Environmentální due diligence

What is environmental due diligence and why is it crucial for your investment?

EDD verifies whether a property complies with all environmental standards and regulations and whether there is a risk of soil or groundwater contamination. The goal is to identify any potential risks that could affect the value of the investment and to protect the buyer from unexpected costs or problems after purchasing the property.

EDD is a key part of the broader due diligence process, which also includes legal, financial, tax, accounting, and technical reviews.

An environmental review is commissioned alongside the financial, tax, and legal components. You can find an overview of what types of due diligence are considered during an acquisition and when each makes sense in our separate guide.

Properly conducted environmental due diligence supports strategic decisions by providing data for budgeting potential remediation costs, negotiating transaction terms, or deciding against high-risk deals. It helps build stakeholder trust and demonstrates proactive sustainability efforts.

It is important to realize that EDD goes beyond mere regulatory compliance; it becomes a strategic business tool that directly affects investment value, risk management, and even the company's public image through ESG (Environmental, Social, Governance) criteria. 

Neglecting EDD can thus lead not only to direct financial penalties but also to broader negative impacts on the company's attractiveness to investors and partners, affecting long-term growth and reputation. Moreover, the evolving regulatory landscape, such as the EU's Corporate Sustainability Due Diligence Directive (CS3D), is making EDD an increasingly mandatory and complex part of business operations. 

This directive, which entered into force in July 2024, requires large companies (including those outside the EU with significant turnover in the EU) to identify and address adverse impacts on human rights and the environment across their global value chains.

This means that EDD is shifting from a "best practice" to a "mandatory matter" for a wider range of businesses, highlighting the need for proactive legal advice and preparation for future regulatory burdens.

Phase I and Phase II ESA: How to uncover hidden environmental liabilities?

The environmental due diligence process is typically divided into two main phases that progressively uncover potential and actual environmental liabilities. These phases, known as Phase I and Phase II Environmental Site Assessment (ESA), are the foundation for informed decision-making in a property acquisition.

Phase I Environmental Site Assessment (ESA): First signs of risk

A Phase I ESA is a non-invasive assessment whose primary goal is to identify and evaluate potential environmental liabilities associated with a property. It includes a thorough review of historical records, a visual inspection of the site, and interviews with key individuals.

When reviewing historical use, for example, old maps, aerial photographs, and records of previous industrial, agricultural, or military activities are examined to uncover possible contamination risks.

Key elements of a Phase I ESA include: a review of regulatory and historical records, a site reconnaissance, interviews, and a vapor encroachment screen. This phase is conducted in accordance with the ASTM E1527-21 standard, which ensures a systematic and reliable assessment process.

The lawyers at ARROWS will help you ensure that the Phase I ESA is conducted in accordance with the highest standards, which is crucial for obtaining "innocent landowner" protection from future liabilities.

Phase II Environmental Site Assessment (ESA): In-depth analysis and testing

If a Phase I ESA reveals "red flags" or potential environmental issues (Recognized Environmental Conditions – RECs), an in-depth Phase II ESA follows. This phase is invasive and involves the collection and laboratory testing of soil, water, and/or air samples to confirm and quantify contamination. 

Common aspects of a Phase II ESA include: geophysical surveys, soil gas and indoor air surveys, exploratory borings, and sampling of various media. The results of the Phase II ESA provide a quantitative analysis that is essential for estimating remediation costs and negotiating the purchase price.

The lawyers at ARROWS will provide you with legal consultations on the survey results and assist with preparing documentation that will protect your investment and minimize the risks associated with the identified contamination.

The sequential nature of Phase I and II ESAs reflects a risk-based approach, where initial non-invasive checks guide more costly, invasive investigations. This procedure optimizes resources while ensuring thoroughness.

This is a practical and cost-effective strategy that allows companies to avoid unnecessary expenses by proceeding to more intensive testing only if the initial screening reveals significant issues.

It is also important that adherence to international standards, such as ASTM E1527-21 and E1903-19, is crucial not only for technical accuracy but also for legal protection. For example, a properly conducted Phase I ESA is one of the requirements for obtaining "innocent landowner" protection under the U.S. CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act). 

