Considerations for Environmental Due Diligence
Source: https://www.lexology.com, March 16, 2019
By: John B. King, Breazeale Sachse & Wilson LLP
Due diligence conducted when acquiring assets in a commercial transaction, whether the assets include property with existing operating facilities or undeveloped property on which a facility is to be constructed, is absolutely essential to ensuring the property does not contain unknown environmental liabilities and is suitable for the buyer’s intended use. Of course, the level of due diligence and the time and money spent on it will vary depending on the size and nature of the acquisition. But it should never be less than enough to obtain sufficient information about potential liabilities and future uses so a buyer may make an informed decision.
Phase I Environmental Site Assessments are routinely done as part of the purchase of developed and undeveloped property. They can provide valuable information to a buyer about the possibility of contamination and environmental liabilities. Environmental sampling can also provide information about the extent of contamination and the steps necessary to address the existing contamination.
This information can be used in at least two ways. First, a properly done Phase I serves to establish one element of an important legal defense that allows a buyer to purchase property with known contamination without liability for that contamination, if all other elements of the defense are met. Second, it allows a buyer to negotiate a reduced purchase price, a “set-aside” or perhaps some other contractual arrangement so the contamination may be appropriately addressed. In short, this information can play an important role in defining the structure of the acquisition and the rights and duties of the buyer and seller.
Many do not realize, though, that proper due diligence requires much more. For example, the operations of an existing facility must be completely understood so a determination may be made as to whether the facility is in compliance with applicable regulations. Obviously, obtaining this knowledge prior to the actual purchase is important, as the lack of necessary permits may require operations cease until they are obtained. Further, the buyer and seller can discuss and negotiate the method or process to achieve compliance and the responsibilities and costs associated with that effort.
Additionally, there are two often overlooked components to environmental due diligence. For an existing facility, the history of opposition from neighboring communities, whether in the form of complaints, opposition to permits or citizen suits, should be investigated. It is important to understand possible future opposition to permit renewals, facility modifications or facility expansions. Further, local governments are increasingly enacting land use ordinances that require an approval for certain types of industrial or commercial use and impose conditions on that use. These ordinances may apply to expansions for developed facilities or the initial development of undeveloped property. Either way, they must be understood so the relative difficulty of obtaining the necessary approvals can be evaluated.
These are just a few of the many considerations that should be integral parts of proper environmental due diligence efforts. With proper due diligence, necessary information can be obtained and evaluated, allowing informed decisions to be made. Without it, unwelcome surprises such as a lack of permits, costly environmental remediation or local regulatory impediments to expansion may impair the buyer’s ability to realize its investment expectations.