Transcript: Environmental Due Diligence Disasters
CLARICE: Hello. And welcome, everybody, to this week’s episode of Environmentally Speaking.
MARISA: Hi, everyone. I’m Marisa Desautel, an attorney in Rhode Island and Massachusetts.
CLARICE: And I am Clarice, coming in with questions, topics, and the occasional sniffle, so apologies in advance if I’m on mute or if you hear any background audio. I think this time of year everybody is getting over a cold, so brace yourself in advance.
MARISA: Thanks for the heads up.
CLARICE: You know, there might be some audio purists out there, so.
MARISA: This week I thought that we would talk about a topic from our spreadsheet of topics.
CLARICE: So official.
MARISA: And it ties in fairly closely with the last time you and I talked about the difference between an environmental lawyer and an environmental consultant. The topic specifically — I don’t know why I’m making this so dramatic. The topic is environmental due diligence disasters.
CLARICE: We love an alliteration like that.
MARISA: In the commercial transaction arena, these types of mistakes have dire consequences. They really do. In terms of environmental liability and risk, going through the due diligence process is just ripe with opportunity for people to make mistakes and it does happen.
CLARICE: All right. So we have to back way up.
MARISA: Ugh. You know, I always do this. I plunge in and then I’m told that we have to back up.
CLARICE: Because you’re excited. I love it.
MARISA: And then now I’m embarrassed.
CLARICE: How do you start the process if there are so many places where you could make a mistake and there are so many pitfalls? How do you know? How do you know if you’re going to make a mistake so you can avoid it?
MARISA: You get a letter from the government telling you you’ve made a mistake.
CLARICE: Oh, no. It’s like when you think you’ve done your taxes right and then the IRS is like —
MARISA: Yes.
CLARICE: — guess again.
MARISA: We’re going to audit you. Sort of like that.
CLARICE: Oh, no.
MARISA: When you’re involved with purchasing or selling commercial industrial property, the first step in that process usually is for the parties to sign something called a letter of intent and that is an initial agreement between the parties to engage in the due diligence process and start looking at all of the corporate assets including real property. When I was doing environmental consulting a bazillion years ago, you had 60 to 90 days to get your environmental due diligence completed.
[0:03:11] CLARICE: That’s not a lot of time.
MARISA: It’s not. It’s not a lot of time. Commercial transactions are very different from residential. They generally take more time. There’s more to look into and there’s more third parties that you have to bring on to help you with the inquiry. Nowadays rumor is that commercial due diligence is shortened or can be shortened to 30 days, 45 days. I read that statistic. You know, I’m not in the environmental consulting field anymore, so I was unaware of this particular parameter being shortened, but I thought, damn.
CLARICE: Oh, shit.
MARISA: Oh, shit, that is not a lot of time. Now, after the letter of intent is signed, if you are getting financing from a traditional lending institution they will often require that you go through this process called environmental due diligence. If you don’t have a traditional lender, you should still go through this process if you’re the buyer. On your own you should undertake this process if you know what you’re doing to make sure that your risks and liabilities are covered. But with a traditional lender, they will require you to hire a consultant to do this due diligence. And one of the biggest mistakes that’s come out of these particular transactions that I’ve seen in case law is such a technicality that you just — it makes you want to scream. It’s something called privity of contract. Are you familiar with that from law school?
CLARICE: Oh, God. That sounds like something I remembered for the exam and then the minute I walked out of the room threw it out. I remember the words. Tell me what it is again.
MARISA: It sounds so old English, doesn’t it, privity?
CLARICE: It does. It sounds fancy. I’m exclusively thinking of old landowners.
MARISA: Old landowners. And it kind of sounds like privacy the way that the English say it.
CLARICE: Yeah.
MARISA: So maybe that’s why I’m thinking that. Anyhoo, privity of contract is not an old English phrase. It means that the two or more parties to a contract have a meeting of the minds together.
CLARICE: Oh, for Pete’s sake. Isn’t it the point of the contract?
[0:05:54] MARISA: It’s the point of the contract. You have to be a party to the contract in order to be subject to the contract. Well, as you can imagine, if the lending institution — I know. It’s hard not to laugh, but it’s a critical thing and you get really screwed if you make these mistakes with due diligence. If the party that’s conducting the due diligence process for the lending institution contracts with only the lending institution, then you as the buyer are not covered by that due diligence process. It’s as though you never engaged in the due diligence process.
When the environmental consultant is brought on to do something called a phase one environmental site assessment or sometimes even during a refinance you might have a transaction screen completed, if you as the buyer don’t sign the contracts with the consultant then you’re not covered by anything that they find or don’t find. And you have the option of getting something called — not a letter of privity but during the transactional process you can request from the consultant that you be covered and they’ll issue you some type of coverage letter. And of course after having prepared for today’s episode I’ve completely forgotten what the name of that letter is. Maybe I’ll come back to that.
