Kevin E. Timson, Esq., Bellavia Blatt, PC
The purchase of the real property underlying a dealership is typically an important part of a buy-sell transaction. One of the buyer’s biggest uncertainties when purchasing real property is whether it has been subject to environmental contamination that has not yet been remediated — i.e., when the groundwater or soil beneath the property has become contaminated with hazardous materials in violation of federal and state environmental laws.
These laws include the U.S. Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which may impose liability on the buyer as a “potentially responsible party” for the release of hazardous materials occurring prior to the buyer’s possession of the property. Because of this liability, the buyer might end up spending hundreds of thousands of dollars in remediation costs that it did not factor into the purchase price offered to the seller.
To avoid this outcome, the buyer should have a right under the purchase agreement to perform “all appropriate inquiries” regarding the property’s environmental conditions. Several assessment issues that must be addressed in the purchase agreement are discussed below.
The purchase agreement should give the buyer the right to conduct a Phase I Environmental Site Assessment on the property after the agreement is executed. The Phase I assessment would include a review of state, local and federal records, property surveys, reports from past environmental site assessments on the property and interviews with the owners, occupants, neighbors and local government officials.
The purchase agreement should detail all these steps to ensure that the seller does not limit how the buyer conducts such an assessment. The records and interviews provide the best source for identifying any likely contamination on the property or a nearby property. Reviewing nearby properties is also important because, depending on the proximity of these locations to the dealership property and the topography of the area, some amount of hazardous material could have migrated from these locations to the dealership property.
The purchase agreement should also require the seller to timely provide the buyer with any surveys and environmental reports that the seller has for the property, along with any correspondence the seller might have had with state, local and federal government officials about the property’s environmental conditions or the conditions for nearby properties.
If the Phase I assessment indicates the potential presence of contamination on the property, the purchase agreement should give the buyer the right, in its sole discretion, to then conduct a Phase II assessment. A Phase II assessment involves a subsurface investigation of the property to identify whether contaminants are present below ground and in what amounts. Soil, underground storage tanks and groundwater would all be subject to testing to identify sources of contamination.
Tests would include collection of soil samples through soil borings, installation of groundwater monitoring wells and examination of underground storage tanks. The purchase agreement should provide the buyer the right to perform these tests and any others recommended under industry standards such as those set by the American Society for Testing and Materials.
The buyer should note that the seller may demand some accommodations to allow these tests on the property, including two or three days’ prior notice of any testing and requirements that testing occur outside normal business hours to avoid disrupting dealership business and generating any suspicion by dealership employees regarding the potential sale of the business. The seller might also require the buyer to be liable for any property damage caused by soil borings or other tests.
The amount of time allocated in the purchase agreement for Phase I and Phase II work is an important issue to negotiate. Ideally, the buyer should seek to not be subject to any fixed timeframe for testing prior to closing of the transaction. However, a seller may demand that the assessments be performed as soon as possible to avoid a delay in closing.
If that happens, the buyer should consult an experienced environmental professional to propose a reasonable deadline under the purchase agreement for performing the assessments. A proper assessment can take several months — from reviewing government records and performing interviews for a Phase I study to conducting various tests on the property for a Phase II study. The buyer and seller may agree to a time period for these assessments that coincides with the deadlines set in the purchase agreement for the buyer’s franchise and floorplan approval. However, the assessments may take longer than the time to satisfy these other closing conditions.
Regarding the cost of performing these assessments, the buyer is typically expected to cover the cost of the Phase I assessment. The buyer might propose to split this cost equally with the seller. However, the seller may push back on such an arrangement, arguing that there is no contamination and that, if there were any claims and remediation costs imposed upon the buyer, they are already subject to indemnification by the seller.
Nonetheless, if the Phase I assessment indicates that hazardous materials have likely been released beneath the property, the buyer may have a stronger justification for the purchase agreement allocating some or all the cost of the Phase II assessment to the seller.
Rights Upon Discovery of Hazardous Materials
The buyer must clearly establish rights and obligations in the purchase agreement between the parties if the assessments determine that remediation must be performed under state or federal law. The buyer might propose that, upon the discovery of any hazardous materials, it will have the right to terminate the purchase agreement and receive its deposit back from the seller. Without this provision, the buyer risks the threat of the seller demanding specific performance of the agreement in court. Such specific performance, if awarded, would force the buyer to take ownership of the property and assume the entire cost of the remediation.
Alternatively, the buyer could propose that it may terminate the agreement if the seller is not willing to share in the remediation costs. For instance, the buyer’s termination right could be exercised only if remediation costs more than $100,000 and the seller is not willing to cover any costs in excess of that amount.
Before any negotiation occurs of terms regarding environmental assessment and remediation costs, it is important for the buyer to conduct enough due diligence on the property to form a reasonable basis for any contract demands made thereafter. The buyer should visit the property and look around, talk with the seller, and get copies of any prior Phase I or II reports. Questions to consider asking the seller might include:
- What was on the property before the dealership?
- How old is the service facility? Is it a new facility with limited potential for fluids to penetrate the flooring?
- Are there any active or closed underground storage tanks on the property?
- Are there any in-ground lifts and if so, is the lubricant for these lifts stored aboveground or below the ground?
Additionally, the Buyer should make sure that any representations the seller makes about the property’s environmental conditions go beyond general statements about the seller complying “with all environmental laws.” The purchase agreement should specify which laws are considered “environmental laws” such as CERCLA and specific state laws. This is important because laws may vary regarding what substances are considered hazardous materials under and what amounts are deemed hazardous. The buyer wants to be protected from liability no matter what statute or regulation applies to the property.