How Can Environmental Contamination Affect a Commercial Real Estate Closing?

Environmental contamination can delay a commercial real estate closing by requiring additional investigation, regulatory review, remediation planning, and negotiations between buyers and sellers. When environmental issues are discovered, the parties may need to determine the extent of contamination, potential cleanup obligations, and how those issues affect the property’s value and future use.

Commercial real estate transactions often involve significant due diligence before closing. Buyers, lenders, and investors want confidence that a property does not contain undisclosed environmental liabilities that could create future costs or restrictions.

In New Jersey, environmental concerns may involve oversight by the New Jersey Department of Environmental Protection (NJDEP), particularly when contamination requires investigation or remediation under the state’s Site Remediation Program.

Environmental issues that delay closings often involve:

  • Historic industrial operations
  • Petroleum contamination
  • Underground storage tanks
  • Hazardous substances
  • Contaminated soil or groundwater
  • Prior NJDEP cases
  • Concerns about future remediation costs

A delay does not necessarily mean a transaction will fail. Many contaminated properties are successfully sold and redeveloped after the environmental issues are properly evaluated and addressed.

Why Is Environmental Due Diligence Important Before Buying Commercial Property?

Environmental due diligence helps buyers identify potential contamination risks before purchasing commercial real estate. By reviewing environmental conditions early, buyers can better understand possible liabilities, negotiate transaction terms, and avoid unexpected delays.

A common first step in commercial property transactions is a Phase I Environmental Site Assessment (ESA).

A Phase I ESA typically reviews:

  • Current and historical property uses
  • Government environmental records
  • Previous industrial activities
  • Nearby contaminated sites
  • Property ownership history
  • Potential sources of contamination

The purpose of this review is to identify recognized environmental conditions (RECs) that may require additional investigation.

For example, a property currently used as a warehouse may have previously operated as a manufacturing facility. While the current use may appear low-risk, historical activities could have resulted in contamination that affects the transaction.

If environmental concerns are identified, buyers may request additional testing before proceeding.

What Types of Environmental Contamination Commonly Delay Real Estate Transactions?

Environmental contamination that commonly delays commercial real estate closings includes soil contamination, groundwater contamination, underground storage tanks, and pollution associated with former industrial operations. These issues may require additional investigation, cleanup planning, or regulatory review before the parties can complete the transaction.

Common examples include:

Petroleum Contamination

Petroleum releases from underground storage tanks are a frequent environmental concern in New Jersey. Former gas stations, industrial properties, and commercial facilities may have underground tanks that leaked over time.

Petroleum contamination may require:

    • Soil sampling
    • Groundwater testing
    • Tank removal
    • Remediation activities
    • NJDEP reporting

Hazardous Chemicals

Industrial properties may have historical contamination from:

    • Solvents
    • Degreasers
    • Manufacturing chemicals
    • Metals
    • Industrial waste

These contaminants may affect soil, groundwater, or indoor air quality.

Contaminated Fill Material

Some New Jersey properties were developed using fill material that may contain contaminants. During redevelopment, unexpected discoveries can require additional testing and management.

Vapor Intrusion Concerns

Certain contaminants can migrate from soil or groundwater into buildings as vapor. If vapor intrusion is identified, additional investigation may be needed before redevelopment or occupancy.

Can a Phase I Environmental Site Assessment Find All Contamination?

A Phase I Environmental Site Assessment can identify potential environmental risks, but it cannot guarantee that a property is free from contamination. A Phase I primarily reviews records, historical information, and site conditions; additional testing may be needed if concerns are discovered.

This is a common misconception among commercial property buyers.

A Phase I ESA generally does not include:

  • Soil sampling
  • Groundwater testing
  • Laboratory analysis
  • Excavation
  • Removal of underground tanks

If a Phase I identifies potential concerns, a buyer may consider additional investigation, such as:

  • Phase II Environmental Site Assessment
  • Soil testing
  • Groundwater sampling
  • Vapor testing

The level of investigation depends on the property’s history, intended use, and identified risks.

How Does NJDEP Involvement Impact a Commercial Property Closing?

NJDEP involvement can affect a commercial real estate closing because environmental investigations and remediation activities must often comply with New Jersey environmental regulations. The timing depends on the complexity of the contamination, required documentation, and whether cleanup activities are necessary.