CLARICE: Oh, but this isn’t funny anymore. You were right. This has some serious consequences.
MARISA: Yeah, it does.
CLARICE: Holy cow.
MARISA: Yeah.
CLARICE: So you could be a buyer who is following all of the steps, but if you just miss, you know, signing that paper —
MARISA: Yeah.
CLARICE: — everything that’s found — you lose coverage. You lose protection. And am I going too far and reaching by saying could some of those faults of the property suddenly become your responsibility —
MARISA: Yeah.
CLARICE: — even though you’re not yet the buyer, or you’re not yet the cause?
MARISA: Yes. The federal statute that governs all of this activity is called CERCLA. We’ve done an episode on it.
CLARICE: Yes.
MARISA: People also refer to CERCLA as the Superfund, not super fun.
CLARICE: It was not fun.
MARISA: Superfund with a D. And if you’re involved in the chain of title for a piece of real property, the rule is that you are strictly liable for any of the environmental contamination at that property. Strict liability, if you recall from law school, means —
[0:08:59] CLARICE: It was a big deal.
MARISA: — means it doesn’t matter. If you’re on the chain of title, you are automatically liable. You don’t have to have — there’s not a lot of demonstration required by the government to show that you should pay for the cleanup. What? You’re dying laughing. What’s happening?
CLARICE: I just love the — I wish I could have just written on my exam, it doesn’t matter.
MARISA: Mattah, M-a-t-t-a-h. It doesn’t mattah. Yeah. It does want matter. You’re on the hook.
CLARICE: Yeah.
MARISA: And further under the Superfund statute there’s something called joint and several liability which means let’s say you and I own this real property together that’s contaminated, or I buy it from you. You are 100 percent responsible. I am also 100 percent responsible.
CLARICE: It’s both of our faults no matter what.
MARISA: And the way that that framework works out in the context of environmental litigation is the parties just going at each other like cats. No, you did this and you did this. And the government says, you guys figure apportion liability and contribution and we’re just going to tell you that we know you’re responsible because you’re on the chain of title and so you’re responsible for 100 percent of the cleanup. The purpose of the environmental site assessment is to cover your ass. You hire a qualified professional. You enter into the contract with them, hopefully. They do a comprehensive review of all available materials.
There is a standard that governs this process, so it’s not like some random guy on the street can go and do this work for you. There’s a standard that you have be familiar with. There’s a particular review that you have to undertake. And the thought is that that environmental consultant is going to capture all of the known environmental risks under the Superfund site.
Phase one site assessment does not cover, for example, OSHA Occupational Safety and Health Administration type of issues, issues with the title itself, you know, like if there was a deed that was recorded incorrectly. It doesn’t cover any of that. It only covers contamination associated with the Superfund site because we’re talking about strict and joint and several liability. It’s a huge risk. So the first mistake that I’m familiar with is this issue where there’s no privity of contract between the buyer and the person or the company that’s doing the site assessment. Another type of mistake and horror show that you can end up with is a case that I worked on when I was an environmental consultant. When you’ve got historical underground storage tanks on a property —
[0:12:08] CLARICE: Yes.
MARISA: — it’s usually because they held heating oil or fuel of some sort and they’re underground because, you know, we’re still burying tanks underground to this day at gas stations, for example. And the party that was hired to remove two of the underground storage tanks at the site only came in to do that scope of work because the previous owner wanted to save money.
And let me just tell you, whenever you’re dealing with an environmental matter saving money is not on the agenda. It’s the opposite. You just get ready to open the bank account spigot and have at it. So the previous owner had two underground storage tanks removed successfully and when I came in it was part of a transaction screen for — I think it was a — I can’t remember if it was a refinance, but we had the capability to employ something called ground penetrating radar and discovered additional underground storage tanks that the previous consultant had not found and the new owner had to pay for it.
CLARICE: So was the mistake that this new owner only went by the previously given plan and didn’t do additional research? Where was that? Where did he or she go wrong? Where did this new buyer go wrong?
MARISA: A couple of different areas. The previous owner was trying to save money and did save money by only doing this limited scope of work and probably picked the cheapest estimate that he got which makes sense. That’s what you do, right.
CLARICE: Yeah.
MARISA: You get your car fixed. You want it for the cheapest amount, but, again, we’re in the context of Superfund, so nothing is cheap and saving a grand over here means that you’re on the hook for a million over here, so that doesn’t make sense. So that was the first mistake, in my opinion. Ultimately, I don’t know what happened between the previous owner and the buyer because I was not an attorney at the time. I just know this issue came up in the consulting field.
CLARICE: Okay.
