Are You Making These Costly Due Diligence Mistakes?

Companies that perform shoddy pre-purchase investigations can end up with the environmental liabilities of the entities they acquire. They can also miss out on the opportunity to set up a cleanup liability defense, to renegotiate the purchase price if significant contamination is discovered, and to benchmark contamination so that liabilities can be contractually allocated among stakeholders.

When it comes to environmental due diligence, it pays to dig deep. It’s also a good idea to avoid these common mistakes.      

Mistake #1: Leaving due diligence until the last minute.

Despite the numerous advantages of performing environmental due diligence early on in a transaction, many investors schedule it too late in the deal to do much good. It takes one to two weeks to complete a Phase I environmental site assessment, and two to four more weeks to conduct further testing if necessary. If investors wait until the last minute to order a Phase I environmental site assessment, the assessor may not be able to complete the investigation prior to closing because of long wait times associated with Freedom of Information Act requests.

Mistake #2: Ignoring the All Appropriate Inquiry rule.

Another common environmental due diligence mistake is ignoring the U.S. Environmental Protection Agency’s All Appropriate Inquiry (AAI) rule pertaining to Phase I environmental site assessments (ESAs). Fail to follow AAI or its equivalent, ASTM’s E 1527-05 standard, and you could be liable for environmental cleanup under federal law, even if the contamination occurred prior to closing.

Mistake #3: Failing to discuss the asset’s future.

Buyers who plan to develop any asset should discuss their plans with an environmental professional so they can decide on the appropriate level of environmental due diligence. (Conversely, consultants who perform due diligence should ask about potential development.) If, for instance, a buyer intends to develop a surface parking lot with an office building and the consultant isn’t aware of those plans, there may be unintended development expenses associated with soil and groundwater impacts which would not be factored into the cost and schedule for site development and permitting.

Mistake #4: Not thinking beyond the Phase I.

While unforeseen contamination can be costly for investors, so too can issues like environmental compliance and building maintenance. Depending on the circumstances, investors should consider supplementing the ASTM 1527-05–compliant Phase I ESA with additional investigations, such as a compliance audit if the facility is a manufacturer or a property condition assessment if building maintenance is a concern. Investors also need to understand issues like permit transfer requirements and corporate successor liability concerns such as historic waste disposal. (This is where a good environmental attorney can come in handy.)

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