New Jersey manages contaminated properties through the Site Remediation Program, which oversees the investigation and cleanup of contaminated sites.

The Site Remediation Reform Act (SRRA) established the Licensed Site Remediation Professional (LSRP) program. LSRPs oversee many aspects of site remediation while ensuring compliance with NJDEP requirements.

NJDEP-related issues that may affect a closing include:

  • Open remediation cases
  • Pending environmental investigations
  • Required cleanup actions
  • Regulatory reporting obligations
  • Existing restrictions on property use

For example, a buyer purchasing a former manufacturing facility may discover an active NJDEP remediation case during due diligence. The parties may need to determine whether the seller will complete remediation, whether the buyer will assume responsibility, or whether the transaction terms should be modified.

Who Is Responsible for Environmental Contamination Discovered Before Closing?

Responsibility for environmental contamination depends on the circumstances surrounding the property, ownership history, applicable environmental laws, and agreements between the parties. The seller, buyer, previous owners, operators, or other parties may have responsibilities depending on when contamination occurred and who contributed to the environmental condition.

A common misconception is that the current property owner automatically caused the contamination or is always the only responsible party. Environmental liability can be more complicated.

Factors that may affect responsibility include:

  • Who owned the property when contamination occurred
  • Who operated the business that caused the release
  • Whether hazardous substances were used or stored onsite
  • Whether previous owners addressed known contamination
  • Whether contracts allocate responsibility between parties
  • Applicable state and federal environmental laws

New Jersey environmental laws, including the Spill Compensation and Control Act (Spill Act) and the Site Remediation Reform Act, may impose obligations related to contaminated properties. These requirements can apply regardless of whether a current owner directly caused the contamination.

Because environmental liability can significantly affect transaction costs, buyers and sellers often address these issues through purchase agreements, environmental representations, indemnification provisions, and other contractual protections.

Can Environmental Contamination Prevent Commercial Real Estate Financing?

Yes, environmental contamination can affect commercial real estate financing by creating uncertainty about property value, cleanup costs, and future liabilities. Lenders may require additional environmental reviews before approving financing for properties with potential contamination concerns.

Banks and commercial lenders typically want assurance that environmental issues will not reduce the property’s value or create unexpected expenses.

Environmental concerns that may affect financing include:

  • Active NJDEP remediation cases
  • Significant soil or groundwater contamination
  • Unresolved underground storage tank issues
  • Restrictions on property use
  • Uncertain cleanup costs

For example, a lender financing the purchase of a former industrial facility may require additional environmental documentation before approving a loan. If contamination is discovered, the lender may request a remediation plan, additional guarantees, or changes to the transaction structure.

Environmental due diligence is therefore important not only for buyers and sellers but also for financial institutions involved in commercial real estate transactions.

How Can Buyers and Sellers Address Environmental Issues Before Closing?

Buyers and sellers can address environmental issues before closing by identifying potential concerns early, conducting appropriate due diligence, and clearly allocating responsibilities in the purchase agreement. Early planning can reduce uncertainty and help prevent environmental issues from delaying the transaction.

Common approaches include:

Completing Environmental Due Diligence Early

Waiting until shortly before closing to evaluate environmental conditions can create unnecessary pressure. Early review allows parties time to investigate and respond to potential problems.

Negotiating Environmental Provisions

Commercial purchase agreements often address:

    • Who will perform environmental investigations
    • Who pays for cleanup
    • How contamination discovered after closing will be handled
    • Whether closing depends on certain environmental conditions being met

Using Environmental Professionals

Environmental consultants and LSRPs can help evaluate technical issues, while environmental attorneys can help address legal responsibilities and transaction risks.

Considering Different Transaction Structures

Depending on the circumstances, parties may consider:

    • Adjusting the purchase price
    • Escrow arrangements
    • Indemnification agreements
    • Delayed closings
    • Agreements allocating remediation responsibilities

The appropriate approach depends on the property, contamination concerns, and goals of the parties.

Can a Contaminated Property Still Be Purchased and Redeveloped?

Yes, contaminated properties can often be purchased and redeveloped when environmental issues are properly evaluated and managed. Many former industrial properties in New Jersey have been successfully cleaned up and returned to productive use.

Contaminated properties may present redevelopment opportunities because they are often located in established commercial areas with existing infrastructure.

