The federal government has a number of laws and regulations in place that are designed to protect the environment. Likewise, the State of California has additional environmental laws and regulations of which real estate developers in the Los Angeles must also be aware.
When conducting a real estate deal, one of the biggest risks is that an investor will wind up responsible for the cleanup of a serious environmental issue. Mandatory environmental cleanups can cost millions of dollars. Many times, insurance is not in place to cover the cost of these cleanups.
If one of these cleanups gets sprung on an investor, it can financially derail a real estate project that otherwise might have been profitable.
There are cases in which a business may not be responsible for a cleanup and will have to defend its position in court. However, prevention and planning often are the right steps when it comes to avoiding responsibility for cleanups.
Due diligence is a key step in a commercial real estate transaction
For any significant commercial real estate transaction, a buyer will want to perform what commonly gets referred to as environmental due diligence. When done correctly, due diligence will uncover possible environmental hazards on the land that otherwise may go overlooked.
Basically, due diligence would involve reviewing the history and condition of the property thoroughly.
The reason for due diligence is that once a developer buys property, the developer is responsible for environmental cleanups, such as, for example, cleanups following leaks in underground tanks. It can be very difficult for the developer to go back to the seller and demand compensation for their cleanup costs after the fact.
On a related note, a business which plans to purchase and then lease real estate to another commercial business should strongly consider negotiating legal language that makes the tenant responsible for the tenant’s violations of any environmental laws.
Otherwise, a landlord might wind up responsible even if the landlord had no idea that its tenant was unlawfully polluting the environment.