Virtually all business transactions involve some level of environmental risk. The key is to identify all of the potential risks and collect sufficient information about them early in the due diligence period of a transaction. This proactive approach to environmental due diligence will help the buyer determine whether the risks are acceptable in light of the overall transaction and develop a strategy for managing them, both in the contract negotiations prior to acquisition and after the transaction is complete.
How much and to what extent businesses should conduct environmental due diligence typically depends on the nature of the transaction and the anticipated use of the property after purchase.
Below are five tips for buyers to consider when determining the appropriate level of environmental due diligence that should be performed in business transactions.
Although the tips are geared toward buyers, sellers should also consider them so that they can better anticipate the types and level of due diligence that a buyer may perform (and understand their reasons for doing so). Identifying and correcting environmental problems in advance of the transaction may help prevent buyer demands for purchase price reductions or substantial escrows to cover potential environmental liabilities.
Identify the types of environmental liabilities that could be implicated
The most common types of environmental liability and costs associated with businesses and their properties include:
Cleanup of contamination on owned or leased property; Cleanup of contamination on nearby property owned by others, where contamination has migrated from a company property; Cleanup of contamination on property where the company's waste has been sent for treatment or disposal; Tort liability (bodily injury and property damage resulting from exposure to hazardous substances); Fines/penalties for violations of environmental laws and permits associated with the company's operations; Capital expenditures necessary to achieve or maintain compliance with environmental laws and permits applicable to company operations; Increased costs of demolition or site redevelopment associated with contamination of the property, the presence of asbestos or other hazardous materials in site structures, or the presence of wetlands or other sensitive environmental conditions on the property; and Legacy environmental liabilities associated with former properties, operations and businesses of the company. When purchasing...