By: Ted Olt III
A wide variety of environmental issues may impact the sale or purchase of a business. Most sale of business transactions including some form of real estate transfer, and liability for environmental problems often runs with the land. Accordingly, it is important that both Seller and Buyer include consideration of environmental issues early in the process.
The first issue for either Buyer or Seller to address is identification of potential risks. If the transaction involves the sale of real estate, this usually involves a Phase I Environmental Site Assessment (“Phase I”). The Phase I is a non-intrusive review of records effecting the Property, and a physical inspection of the Property to identify potential for environmental concerns. A Seller may want to have the Phase I performed prior to offering the business for sale in order to identify and address environmental concerns proactively rather than reacting to them when raised by a Buyer. However, if the Seller obtains a Phase I before the Buyer is identified, the Seller should ensure the Environmental Consultant will allow a potential Buyer to rely upon the Report. In addition, the Seller should recognize that some Buyers (and their lenders) may not accept the Seller’s Phase I, and may require their own Phase I.
The Seller may use the Phase I to identify and perhaps remediate any environmental condition before sale, or at least consider the impact in the structuring of the transaction. From the Buyer perspective, the Phase I provides critical information regarding the historical and current use of the Property in order to evaluate potential risk relating to owning or leasing the Property. In addition, if the Phase I is performed according to regulatory standards, the completion of the Phase I may constitute “all appropriate inquiry” and provide some protection against liability for previously unknown environmental issues. A Buyer should always obtain a Phase I prior to taking title to commercial property.
If the Phase I identifies a “Recognized Environmental Condition” (REC), or potential for environmental problems, Buyer’s consultant or environmental counsel may recommend a Phase II Environmental Site Assessment (“Phase II”). The purpose of the Phase II is to conduct actual testing to confirm or deny the presence of an environmental conditions identified in the Phase I. The scope and expense of a Phase II varies depending upon the nature of the REC’s identified in the Phase I. It is important to recognize that a Phase II merely confirms or denies the existence of an environmental problem, it does not necessarily define the scope and extent of the problem.
In addition to the Phase I/Phase II property assessments, Environmental Due Diligence may include comprehensive review of current and past business operations, including evaluation of business waste flows, permitting, and compliance history. Such a review may identify potential liability as well as identifying ways of improving business operations to avoid future environmental problems after closing.
Identification of environmental problem should not necessarily prevent the sale or purchase of a business, as there are many ways a transaction can be structured to mitigate or limit the risk from past environmental concerns. (It should be noted however, that depending upon the nature of the issues, is often very difficult (if not impossible), to eliminate all risk). These strategies will be addressed in a later installment of the merger and acquisition series.
Ted practices law in our Corporate & Transactional Law practice group, focusing on corporate law, mergers & acquisitions, contracts, commercial real estate, and environmental law. With over 20 years of experience counseling a wide variety of business clients, he combines legal knowledge and analysis with practical advice to help clients achieve their objectives in an effective and efficient manner.