As potential shifts brought by the October Budget propose new dynamics for commercial property investors, including navigating interest rate fluctuations and potential fiscal changes, environmental due diligence (EDD) remains a vital step in mitigating risk and liabilities whilst ensuring that assets are both a financially viable investment and environmentally sustainable.

Step 1: Importance of Environmental Due Diligence

Environmental due diligence ensures investors are aware of potential risks and liabilities that may result in future regulatory intervention or result in a depreciation in value. These risks can include:

• Soil contamination from previous industrial use, which may pose legal or health concerns.
• Water pollution risks from contaminants leaching into groundwater or surface water bodies, potentially affecting ecosystems and public health.
• Compliance with regulatory and sustainability mandates, which have become increasingly prominent, particularly as public and private entities aim to reduce their environmental footprint.

Step 2: Conducting a Phase I Environmental Assessment

The first step in EDD is a Phase I Environmental Assessment. The assessment starts with the study of historic plans of the site to identify any possible sources of contamination. In addition, environmental databases are reviewed to determine ground conditions, site sensitivity and known past industrial and commercial uses which may have resulted in a negative impact. It is recommended to couple this with a site walkover, where a qualified consultant will explore the site, making notes of any features and buildings and taking photographs to provide a record of the site layout and properties. During this walkover, they will also endeavour to identify if any obvious sources of contamination are present currently on site.

Recommendations are given within the Phase 1 report which details the next steps to be taken pre and post transaction.

Step 3: Phase II Environmental Site Investigation, Abnormal Costing or Environmental Insurance

When a Phase I identifies significant contamination risks for continued use, property investors have a number of options.

• ‍Phase II Environmental Site Investigation - This phase includes sampling and testing to evaluate the extent of contamination. Understanding contamination levels is crucial for investors who often require a clean bill of environmental health before funding can be approved, or to understand the costs and risk associated with cleaning up the contamination.
• ‍Abnormal Costing– Alternatively, a Purchaser may look to their environmental consultants to develop abnormal costs associated with the potential contamination identified within a Phase I. Such costs can be used to price chip the property to adjust the value for the potential liabilities associated with the previous uses and potential for contamination.
• ‍Environmental Insurance - The residual liability associated with historical pollution (and any indemnity given to the vendor) may be transferred to a suitable insurance product. This product can be transferred to a future purchaser.

Step 4: Risk Mitigation and Remediation

If contamination is found, and environmental insurance not selected as the next step, investors should work with environmental consultancies pre or post transaction to devise a remediation strategy. Techniques such as soil excavation, capping layers, ground gas exclusion strategies, groundwater treatment, and other remediation strategies are employed to clean up the site, ensuring it meets regulatory requirements and is safe for its continued use.

Remediation not only removes hazards but also positions the property as an attractive, viable investment for future sale. Investors can leverage these cleanups to meet sustainability goals, such as incorporating green infrastructure into the remediation plans.

Step 5: Long-Term Benefits of Environmental Due Diligence

Performing due diligence upfront saves investors from costly surprises down the line. It ensures that projects are not only environmentally compliant but also positioned to capitalise on new sustainability incentives and grants and growing tenant demand for properties which meet their own internal sustainability strategies. Investors who proactively address environmental issues can optimise long term financial viability.

Conclusion

Environmental due diligence is a non-negotiable aspect of property investment in today’s market. It mitigates risk, ensures compliance with regulations, and protects the long-term value of assets, reducing risk and liabilities.

For investors seeking expert advice on environmental assessments during transactions, Roberts Environmental offers comprehensive consultancy services.