Top Environmental Due Diligence Mistakes

It’s time for my annual rant about the lack of respect given to environmental due diligence during the M&A process. It is still the overlooked stepchild of a deal, and buyers, lenders, and investors can get seriously burned by neglecting this critical component.

Identify Surprises Before Your Deal Closes

Dealmakers should be familiar with the term “Phase I,” which is the preliminary environmental report that could protect a buyer from pre-closing contamination and that must follow the guidelines set out in ASTM E1527-13.

But due diligence can be more than just commissioning a Phase I. Here are the top mistakes I already have seen in 2018:

  • Using the Lowest Bidder on a Phase I Report – You definitely get what you pay for. In addition to typos and poor grammar, I have seen obvious things overlooked (e.g. nearby leaking underground tanks) and non-problems made into problems. Many “cookie cutter” Phase I shops grind out the Phase I reports with the hope of getting the Phase II sampling work that they recommend (and, not surprisingly, charge significantly more for). To prevent this, ask around for consultant referrals. In addition, have the consultant generate a DRAFT report for your attorney to review before issuing the final report to prevent surprises.
  • Ignoring Potential Issues That Are Outside the Scope of the Phase I – Remember, a Phase I only looks at contamination and not compliance with environmental laws. Does the seller have all necessary permits AND is it complying with those permits? Representations and warranties in the sales contract are only as good as the seller’s continued financial viability.
  • Only Reading the Executive Summary of the Phase I – Have your environmental attorney read the entire report, including the appendices, to make sure nothing was missed. She should be able to complete this task in one or two hours.
  • Using an Old Phase I report – A Phase I that is more than 180 days old is considered out-of-date and needs to be updated.  (ASTM E1527-13 Section 4.6).
  • Using the Seller’s Phase I – This is a problem for at least two reasons: First, the buyer has no privity of contract (i.e. no contractual relationship) with the consultant who did the seller’s report, so the buyer could not sue if the Phase I turns out to be wrong. This issue can be resolved by getting a reliance letter from the consultant. Second, the consultant may be biased toward the seller, so frankly, I would not trust their report.

Keep these points in mind when planning your next deal to prevent unwanted surprises.

One thought on “Top Environmental Due Diligence Mistakes”

  1. Hi Cindy – Thanks for including me on your newsletter. I especially like the article the Top Environmental Due Diligence Mistakes (your annual rant). I would ask that you specifically check out my latest blog via our webpage at http://www.verumcrm.com. I used to be the “accountable owner” of bad due diligence mistakes, and I’ve taken those “lessons” into my consulting business. Check us out. I hope we can discuss a business alignment, if that makes sense. Thanks, Greg

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