How Environmental Liabilities Are Killing More Deals Than Financing Issues

Written by:

Rudi Davis

Date:

31 Jan 2026

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While most real estate investors focus on interest rates and access to capital, a different risk is quietly derailing more commercial property deals: environmental liabilities hidden in properties with long operational histories.

John Paul Teague, a partner at Musick, Peeler & Garrett LLP who recently closed what he calls “probably the second largest real estate transaction in terms of size in US history,” says that environmental issues are now a leading reason deals fall apart. “It’s usually during due diligence that things are discovered that are problematic,” Teague says. “Maybe there’s a lot of litigation or liability risk. Those would tend to be more common than financing as a reason why a deal falls apart.”

Teague’s experience contradicts the widespread view that financing is the main obstacle to closing deals in today’s market. “Not so much financing,” he says. “People generally have the financing lined up, or they have a clear strategy in terms of how to obtain it. So that doesn’t tend to be the most common” reason transactions collapse.

The Hidden Costs of Historical Land Use

Environmental risk is especially acute for properties with decades of agricultural or industrial use. Teague points to a recent deal involving a former company town owned by a large produce company to illustrate the complexity. In this case, ranching operations used chemicals to clean livestock. “They had these dipping vats where they put in caustic chemicals and toxic chemicals. The solution in past decades was to bury them,” Teague explains.

Burying hazardous materials in this way creates a significant challenge for buyers and sellers. Teague emphasizes that buyers must account not only for known risks but also for “known unknowns and unknown unknowns,” and factor these into the structure of purchase agreements.

The problem is not limited to agricultural sites. Any commercial property with a long operational history may have environmental exposures that standard due diligence won’t uncover. “If there’s a history there, structuring indemnifications and warranties and representations is always key, and a lot of time is spent on that when there’s a lot of unknowns, such as environmental issues,” Teague says.

Why Standard Due Diligence Fails

Traditional environmental due diligence typically involves Phase I and Phase II assessments. However, Teague argues that this approach often fails to capture the actual risk posed by legacy properties. “Any decent attorney is going to spend a lot of time on structuring indemnification and how to put in knowledge qualifiers that really protect the client and prevent them from facing liability,” he says.

The critical factor is how purchase agreements address risks that investigative methods cannot reveal. “You want to put any potential scope for dispute in a clearly defined box that limits what exactly can be considered non-disclosure,” Teague explains. This means spelling out in the contract what is and isn’t covered, so both sides know the boundaries.

This approach requires rethinking how representations and warranties are drafted. For sellers, the goal is to use carve-outs and qualifications to limit post-closing disputes. “There’s really very little scope for disputes later on, because you’ve limited the indemnification or the representations to such an extent that there’s really very little potential for anybody to come back and argue that you didn’t disclose anything,” Teague says.

For buyers, this means acknowledging they are purchasing properties with environmental conditions that may never be fully known. Sellers, in turn, are protected from claims based on conditions they could not reasonably have discovered. “If it’s limited enough, then you really don’t have too much to worry about during due diligence,” Teague notes. “If anything’s uncovered, it wasn’t known, so they either proceed with the transaction or don’t.”

How Environmental Risk Is Reshaping Deal Structure

Teague’s experience suggests that managing environmental risk has moved from a routine checklist item to a core question of how deals are structured. Sophisticated buyers and sellers now build entire transaction frameworks around the assumption that not all environmental issues can be identified before closing.

This approach is especially relevant for buyers acquiring large landholdings or properties with extensive histories. In the million-acre ranch deal Teague recently closed, the team assumed there could be buried hazards that decades of investigation might never reveal. The transaction was structured with “clearly defined boxes” that set limits on future disputes over undiscovered environmental issues, allowing the deal to proceed despite uncertainty.

How Sophisticated Buyers Are Adapting

Musick, Peeler & Garrett LLP has developed specialized methods for structuring transactions in which environmental conditions are uncertain. This includes the use of knowledge qualifiers to clarify what parties know and do not know, carefully drafted indemnification provisions, and representations that set realistic boundaries given longstanding practices.

“If you’re representing the seller, the carve-outs and the qualifications will be such that there’s really very little scope for disputes later on,” Teague says, describing how these provisions protect clients while keeping deals viable.

For example, the firm recently represented a family that had assembled more than 1 million acres of ranchland in New Mexico since the 1980s. The deal required accounting for decades of ranching practices, possibly buried chemicals, and environmental conditions that could not be thoroughly investigated due to the property’s scale.

The Future of Environmental Risk Management in Real Estate

Whether this approach becomes standard for legacy property transactions may depend on how many more deals collapse during due diligence when buyers encounter environmental liabilities their contracts did not anticipate. As Teague’s experience shows, ecological risk is no longer a secondary consideration. It is now a leading factor shaping not only whether deals close, but also how they are structured from the start.

For buyers and sellers of properties with long operational histories, the lesson is clear: environmental liabilities can no longer be treated as afterthoughts or routine checklist items. Instead, they require detailed, explicit structuring across all aspects of the transaction. Those who fail to address these risks directly may find that deals collapse—not because of financing, but because of what’s hidden beneath the surface.