This means that simply conducting an assessment is not enough; it must be done correctly and in accordance with recognized standards to provide the intended legal protection from future liabilities. This underscores the key role of legal counsel in overseeing the technical process.

Uncovering hidden threats and solutions with ARROWS

The most common contaminants and their origins: What to look for on Czech brownfields?

Brownfields are defined as unused, neglected sites that have often lost their original purpose and may be contaminated. They typically arise as remnants of industrial, agricultural, residential, military, or other human activities. In the Czech Republic, we most often encounter soil and groundwater contamination at these sites.

Among the most common contaminants in Czech brownfields are petroleum substances, chlorinated aliphatic hydrocarbons, polycyclic aromatic hydrocarbons, polychlorinated biphenyls (PCBs), and heavy metals. These substances come from various sources, such as abandoned industrial plants, agricultural sites, oil refineries, landfills, unsecured hazardous substance storage facilities, or former military bases.

Furthermore, hazardous substances may also be present in the building materials themselves, such as asbestos or lead-based paints, and there is also a risk of vapor intrusion from underground contamination, which can affect indoor air quality.

The diversity of contamination sources in brownfields means that a one-size-fits-all approach to environmental due diligence is insufficient. It is necessary to conduct a targeted investigation based on detailed knowledge of the site's historical use. For example, a site with a former chemical production facility will require different types of analysis than a former farm. This fact underscores the need for an expert assessment of the scope and methodology of the EDD.

Moreover, contamination is not a static problem; it can migrate through various media, creating complex and evolving risks. Contamination present in the soil can seep into groundwater, which may serve as a source of drinking water, or volatile substances can be released into the air, posing health risks to residents. This dynamic means that in addition to an initial assessment, ongoing monitoring and a broader remediation strategy that considers all possible pathways of pollutant transport are often necessary.

Financial and legal consequences of contamination: How to avoid million-crown fines and losses?

Environmental contamination of a property can have far-reaching financial and legal consequences that significantly exceed the initial purchase cost. One of the most fundamental legal principles is in rem liability, which means that the obligation to clean up an environmental burden follows the legal fate of the property and passes to its legal successors. In practice, this means that even a new, innocent owner can inherit the duty to remediate historical contamination, which represents a huge and unforeseen financial burden.

The financial impacts are substantial. The costs of remediating contaminated soil and groundwater can run into millions of crowns, and in the case of extensive contamination, they can be ruinous for a company. In addition to the direct costs of remediation, there is also a decrease in the market value of the property. Properties with environmental liabilities are harder to sell, fetch lower prices, and banks are reluctant to provide financing for them. 

For example, new strict environmental standards associated with the "Green Deal" may lead to older buildings that do not meet energy efficiency requirements becoming "unsellable piles of bricks with no real value," and modifications could amount to 25–30% of their current value.

Legal consequences include high monetary penalties and fines. The Czech Environmental Inspectorate (ČIŽP) regularly imposes fines on companies in the range of hundreds of thousands to millions of crowns for violations of environmental regulations, such as unauthorized water management, operating concrete plants without a permit, failure to implement corrective measures, or violating Act No. 185/2001 on Waste. In serious cases, environmental crimes can even lead to imprisonment.

In addition to direct remediation costs and fines, environmental contamination and non-compliance can seriously affect a property's market attractiveness, access to financing, and overall return on investment, especially with tightening ESG regulations and "Green Deal" initiatives. Companies that fail to manage their environmental risks may face a loss of investor confidence, limited access to "green" financing, and negative publicity, which damages their reputation and long-term sustainability.

Financial and legal impacts of contamination and support from ARROWS

Regulations and international standards: How to stay compliant with the law?

For companies operating in the Czech Republic and internationally, it is crucial to know and comply with relevant environmental regulations and international standards. These regulations are constantly evolving, and ignorance or non-compliance can lead to serious legal and financial consequences.

In the Czech Republic, environmental legislation affects many areas. This includes, for example, the Ministry of the Environment's Decree No. 153/2016 Coll., which specifies details of agricultural soil quality protection and limits for risk elements and substances in soil, including procedures for sampling and evaluation.

