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Law360 (November 2, 2020, 5:22 PM EST) --
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| Paul Schmidt |
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| Aaron Mapes |
Similarly, in the transactional world of buying and selling properties, we see several emerging trends in the standard practice of environmental due diligence in response to COVID-19. These practices fall into two basic categories: expansion of the subject matter covered in due diligence, and alterations to the due diligence process itself.
Assembling an Environmental Diligence Team
Before discussing how COVID-19 has impacted environmental due diligence, it is worth commenting on the importance of appropriately assembling your environmental diligence team.
Qualified counsel can identify the COVID-19-related government requirements and industry standards that apply to the target of a transaction, identify property conditions that trigger COVID-19 risks, help determine whether COVID-19 risks are covered by existing insurance (as some are), and help evaluate the COVID-19-related risk associated with a transaction. Additionally, counsel can be used to identify and retain experts in disciplines necessary to evaluate and address a target's COVID-19 protocols and risks, such as a certified industrial hygienist or mechanical systems engineer.
Of particular importance with respect to subjects like COVID-19 — where there has yet to be litigation to pass final judgment on the appropriateness of a building owner's, property manager's or business's operational protocols — communications related to environmental due diligence can be funneled through counsel, providing a basis to assert that the confidentiality of these communications is protected by the attorney-client privilege and/or attorney work-product doctrine. These legal protections can avoid headaches in future transactions or litigation, by protecting preliminary, speculative or confidential communications or work product from disclosure.
For example, a consultant assisting a lawyer with its environmental due diligence may make six recommendations related to a building owner's, property manager's or business's COVID-19 exposure mitigation and response protocols, one of which is obviated by facts developed subsequently, and one of which will be addressed by operational changes the buyer intends to make immediately after closing the transaction.
Another one of the recommendations may be deemed speculative and impracticably costly to address, with little or no commensurate benefit. In the event of subsequent COVID-19-related litigation initiated by a tenant, employee or business invitee, these recommendations and associated deliberations may be privileged, such that they can be withheld from disclosure or document production in the litigation, without need to justify the responsive action taken or not taken.
Expansion of Subject Matter Covered in Environmental Due Diligence
The COVID-19 pandemic has triggered application of a wide array of facility-level protocols which warrant evaluation. Some of these protocols are required by government laws and guidance, and others by industry standard.[1]
Beyond the simple need to ensure protection of occupants, an incoming building owner, property manager or business would become responsible should a target be accused of having insufficient post-acquisition COVID-19 protocols — or even preacquisition protocols, under a successor liability theory. Such responsibility could arise from a government health and safety inspection or, perhaps more likely, a lawsuit alleging responsibility for significant bodily injury or death.
Indeed, across the country, many companies already have been subject to lawsuits brought by or on behalf of workers who fell ill or passed away from COVID-19.[2] Admittedly, causation may be difficult to prove in such lawsuits, and states are passing laws protecting businesses from COVID-19 liability.[3] Congress, too, is considering similar protections.[4]
Nevertheless, this threat of claims alone, in our opinion, substantiates the need to review existing COVID-19 protocols when considering the purchase of commercial real estate, so that building owners, property managers and businesses are prepared to prove that their COVID-19 protocols were sufficient to protect tenants, employees or business invitees.
Examples of a target's COVID-19 protocols that should be evaluated during environmental due diligence, or adopted after acquisition, include the following:
- How to respond to COVID-19 cases at the premises;
- How to operate the air management system to reasonably minimize COVID-19 risks;
- What employee work practices are in place — e.g., social distancing, plastic barriers, staggered schedules, etc.;
- What practices are in place to accept business invitees onto the premises;
- What regular and incident-related building disinfection practices are in place;
- How information will be shared, including sensitive health-related information; and
- How sensitive subpopulations will be managed and their information protected, and whether this will satisfy the Americans with Disabilities Act and other applicable federal, state and local laws.
Assessing protocols such as these can require a wide array of technical and legal experts working in tandem. It can also involve chasing a moving target, as best practices related to COVD-19 protocols are regularly changing.
This can be a daunting task, but with an experienced team, it can be conducted with little or no impact on the normal due diligence timeline. The assessment process can also result in substantial improvements to a facility's COVID-19 exposure mitigation and response protocols, reducing future COVID-19 liability risks.
While necessary to reduce liability risks, implementing COVID-19 exposure mitigation protocols presents its own environmental risks that may require additional focus during environmental due diligence. For example, extended shutdowns and reduced occupancy can lead to stagnant water in pipes, icemakers, water fountains, decorative fountains, sinks, showers and other plumbing fixtures, which can result in amplification of Legionella bacteria responsible for the deadly Legionnaires' Disease.[5]
Similarly, the reduced operation of building air management systems can increase risks related to Legionella and other microorganisms, such as mold.[6] These conditions can affect both individuals present in a building during low-occupancy periods and individuals returning to a building after zero occupancy periods.[7]
Separate from conditions such as Legionella and mold, reduced occupancy may have led to lapses in compliance with environmental regulatory obligations, such as conducting sampling events, inspecting and maintaining remediation caps, and submitting required remediation reports.[8] It is therefore prudent to be mindful of environmental regulatory compliance risks — which often are not fully evaluated by a standard Phase I environmental site assessment.
