and for good reason.

A lender is taking the property as collateral. If the collateral is contaminated, the lender’s risk increases immediately. Environmental problems can reduce the value of the property, impair marketability, limit redevelopment options, trigger cleanup obligations, and make the asset harder to sell or refinance. In a default scenario, contamination can turn what looks like solid collateral into a troubled asset.

That is why commercial lenders commonly require environmental due diligence before approving financing. Depending on the property type, the lender, and the site history, the lender may require:

• A current Phase I ESA
• Reliance letters or updates
• Additional investigation, including Phase II testing
• Escrows or reserves
• Evidence of remediation or closure
• Environmental insurance in some situations

Environmental concerns may:

• Delay loan approval
• Result in additional conditions to closing
• Reduce leverage
• Affect loan-to-value calculations
• Limit or prevent development financing
• Cause the lender to decline the deal altogether

In short, lenders care because environmental risk affects the value, usability, and exit potential of their collateral. Buyers and sellers who underestimate that point often find themselves dealing with unexpected delay and retrading late in the transaction.

Allocation of Environmental Risk in Transactions

Environmental risks are often negotiated between buyers and sellers as part of the purchase agreement.

Common approaches include:

• Representations and warranties regarding environmental conditions
• Indemnification provisions allocating cleanup responsibility
• Escrow arrangements for remediation costs
• Purchase price adjustments based on identified risks

This is one area where the contract matters a great deal. Boilerplate language may not adequately address the actual risk presented by the property. The deal documents need to reflect what is known, what is suspected, what further investigation is permitted, and how the risk will be allocated if a problem is found.

What Sellers Should Do to Mitigate Environmental Risk

Sellers should not assume environmental issues are only the buyer’s problem. Environmental issues can reduce value, shrink the buyer pool, delay closing, create lender concerns, and in some cases lead to post-closing claims if the contract is not drafted carefully.

Practical steps sellers can take to mitigate environmental risk include:

1. Evaluate the property before going to market

If the property has a history that raises environmental concerns, it is usually better to understand that early rather than wait for the buyer’s consultant to find it first.

2. Gather existing environmental records

Sellers should locate and organize prior Phase I reports, Phase II reports, closure letters, tank records, permits, asbestos reports, remediation documents, and other relevant environmental materials.

3. Understand the property’s historical uses

Past operations often matter as much as current use. Older industrial, automotive, manufacturing, dry-cleaning, agricultural, or fuel-related uses may present obvious red flags.

4. Be careful with representations and warranties

Sellers should avoid broad or careless statements about environmental conditions. Representations should be accurate, appropriately limited, and consistent with the seller’s actual knowledge and records.

5. Disclose known issues strategically and accurately

Trying to hide a known problem usually makes matters worse. In many cases, a known issue can be managed through disclosure, pricing, indemnity structure, or escrow. A credibility problem is much harder to fix.

6. Consider whether pre-sale remediation or corrective action makes sense

In some cases, addressing a discrete issue before marketing the property can improve marketability and reduce late-stage renegotiation. In other cases, the better course is to sell with full disclosure and allocate the risk by contract.

7. Coordinate with counsel early

Environmental issues affect the letter of intent, due diligence timeline, access rights, lender process, contract language, and closing strategy. Early planning usually improves leverage and reduces surprises.

Impact on Financing and Development

Environmental concerns can affect far more than liability. They can directly affect whether the transaction can be financed and whether the property can be developed or redeveloped as planned.

For developers, environmental issues may trigger:

• additional investigation and delay
• remediation requirements
• agency involvement
• permit complications
• site design changes
• increased project cost

For buyers, even a manageable environmental issue can become a serious transaction issue if the lender will not fund until the issue is better defined or resolved.

Regulatory Compliance and Ongoing Obligations

Environmental liability does not end at closing. Property owners must also comply with ongoing federal, state, and local environmental regulations.

These may include:

• Reporting and monitoring requirements
• Proper handling and disposal of hazardous materials
• Compliance with environmental permits
• Remediation obligations if contamination is discovered

Failure to comply can result in fines, enforcement actions, or additional liability.

Why Early Environmental Due Diligence Is Critical

As with title issues, timing is everything. Identifying environmental risks early in the transaction allows parties to:

• Evaluate whether to proceed with the purchase
• Negotiate risk allocation with the seller
• Obtain necessary testing or remediation
• Coordinate with lenders and regulators

Attempting to address environmental issues late in the process can lead to costly delays or failed transactions.

Work With an Experienced Commercial Real Estate Attorney

Environmental laws add another layer of complexity to already sophisticated commercial real estate transactions. Properly navigating these issues requires coordination between legal counsel, environmental consultants, lenders, and regulatory agencies.

At The Stejkowski Law Firm, we assist buyers, sellers, and investors with environmental due diligence, contract negotiation, and risk management strategies in commercial real estate transactions. Our goal is to help clients identify potential environmental concerns early and structure transactions in a way that protects their investment.

Final Thoughts

Environmental laws—particularly CERCLA—can have a profound impact on commercial real estate transactions. From strict liability exposure to financing hurdles and development limitations, environmental risks must be carefully evaluated and managed.

The key is thorough due diligence and proactive planning. By conducting proper environmental assessments and addressing potential issues early, buyers and sellers can minimize risk, avoid unexpected liabilities, and move forward with confidence.

If you are preparing to buy, sell, or develop commercial property and have questions about environmental due diligence or liability, working with experienced legal counsel can make all the difference. The Stejkowski Law Firm is here to guide you through every step of the process with clarity and confidence.