Furthermore, key laws govern air protection, waste and packaging management, and water and wastewater management. The Water Act No. 201/2012 Coll., for example, sets out obligations regarding environmental liabilities and offenses related to water management. Compliance with these regulations is actively enforced, as evidenced by examples of fines from the Czech Environmental Inspectorate (ČIŽP) for various violations.

At the international level, standards such as ASTM E1527-21 and ASTM E1903-19 play an important role, providing methodological guidance for conducting Phase I and II environmental site assessments. These standards are recognized globally, and compliance is often necessary for the legal protection of investments. Developments in the European Union are also key, especially the aforementioned Corporate Sustainability Due Diligence Directive (CS3D), which entered into force in July 2024.

The CS3D directive aims to promote sustainable and responsible corporate behavior across global value chains and requires companies to identify and address adverse impacts on human rights and the environment. CS3D is modeled on existing international standards, including the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

The increasing interconnection of environmental law with broader concepts of corporate sustainability (ESG) and human rights due diligence means that environmental compliance is no longer an isolated issue but a fundamental part of overall corporate governance and risk management.

This has a direct impact on access to financing and the company's perception in the market. The international nature of environmental due diligence, where directives like CS3D also affect non-EU companies with significant turnover in the Union, requires a legal partner with a robust international network capable of navigating diverse regulatory environments.

ARROWS: Your experienced partner for secure real estate acquisitions with an international reach

In the field of environmental due diligence and real estate acquisitions, it is crucial to have a partner by your side who understands not only the legal regulations but also the complex business and environmental contexts. The ARROWS law firm, with twenty years of practice, reflects the expertise of an experienced lawyer while being understandable and attractive to clients.

ARROWS offers comprehensive legal services covering all aspects of environmental due diligence and related risks. The firm's services include drafting internal guidelines for environmental compliance, preparing documentation to protect against fines and penalties, and providing legal consultations to safeguard against inspections.

We also provide preparation or review of contracts, representation in courts and before administrative authorities, legal opinions, obtaining licenses and necessary permits, and expert training for employees or management, including certification.

More than 2,000 clients trust the ARROWS law firm, and we have been recognized as the Law Firm of the Year 2024. Our portfolio includes experience from providing long-term services to more than 150 joint-stock companies, 250 limited liability companies, and 51 municipalities and regions.

We pride ourselves on speed and high quality. Our investment in modern technologies, including artificial intelligence, allows us to automate routine tasks, streamline document processing, and provide faster, more accurate, and personalized services, which directly reduces costs and time for our clients.

Our ten-year-old ARROWS International network enables us to handle issues with an international element on a near-daily basis in more than 70 countries worldwide. Our international presence is a key competitive advantage for clients navigating the complex environment of international environmental regulations and transactions.

In addition to traditional legal services, ARROWS is actively involved in connecting clients. We can connect clients with each other if they have interesting investment or business opportunities. We are also happy to listen to interesting entrepreneurial or business ideas. This makes ARROWS not just a provider of legal services, but a strategic partner that supports the growth and development of its clients' businesses.

Ensure peace of mind and certainty with the ARROWS law firm

Environmental due diligence is not just a recommendation but a strategic necessity for anyone considering the purchase of a commercial site or brownfield. It protects your investment from hidden risks, potentially million-crown fines, and long-term legal liabilities. Properly conducted EDD is the foundation for informed decision-making and the long-term sustainability of your business.

The ARROWS law firm is your reliable partner that routinely handles this issue and has extensive experience with it.

Thanks to our team of specialists, long-standing practice, and the ARROWS International network, we are able to provide comprehensive legal support, whether it involves drafting internal guidelines, preparing documentation, legal consultations, preparing or reviewing contracts, representing clients in courts and before administrative authorities, providing legal opinions, obtaining licenses, or conducting expert training. 

Our comprehensive services, from proactive compliance to dispute resolution, offer clients a full spectrum of legal protection, ensuring long-term business resilience.