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Buying and Selling Property

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When a potentially hazardous property is sold, both the buyer and seller have opportunities to protect themselves from liability for cleanup.

What is due diligence?

Once a buyer has a signed and accepted letter of intent, he or she has a period of time to perform due diligence on the business property. At this point, the buyer has a chance to review parts of the business that have previously remained private. One of the areas the buyer will check is to make sure that he or she is clear on the company's environmental issues.

Owners and operators of properties that have been polluted with hazardous wastes are required by federal law to take care of cleaning them up, even if they were not responsible for the pollution in the first place. That is why a significant part of a pre-purchase due diligence process is ascertaining whether the buyer is going to inherit a hazardous waste cleanup and, if so, to determine the cost (usually enormous) of returning the property to a nonpolluted state.

This is not an easy liability to avoid. One potential defense against a government claim of hazardous waste is that the buyer must show he made a genuine effort to discover a hazardous condition and still did not know about it.

If I am buying or leasing a property for my business, how can I protect myself from the huge costs of cleaning up a polluted site?

At the time you sign a lease or purchase for a property, it is important to take any possible legal steps to avoid assuming responsibility for a hazardous waste liability. For one thing, you can ask the owner or the landlord to indicate what the prior uses for the land were and whether they might have been the kinds of activities which would have caused environmental damage.

You can also request information about any governmental notices regarding the site. An independent inspection, called a Phase I or Phase II environmental audit, is also a possibility.

If I am selling my business property, how can I protect myself from the huge costs of cleanup if the site turns out to be polluted?

To make sure you are safe from claims after the sale, you will want to have a Phase I environmental audit performed. This protects you as a seller, since it attests to a clean condition at the time of the sale. It can support a claim that problems were caused by owners who followed. The audit must be conducted by environmental consultants who specialize in this activity.

What should I do as a seller before the sale of my business property?

If you are a seller who wants to make a quick, clean sale, be prepared to respond to your buyer's questions regarding environmental liabilities. In the event that problems turn up after the sale, former owners may be held accountable for some of the cost of cleanup. Some danger signals to look for include lead paint, leaking underground storage tanks or asbestos.

There is always the possibility that your buyer will create a hazardous waste problem and then later blame you as the former owner. A Phase I environmental audit, conducted by an outside consultant, can help you prove that the property was clean at the time of the sale.

What if problems turn up during the audit? Then a Phase II environmental audit may be called for. This would provide more information about the problems and some determination as to how a cleanup should be implemented.

At this point, you may decide to reduce the asking price and sell the property "as is." Ignoring the problem is just not an option, as you will most likely be required to sign a disclosure statement at the closing.