MARISA: So the previous owner saves money, only takes out these two underground storage tanks. Then through the — it must have been sold for this fact pattern to work out the way that it did and the new owner was getting refinanced. So technically you conduct something called a transaction screen and it’s a smaller scope than your phase one environmental site assessment, depends on the lender. It’s the lender requirements. Again, I think it was in the context of a refinance, so you wouldn’t think that you have to do all of this additional work, but for whatever reason either the new owner or the lender said, we want some additional work done out there, we don’t think everything has been handled properly and we want to cover our ass.
So my company gets called in. We have this ground-penetrating radar and we find additional underground storage tanks that the new owner had to pay to remove because there was no knowledge of them at the time of the purchase and sale. And generally speaking if you’ve been in the field long enough as an attorney or a consultant or in some other capacity, a lender, you kind of get a sense or a feeling about a particular property.
[0:16:14] CLARICE: Yeah.
MARISA: If you are conducting a file review and looking at another company’s phase one or phase two that was done previously, sometimes you just look at the company and you know like, oh, I’m going to have to dot my I’s and cross my T’s on this thing because these people are sloppy or whatever. And then sometimes it’s just that the information is so old the property’s not changed hands recently. You might have something from 1970. An environmental assessment from 1970, as you can imagine, was just like, oh, we threw all of our oily rags into the river, everything’s fine. So in those cases —
CLARICE: That tree in the corner is still alive. This is a healthy site.
MARISA: Yeah. Everyone is dying of cancer, but I’m going to go ahead and sell my property. So, yeah, in those instances you’re like, ugh, all right, I need to be more diligent about the review. So those are the two mistakes that came to mind, one in the context of being an environmental attorney. Cover your ass with the privity of contract.
CLARICE: Yes.
MARISA: And, number two, as a consultant looking at scopes of work undertaken previously will tell you whether you need to be more comprehensive in your review.
CLARICE: I mean, hearing all of these stories, these sound like almost hidden pitfalls and non-intentionally hidden pitfalls. These are things that your average buyer wouldn’t necessarily think about because they’re just so unique and niche in the environmental space.
MARISA: Yeah. And you don’t know what you don’t know.
CLARICE: Exactly. That’s what this situation comes out to. So I guess the big takeaways are make sure your privity is signed, do some extra work, make sure that site is checked and check to see how old your environmental info is. What’s the date on that.
MARISA: Yeah. And get a reputable consulting firm. Don’t go for just the cheapest option.
CLARICE: Yeah. Pulling back to last week’s episode, relying on your experts, making sure it’s somebody that you can trust, somebody who’s going to help guide you through the process because we don’t — just like you said, you don’t know what you don’t know and you don’t have to know it. Having that expert —
MARISA: Yeah. You just have to have the money.
CLARICE: — calling that person in.
MARISA: Yeah. The right person to do the job for you.
CLARICE: Exactly. Oh, these are —
MARISA: I don’t know why we’re laughing so much. You know, this is like a very stressful and serious issue. People like file for bankruptcy and are impacted.
[0:19:02] CLARICE: It’s panic laughing.
MARISA: I think it is.
CLARICE: That’s what it is. It’s panic laughing.
MARISA: God, I hope this doesn’t happen to me.
CLARICE: Exactly. Well, I’m not going to be buying a defunct gas station, so I think I’m okay.
MARISA: Okay, good.
CLARICE: Maybe that’s the new takeaway. Don’t buy a defunct gas station.
MARISA: No, no. Because we need folks to redevelop contaminated properties. We need these properties to be reused. We don’t want them to just sit there. We want the contamination cleaned, but you got to go about it the right way.
CLARICE: That’s true. Somebody else should. I’m not going to do it.
MARISA: No. You’re not buying it.
CLARICE: I will support somebody in their efforts.
MARISA: Okay. Well, hopefully this episode did.
CLARICE: Here we go. So on that note —
MARISA: All right. Listen, if you have any questions about this I am no longer allowing Clarice to give out e-mail addresses because it’s wrong every time which is funny, but, you know, if someone has a question I would actually like for them to get in touch. My e-mail is Marisa — M-a-r-i-s-a —info@DesautelBrowning.com. Did you just have your hand raised?
CLARICE: No. I was clapping that I didn’t have to do it anymore.
MARISA: Oh, oh. Clever.
CLARICE: So if you catch us on the socials, Desautel Browning Law on Facebook, Instagram, Twitter, or if you watch our videos on YouTube you’ll get to see me use the clapping emoji on Zoom because I don’t have to say the e-mail.
MARISA: I love that I didn’t know what that was.
CLARICE: Oh, yeah. I love these emojis.
MARISA: What is that?
CLARICE: I don’t know. It’s like a little celebration horn.
MARISA: Celebratory horn. All right. I got to go.
CLARICE: Bye.
MARISA: Bye.
