Pre-Purchase Environmental Due Diligence

The white-hot real estate market that recently came crashing back down has led to some harsh realities for some hoping to cash in. We have heard of home buyers overbidding and waiving inspections in their rush to purchase residential houses. Similar things are happening in commercial real estate, especially in the overheated markets of the GTA and other major Canadian urban centres. This cautionary tale should serve as a warning for real estate buyers and investors about the vital importance of conducting pre-purchase environmental due diligence.

Client: We are a small group of investors purchasing a former car rental property for potential re-development, we need a price to remove an underground tank and check for contamination.

Consultant: Based on the information provided, the cost is approx. $xx with the following assumptions, limitations and contingencies. Consultant inquires about the status of the property transaction (not yet finalized) and outlines process, scope and costs to conduct Phase I and Phase II ESA for pre-purchase due diligence.

Client: We want to remove the UST and do a Phase 2 ESA after we buy the property. The current owner is in a rush and won’t allow us any conditions, and it’s too good a deal to pass on.

Client: We have purchased the property; we want to remove the tank and investigate for potential contamination. We don’t want to pay for a Phase I, only to remove the tank and do the Phase II.

Consultant: It’s advisable to do at least the Phase I research to determine the Site history and possible off-site concerns, in order to accurately scope and cost the Phase II investigation.

Client: OK, but we are on a very tight budget, and we already know the site was only a car rental business with an attached garage, and a small furnace oil tank buried under the floor.

Consultant: The historical research confirmed the property formerly operated as a gas station and auto repair garage with four underground fuel tanks in use from the 1930’s to 1980’s. The surrounding properties (currently a mix of residential and commercial use) historically contained heavy industrial facilities as well as several fuel storage/dispensing sites.

Client: Oh. That’s not what the vendor told us. But we purchased ‘as-is’ and it was too good a deal to pass up. How bad can it really be?

Consultant: We are on-site with the contractor to remove the tank. It is much larger in size than reported and appears to have been leaking a mix of fuel and waste oil & solvents, resulting in significant soil contamination.

Client: Oh, but that’s just the tank, it can’t be that bad everywhere, can it?

Consultant: We will know more when the Phase II work is complete, but based on the confirmed contamination to date, further investigation/delineation may be needed.

Client: We don’t want to spend any more, just tell us how much it will cost to clean it up completely.

Consultant: All of the Phase II samples analyzed were well above the regulatory criteria for one or more petroleum and solvent related contaminants, confirming significant soil and groundwater contamination across the Site. There are also concerns and potential liabilities related to possible off-site migration, vapour intrusion, indoor air quality, and the possible presence of hazardous building materials such as asbestos, PCBs and lead.

Client: Oh. Maybe we will sell or rent it out. It can’t be that bad, can it? It was still a great buy at that price ($1M, as-is), and in this market we should easily get twice what we paid for it even with some contamination, and three times as much if we clean it up. How much to clean it up completely?

Consultant: Subject to a lot of limitations, including the need to fully delineate, preliminary costs to clean up the Site, without considering off-site impacts, building demolition, legal implications & liabilities, asbestos removal etc. are estimated in the range of $2.5M to $3.0M, but could easily go higher.

Client: Oh.

The morale of this story is to conduct your due diligence before you waive conditions and proceed with any property purchase; and if a deal sounds too good to be true, it probably is. 

Bill Leedham, P. Geo., CESA

Bill is the Head Instructor and Course Developer for the Associated Environmental Site Assessors of Canada (www.aesac.ca); and the founder and President of Down 2 Earth Environmental Services Inc. You can contact Bill at info@down2earthenvironmental.ca