With the Corporate Sustainability Due Diligence Directive legislation expected to reach an agreement soon, companies will be expected to make a host of changes to be more environmentally friendly. As such, it’s likely that business leaders already have a focus on the sustainability of their business activities. However, what you may not know is that there already exists a requirement for environmental due diligence in commercial property transactions. Find out more in this article.
The importance of due diligence
In any commercial property transaction, due diligence plays a vital role in ensuring that buyers are fully informed. It’s beneficial for the seller also, as it helps things progress with minimal risk of delays. Due diligence involves assessing the overall condition of the property, how well suited it is for the buyer’s business/investment goals, and any risks the purchase could potentially carry.
Buyers and investors that don’t follow proper due diligence procedure and conduct the relevant checks open themselves up to increased risk. This typically manifests in the buyer paying far more than the initial price of the property, as they have to complete additional works on the building over time. Due diligence will reveal the potential additional costs associated with a commercial property, thereby allowing the buyer to judge more accurately if it’s a financially viable purchase.
Environmental Due Diligence
Environmental Due Diligence (EDD) shares many similarities with regular due diligence except its primary concern is with the property’s environmental condition and environmental risks. Similarly, this is important for buyers to get a detailed analysis of the possible costs associated with the commercial property purchase. In the process of identifying aspects of the property that could impact the environment, EDD can follow these two approaches:
- Traditional EDD: checks are focused on the presence of hazardous materials and pollutants, as well as how these can be limited, safely handled, and disposed of.
- Natural resource EDD: this focuses on the protection of nearby natural resources, including bodies of water, rare species, sites of historical significance, and marshlands. Risks to these areas must be mitigated and eliminated where possible.
The process of environmental due diligence
When you start the process of buying or selling a commercial property, whether it’s solely as an investment or for use as a business asset, it’s recommended that environmental due diligence is done before the completion of the sale. This can also be triggered when a property is being refinanced. Of course, the first step you need to take before starting due diligence is instruct the relevant property and legal experts to help carry out a thorough analysis of the property. This can include an estate agent, a property surveyor, and a commercial property solicitor.
Environmental Site Assessment (ESA)
The first phase of due diligence reporting is done through an environmental site assessment that establishes the past and current state of the land surrounding the property. It is likely to involve soil and water samples being taken from the ground, as well as a review of historical documents by a dedicated property solicitor. In the case of the latter, this reveals whether the previous owner was in compliance with EDD or not. Any outstanding fines can be transferred to the new owner.
Regulatory compliance review
Check if the condition of the property and the land are in line with any environmental regulations. These checks will consider regulations on both a local and national level, along with any permits held by the property owners over time.
Assessment for harmful building materials
Due diligence checks will also be made inside the property for the presence of asbestos and other potentially harmful materials.
Wetlands and endangered species analysis
Environmental due diligence will check whether the property is positioned near sensitive habitats and wildlife. The new owner can then demonstrate how their practices wouldn’t impact these surroundings. If the property lies on or near wetlands, or a body of water, environmental due diligence will also assess the risk to the property of flooding.
Waste management
Measures must be in place for the safe and efficient disposal of waste materials produced by the business’s operations. There will likely be regulations specifically for the building owner’s waste management practices.
Final risk assessment
Finally, it will be up to an expert to collate all the potential risk areas into a document for the buyer. This will contain details on the nature of the environmental risk, along with actionable suggestions of the steps that might mitigate or nullify these risks. For instance, if asbestos is identified, this final assessment could outline what steps need to be taken to remove it from the property and how much this would roughly cost.
What else triggers environmental due diligence?
Alongside the purchase, sale, or refinancing of a commercial property, the following events can lead to environmental due diligence:
- It’s ordered by a regulatory agency – if a regulatory body believes that the building or the land it’s on has harmful properties, it may see fit to order the current owner to perform a site assessment. The findings will then have to be submitted to the agency for review.
- An existing owner wants to remove liability – someone that wishes to sell their commercial property may decide to conduct environmental due diligence ahead of time. This removes any liability that they knowingly sold a risky asset. To facilitate this further, there will be opportunity for the buyer and seller to agree any actions (price adjustment, cleaning etc) that are needed before the transaction can go ahead.
Commercial due diligence specialists
The team at Toomey Legal are experts in commercial property transactions, possessing in-depth knowledge of everything that’s involved in environmental due diligence. If you’re thinking of upscaling your business or selling a long-standing asset, we can help guide you through the process. After all, we’ve helped many other business owners across the North East get the best deals possible on their commercial property purchases. Get in touch today and we’ll be happy to discuss your goals.