Environmental disclosure: overview, definition, and example
What is environmental disclosure?
Environmental disclosure refers to the obligation of businesses, property owners, or organizations to provide information about environmental risks, liabilities, or compliance related to a property, business operation, or financial transaction. This may include details on pollution, hazardous materials, regulatory violations, or sustainability practices.
Environmental disclosures are often required in real estate transactions, mergers and acquisitions, and financial reporting to ensure transparency and regulatory compliance. These disclosures help investors, buyers, and regulatory agencies assess potential environmental risks before making decisions.
Why is environmental disclosure important?
Environmental disclosures help protect buyers, investors, and the public from unforeseen liabilities related to contamination, hazardous materials, or regulatory violations. Without proper disclosure, a buyer could unknowingly inherit environmental liabilities, such as the cost of cleaning up pollution or penalties for non-compliance with environmental laws.
For businesses, failing to disclose environmental risks can result in lawsuits, regulatory fines, and reputational damage. Many governments require companies to include environmental disclosures in financial reports, ensuring stakeholders have accurate information about a company's environmental impact.
Understanding environmental disclosure through an example
Imagine a company is selling an industrial property that was previously used for manufacturing. Under environmental disclosure laws, the seller must inform potential buyers if the site has any history of soil contamination, hazardous waste disposal, or environmental violations.
If the seller fails to disclose that underground storage tanks on the property leaked hazardous chemicals, the buyer may later discover the issue and face expensive cleanup costs. If the lack of disclosure is proven, the seller could be held legally responsible for the damages.
An example of an environmental disclosure clause
Here’s an example of how an environmental disclosure clause might appear in a real estate or business transaction contract:
“The Seller represents and warrants that, to the best of its knowledge, the Property is in compliance with all applicable environmental laws. The Seller further discloses that [describe known environmental conditions, such as contamination, hazardous materials, or regulatory actions]. The Buyer acknowledges receipt of this disclosure and agrees to conduct its own due diligence regarding environmental conditions prior to closing.”
Conclusion
Environmental disclosure is a critical requirement in real estate, business transactions, and financial reporting, ensuring transparency about environmental risks and liabilities. It helps buyers and investors make informed decisions while protecting businesses from legal and financial consequences.
Before finalizing a transaction, always review environmental disclosures carefully—because hidden environmental risks can lead to costly legal and financial problems down the road.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.