What you need to know about environmental site assessments
An essential part of your due diligence when buying commercial property is getting an environmental site assessment (ESA) before you close the deal.
Essentially, an ESA will help identify the existence and scope of soil or groundwater contamination (e.g., from petroleum, heavy metals, pesticides or herbicides), as well as the presence in buildings of products such as asbestos, lead paint or mould.
An ESA will determine whether contamination issues exist before you buy, and help you avoid unpleasant and costly surprises down the road. “The purpose of due diligence is to make sure a purchaser’s liability is limited,” says Dan LaBossière, Assistant Vice President, Business Development at BDC. “When entrepreneurs discover that a property they want to purchase is contaminated and needs costly clean-up, this can become a condition of the sale, or they may just decide to avoid the issue altogether and walk away.”
Most lenders require an environmental assessment of commercial property and some, including BDC, provide clients with names of accredited experts to do the assessment.
What can happen if a buyer doesn’t get an environmental site assessment?
The consequences of not getting an ESA before purchasing a property can be costly and time consuming. LaBossière gives the example of an entrepreneur who bought a property for cash without conducting due diligence. “When he needed financing to upgrade the property, an environmental assessment was required, and he discovered that the property was contaminated and had to be cleaned up. The entrepreneur decided it was too complicated to pursue the vendor and paid the remediation costs—more than $100,000—himself. If he had known the property was contaminated, he would not have purchased it.”
An environmental assessment starts with Phase 1, a visual, historical inspection. An environmental consultant looks for visual evidence of actual or potential contamination, such as underground storage tanks. The consultant will also collect documents and aerial photos to determine past activities on the site and on neighbouring properties, from which contamination may have migrated. “Often, a business will have cleaned up its own property, but neighbouring property owners have not done the same,” explains LaBossière.
Phase 1 searches should go back as far as possible to determine what the property and neighbouring lands were used for, and whether contamination is possible. “There is generally a higher probability of contamination issues on older properties than in developments that are 20 to 30 years old,” says LaBossière. Even a site that appears perfectly clean today could have previously housed a gas station or dry cleaner.
You may need a Phase 1 ESA even when leasing commercial property. LaBossière points out that some landlords will stipulate in a lease that they are not responsible for environmental contamination caused by the tenant. In such cases, he recommends that tenants whose business may affect the environment have a benchmark phase 1 environmental assessment done before signing the lease, to make sure there are no existing contamination issues they can be held responsible for later on.
A Phase 2 assessment, which can include soil sampling or other tests, provides a better understanding of the condition of the land, groundwater and structures on the property. If Phase 1 identifies potential environmental issues, it usually triggers further action.
Some provinces require that results of Phase 2 assessments or a record of site condition (RSC) be filed with provincial authorities, making the information publicly available. “Recently, when an entrepreneur indicated that he was interested in purchasing a property, I checked the database and was able to tell him that the property was contaminated,” says LaBossière. He warns, though, that as environmental regulations become more stringent, a property deemed uncontaminated 10 years ago may not pass the test today.
Costs and timing
The time required for due diligence should be factored into an offer to purchase. A two-month window should provide sufficient time to complete a thorough environmental assessment.
The cost of a Phase 1 assessment can be between $3,000 and $5,000, while Phase 2 assessments can range from $7,000 to $60,000, depending on the environmental issue.
“You can stop and walk away at any time during this process,” says LaBossière. “For example, you can decide not to go ahead with a Phase 2 assessment and drop your plans to purchase the property.”
Rules and regulations
Regulations governing operations that can affect the environment fall under both federal and provincial jurisdiction, and differ from region to region. The rules for establishing liability for contamination can be complicated and time consuming. “You don’t want to be in a position where you have to pursue a vendor after a sale,” says LaBossière. “You want to be able to tell a vendor that the property must be cleaned up before you purchase it.”
Once you buy a property, LaBossière recommends that you purchase environmental insurance if there is a chance your operations could cause contamination (if, for instance, you operate fuel tanks or a paint shop on a property). Nevertheless, the best strategy is preventing contamination by working to limit the impact of your business on the environment. This includes ensuring safe management of hazardous substances, safe storage and leak prevention, and proper waste disposal.