Evaluating such risks requires attention to the operations of the target property and related permitting and authorizations. These issues can take time to understand and investigate, heightening the need get an early start on the environmental due diligence process.
Addressing and Eliminating Gaps in the Environmental Due Diligence Process
Finally, as suggested above, the COVID-19 pandemic may impact the ability, or time needed, to complete certain environmental due diligence tasks. Because of government restrictions and shut down orders, it may be more difficult to conduct site visits, interviews, record-gathering, sampling events and government file reviews.
In light of these obstacles, it may be prudent to engage a diligence team sooner than you otherwise would. It may also be necessary to push the seller to have its own team work harder to unearth long-forgotten reports and assessments within their files.
As a last resort, where efforts to eliminate gaps in the environmental due diligence process are unsuccessful, parties to a transaction may consider adjusting the purchase price, establishing an escrow fund or incorporating indemnifications to cover the buyer's exposure.
Note, however, that while this can protect the buyer from some risks, failing to complete the tasks required by Title 42 of the Code of Federal Regulations Part 312 and the ASTM E1527-13 standard for Phase I environmental site assessments may preclude the buyer from establishing a statutory defense to liability under CERCLA or state law.[9] This is because the extent of due diligence may not satisfy the "all appropriate inquiry" standard those statutes require for qualification as an innocent purchaser or bona fide prospective purchaser.[10]
In summary, in the midst of the COVID-19 pandemic, parties involved in the acquisition of property need to work harder, faster and smarter to complete their environmental due diligence, keep transactions on track, minimize conventional and emerging risks, and avoid or resolve significant data gaps. While this can be challenging, when carefully managed, we have found that transactions can proceed in the COVID-19 era with little to no disruption caused by the environmental due diligence process.
Paul M. Schmidt and Aaron S. Mapes are principals at Post & Schell PC.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See, e.g., 'COVID-19 Control and Prevention,' U.S. Dept. of Labor, https://www.osha.gov/SLTC/covid-19/controlprevention.html#interim, last accessed October 8, 2020; 'Coronavirus Disease 2019 (COVID-19), Businesses and Workplaces, Plan, Prepare, and Respond,' Centers for Disease Control and Prevention, available at 'https://www.cdc.gov/coronavirus/2019-ncov/community/organizations/businesses-employers.html, last accessed Oct. 8, 2020; 'Coronavirus Outbreak Resource Center', American Industrial Hygiene Association, available at https://www.aiha.org/public-resources/consumer-resources/coronavirus_outbreak_resources, last accessed Oct. 8, 2020.
[2] See, e.g., Janey Adamy (2020) 'Families File First Wave of Covid-19 Lawsuits Against Companies Over Worker Deaths,' The Wall Street Journal, July 30, 2020, available at https://www.wsj.com/articles/families-file-first-wave-of-covid-19-lawsuits-against-companies-over-worker-deaths-11596137454.
[3] See Seth Pierce Johnson and Laura G. Hester (2020) 'An Invisible Shield: States Begin Enacting COVID-19 Liability Protections,' The National Law Review, July 20, 2020, available at https://www.natlawreview.com/article/invisible-shield-states-begin-enacting-covid-19-liability-protections.
[4] See Adamy, supra.
[5] See Maggie Fox (2020), 'Coronavirus shutdown causes new risk at CDC: Legionnaire's disease,' CNN, Aug. 7, 2020, available at https://www.cnn.com/2020/08/07/health/coronavirus-legionnaires-water-cdc/index.html; 'Guidance for Reopening Buildings After Prolonged Shutdown or Reduced Operation,' Centers for Disease Control and Prevention, https://www.cdc.gov/coronavirus/2019-ncov/php/building-water-system.html, last accessed Oct. 8, 2020.
[6] Id.
[7] Id.
[8] See Paul M. Schmidt (2020), 'Conducting Environmental Compliance Activities During the COVID-19 Crisis,' Post & Schell, P.C. Environmental Law Posts, March 31, 2020, available at https://www.postschell.com/insights/conducting-environmental-compliance-activities-during-covid--crisis.
[9] See 40 CFR Part 312 — "Innocent Landowners, Standards for Conducting All Appropriate Inquiries"; ASTM E1527-13 — "Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process."
[10] See Comprehensive Environmental Response, Compensation, and Liability Act, Sections 101(35)(B)(i)(I) and 101(35)(B)(ii) and (iii), 42 U.S.C. § 9601(35)(B)(i)(I) and 9601(35)(B)(ii) and (iii).
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