Understanding Environmental Due Diligence in Real Estate Transactions

Understanding Environmental Due Diligence in Real Estate Transactions

Environmental due diligence is one of the most important steps in any commercial or industrial real estate deal. Buyers need to know whether a property’s past uses could create cleanup obligations—and whether they can protect themselves under federal and state environmental laws. When done correctly, due diligence helps prevent expensive surprises and positions buyers to move forward confidently.

A strong due-diligence process evaluates the property’s physical condition, regulatory status, and potential to trigger liability after closing. It also helps determine whether the purchaser can qualify for key liability protections under CERCLA and California’s cleanup programs.

Why the Phase I Environmental Site Assessment Matters

Most transactions begin with a Phase I Environmental Site Assessment (ESA) conducted under ASTM E1527-21. A Phase I identifies “recognized environmental conditions” (RECs) by reviewing historical land uses, aerial photographs, regulatory records, and interviews with people familiar with the site.

A Phase I is not sampling. Instead, it’s a retrospective investigation—piecing together decades of operations that often include dry cleaners, gas stations, machine shops, and other contamination-prone uses commonly seen throughout California.

Because the Phase I forms the foundation of any environmental defense, it must be completed by a qualified environmental professional. A report that doesn’t meet ASTM criteria will not satisfy the federal All Appropriate Inquiries (AAI) rule, which means the buyer may lose liability protections.

Meeting the Federal AAI Standard and Preserving CERCLA Defenses

Compliance with AAI is essential for buyers seeking protection under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Under CERCLA, a new property owner can be responsible for contamination—even if they played no role in causing it.

The Bona Fide Prospective Purchaser (BFPP) defense allows buyers to avoid that outcome, but only if they meet allAAI requirements. That includes following the full ASTM protocol, ensuring required records are reviewed, and meeting strict timing rules: several elements expire after 180 days, and the entire report must be less than one year old at closing.

Shortcuts or omissions—such as failing to review publicly available historical records or leaving out required consultant certifications—can compromise the defense.

How DTSC and the Water Boards Evaluate Purchaser Liability

In California, state agencies add another layer of oversight. The Department of Toxic Substances Control (DTSC) and the Regional Water Quality Control Boards regularly rely on Phase I ESAs when determining cleanup obligations, evaluating participation in voluntary programs, or issuing comfort and clarification letters.

DTSC’s Prospective Purchaser Program, in particular, requires a compliant ESA before the agency will consider liability relief or land-use restrictions. Water Board staff also use the Phase I to determine whether contamination is historic and whether a new owner should assume responsibility.

These reviews can influence deal terms, redevelopment planning, cost allocation, and long-term obligations—making accuracy and completeness essential.

Continuing Obligations After Closing

AAI compliance before closing is only the first half of maintaining BFPP protection. After acquiring the property, buyers must continue to meet several obligations:

• preventing future releases of hazardous substances
• complying with land-use restrictions and engineering controls
• cooperating with regulatory agencies
• operating and maintaining any remedial systems on the property

Even small missteps can jeopardize liability protections, so these responsibilities must be monitored throughout ownership.

How Environmental Counsel Strengthens the Due-Diligence Process

Environmental attorneys play a critical role in making sure the due-diligence process actually provides the liability protection buyers expect. Counsel reviews the ESA to confirm it meets ASTM and AAI requirements and evaluates whether any deal terms or relationships might affect BFPP eligibility. Attorneys also help buyers understand the implications of institutional controls, deed restrictions, and remedial systems that may carry long-term obligations.

In transactions involving contamination or regulatory engagement, counsel can help navigate DTSC or Water Board programs, interpret complex regulatory databases, and assess whether additional investigation is needed before closing. In higher-risk situations, attorneys may negotiate Prospective Purchaser Agreements or work directly with agencies to secure liability assurances—often reducing uncertainty and strengthening the buyer’s position.

How Environmental Issues Affect the Broader Transaction

Environmental due diligence affects more than cleanup issues. It intersects with title, zoning and entitlements, easements, redevelopment planning, building assessments, and lease negotiations. A land-use restriction tied to past contamination, for example, may limit soil disturbance or operational activities, affect site design, or require long-term monitoring.

Understanding these connections early helps buyers structure deals more strategically and avoid unexpected costs.

Moving Forward With a Clear, Defensible Strategy

When environmental due diligence is completed thoroughly—and when both pre-closing and post-closing obligations are met—buyers gain clarity and protection. In a regulatory environment where cleanup liability can attach quickly, the combination of a well-executed Phase I ESA and strong environmental legal guidance is essential. It ensures a property’s history doesn’t become an unexpected burden and allows buyers, developers, and investors to move forward with a defensible, informed, and strategic approach to acquisition.

For more information:
https://www.epa.gov/enforcement/bona-fide-prospective-purchasers
https://dtsc.ca.gov/brownfields/prospective-purchaser-agreements-and-liability-relief