Redevelopment may involve:

  • Environmental investigation
  • Remediation activities
  • Engineering controls
  • Institutional controls
  • NJDEP oversight
  • Long-term monitoring

For example, a former manufacturing facility with historical contamination may be remediated and converted into warehouse space, office space, or mixed-use development.

Environmental issues do not automatically prevent redevelopment. The key is understanding the scope of the problem and developing an appropriate plan.

What Environmental Issues Commonly Delay Warehouse and Industrial Redevelopment Projects?

Warehouse and industrial redevelopment projects are often delayed by historical contamination, regulatory requirements, and unexpected environmental discoveries during construction. Developers may encounter environmental issues even when a property appears suitable for redevelopment.

Common issues include:

  • Former manufacturing operations
  • Underground storage tanks
  • Contaminated fill
  • Soil disposal requirements
  • Groundwater contamination
  • Stormwater compliance issues
  • Historic chemical use

Large redevelopment projects often involve significant excavation and construction activity, which can reveal environmental concerns that were not apparent during initial reviews.

For example, a developer preparing a former industrial site for a distribution center may discover contaminated soil during excavation. The project may need additional testing and regulatory coordination before construction can continue.

What Are Common Misconceptions About Environmental Contamination and Real Estate Closings?

Many misconceptions exist about contaminated commercial properties, including assumptions that contamination automatically prevents a sale or that environmental problems can always be resolved quickly. Understanding the realities of environmental due diligence can help buyers and sellers make better decisions.

Misconception: Contaminated properties cannot be sold.

Reality: Many contaminated properties are bought, remediated, and redeveloped. Environmental issues often affect transaction terms rather than making a sale impossible.

 

Misconception: The seller is always responsible for cleanup.

Reality: Responsibility depends on the facts, applicable laws, and agreements between parties.

 

Misconception: A clean Phase I means there are no environmental problems.

Reality: A Phase I identifies potential concerns but does not test soil, groundwater, or building materials.

 

Misconception: Environmental issues can be handled after closing without planning.

Reality: Ignoring environmental concerns before closing can create unexpected costs, delays, and disputes.

Practical Example: How Contamination Can Delay a Closing

A company plans to purchase a former industrial property in New Jersey to develop a logistics facility. During environmental due diligence, investigators discover petroleum contamination associated with an old underground storage tank.

The buyer and seller must determine:

  • The extent of contamination
  • Whether additional investigation is required
  • Who will manage remediation
  • Whether NJDEP reporting is necessary
  • How cleanup costs will be handled

The closing may be delayed while these issues are evaluated. However, with proper planning, the transaction may still proceed after the parties establish a clear environmental strategy.

Key Takeaways

  • Environmental contamination can delay commercial real estate closings by creating regulatory, financial, and contractual issues.
  • Early environmental due diligence helps identify risks before they affect a transaction timeline.
  • A Phase I Environmental Site Assessment can identify potential concerns but does not guarantee a contamination-free property.
  • NJDEP requirements may affect closing schedules when investigation or remediation is required.
  • Environmental liability depends on the facts, property history, and applicable laws.
  • Contaminated properties can often be purchased and redeveloped when environmental issues are properly managed.
  • Buyers and sellers should address environmental responsibilities before finalizing a transaction.

When Should You Contact an Attorney?

You should consider contacting an environmental attorney when environmental contamination may affect a commercial real estate transaction, redevelopment project, or business decision. Early legal guidance can help identify risks, evaluate responsibilities, and address environmental concerns before they create unexpected delays.

An environmental attorney may be helpful when:

  • Buying or selling commercial property with potential contamination
  • A Phase I or Phase II Environmental Site Assessment identifies concerns
  • NJDEP involvement exists
  • Cleanup responsibility is unclear
  • A transaction deadline is approaching
  • Purchase agreements require environmental provisions
  • A property has historical industrial uses

Environmental matters often involve technical findings, regulatory requirements, and contractual negotiations. Coordinating legal and environmental professionals early can help parties make informed decisions.

Environmental contamination can create significant challenges during commercial real estate transactions, from unexpected delays to complex regulatory requirements. The Law Office of Alan S. Ashkinaze helps New Jersey businesses, property owners, developers, and investors navigate environmental compliance issues involving contaminated properties, NJDEP requirements, and redevelopment projects. Contact The Law Office of Alan S. Ashkinaze to discuss how environmental concerns may affect your commercial real estate transaction.