There are a number of challenges with conducting environmental due diligence for commercial real estate transactions during the COVID-19 pandemic. Government restrictions including shelter-in-place orders and social distancing guidelines present obstacles for completing key requirements of a Phase I Environmental Site Assessment (“Phase I ESA”), Phase II sampling, a baseline environmental assessment (“BEA”) and due care plan in accordance with Michigan law. Common data gaps and limitations encountered as a result of the COVID-19 pandemic include the following:
- site access limitations;
- impediments to obtaining and reviewing government records;
- an inability to complete interviews; and/or
- delays for sampling and data analysis.
The good news is that flexibility in the environmental due diligence process is emerging in response to this unprecedented situation, such as a recent announcement by Michigan’s Department of Environment, Great Lakes & Energy (“EGLE”) relating to BEAs, and some consultants and lenders are utilizing alternative approaches to address limitations, as discussed below.
EGLE Press Release Regarding 45-day Deadline for BEAs
Per EGLE’s recent press release, for properties purchased, occupied or foreclosed on or after February 1, 2020, EGLE will consider whether failure to conduct a BEA within the 45-day deadline qualifies as “inconsequential” based on an existing statutory provision. The press release states that a BEA may be submitted with a cover letter indicating the submitter is seeking an “inconsequential” determination due to limitations associated with the executive orders issued by Governor Whitmer related to the COVID-19 pandemic.
The opportunity for additional time to complete a BEA (of which a Phase I ESA is one component) is welcome news for new owners and operators who meet certain requirements. Prospective owners and operators of contaminated property can also benefit from this flexibility, although this option is best suited for situations in which the owner or operator has sufficient information to conclude the property will be eligible for a BEA (e.g., the property is contaminated) prior to purchase, occupancy or foreclosure.
Those who intend to rely on this potential flexibility should be prepared to demonstrate eligibility for an “inconsequential” determination. Circumstances such as the specific limitations encountered, based on the executive order, and any good faith efforts made to obtain the necessary information prior to the expiration of the 45-day deadline should be documented in the request.
Options for Addressing Data Gaps and Limitations
To address site access limitations, some consultants are offering to conduct virtual site inspections. Small Business Administration (SBA) representatives have indicated that virtual site inspections, owner or operator led tours, recordings and/or photos may be acceptable to address site access limitations in environmental assessments for purposes of SBA loans. Other lenders have indicated a willingness to accept these types of alternative approaches and/or consider the environmental due diligence adequate for purposes of loaning funds even if there are data gaps or limitations.
From a legal perspective, there is some flexibility in requirements for establishing cleanup and due care liability defenses under Michigan law, but some data gaps and limitations – and even alternative approaches designed to eliminate data gaps – may jeopardize liability protections. Accordingly, whether a prospective owner or operator should proceed with a transaction when there are data gaps or limitations with respect to key aspects of environmental assessments should be evaluated on a case-by-case basis.
Generally, extending due diligence periods and closings (or lease commencement or foreclosure, as the case may be) is preferable so that prospective owners and operators can obtain the information needed to fully comply with applicable standards to establish adequate liability defenses and also to make informed decisions regarding future obligations, risks and costs. Where an extension is not workable, prospective owners and operators may have an opportunity to complete a BEA, keeping in mind that due care obligations begin on the date of purchase, occupancy or foreclosure. Strategies to mitigate risks and post-closing surprises include the following:
- Work with a qualified environmental consultant and legal counsel to complete environmental due diligence;
- Where there is insufficient data to fully evaluate potential due care obligations for a particular project or end use, evaluate various risk scenarios to estimate potential costs; and/or
- Negotiate an agreement with the seller or landlord, as applicable, to allocate post-closing costs and risks.
At Rhoades McKee, we routinely assist our clients in navigating the environmental due diligence process for real estate transactions. To discuss a specific situation, please contact any of our environmental lawyers.More Publications