Dumping Ground

Environmental Audits

In the meantime, small-business owners are subject to the same law as major corporations. Even if the site was contaminated years before you bought it, through no fault of your own, you can be required to pay the entire cost of remediation.

How would you know if your property was contaminated? Someone might notice an oil slick on a nearby creek or patches on a vacant lot where nothing will grow. People drinking water from a nearby well might start getting sick. Often, it's the city or county health department that investigates a problem and reports its suspicions to the state EPA. The agency can then order you, the property owner, to hire consultants and remediation crews. In emergency cases, the agency may hire a crew, then sue you and your business for the cost of cleanup. Often it's a battle of experts to determine what the most appropriate remedy is.

The only way for the property owner to get off the hook is the "innocent landowner defense." CERCLA excuses private property owners who acquire the land after it was contaminated, but only if they inherited the property or if they "did not know or had no reason to know" about the hazardous substance.

Just buying blind, though, isn't good enough. To prove that you did not know about the problem, you must have undertaken "all appropriate inquiry" into previous ownership and uses of the property to minimize your liability. That means having an environmental audit conducted at the time you purchase the property.

Given the risks, many real estate lawyers recommend an environmental audit as a routine part of commercial property sales. A Phase I environmental audit is a preliminary assessment, typically conducted by an environmental consultant or engineer. It includes looking over the site for evidence of contamination and examining the records of previous ownership to see what kinds of businesses operated there in the past. If warranted, the consultant then recommends a Phase II assessment, conducted by an environmental engineer or similar specialist, which involves digging, drilling and testing samples.

A Phase I assessment can cost anywhere from $1,500 for a small retail site to tens of thousands of dollars for a factory. Phase II will likely cost even more. The potential cost of buying blind, though, is much worse.

If you're buying commercial property, ask whether the seller has had an environmental audit done. If he or she has, ask to see the final report before committing yourself to the deal. It may even be wise to have your own audit conducted. Most medium-to-large communities have several environmental consultants and engineers. But because it's a new field-and a lucrative one-not all consultants are well qualified. Check all references carefully. Ask to see samples of the consultant's reports, and ask for the name of an attorney who's worked with the consultant for additional insight.

Some buyers attempt to protect themselves by insisting on a clause in the purchase contract stating that the seller assumes all responsibility for environmental contamination should it appear. Federal law, though, states that buyers can't escape responsibility through such clauses. In any case, the clause would be only as good as the seller's ability to back it. As a result, a competent environmental assessment is still your best protection.

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This article was originally published in the January 1996 print edition of Entrepreneur with the headline: Dumping Ground.

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