Month: March 2018

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  • Using an Old Phase I report – A Phase I that is more than 180 days old is considered out-of-date and needs to be updated.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.

Another Good Use for Your Environmental Counsel: Bad Cop

When should you call your environmental lawyer?  Some reasons are obvious: when you get sued or to review the environmental provisions of a contract, for example.

But here’s another good reason, based on a recent project I worked on:  Environmental attorneys can provide oversight of your environmental consultant and be the “bad cop” with the government agency.

I have many friends who are environmental consultants. They do great work but are sometimes reluctant to take an adversarial stance with the government agency or offer cleanup alternatives that are contrary to the agency’s recommendation.  Consultants work almost daily with the government agency project managers and want to stay on good terms with them.

But, sometimes, a bit of toughness is required. And that’s where your lawyer can come in handy. Nobody expects us to be nice. 

Okay. Maybe I’m not this aggressive.

Recently, I worked on a project where the Texas Commission on Environmental Quality (TCEQ) wanted my client to install additional monitoring wells and conduct more sampling to prove that the contamination was sufficiently low to close the file.

I didn’t support their reasoning. There were other businesses nearby with similar contamination, so how would we ensure that we weren’t detecting their contamination? Moreover, TCEQ had granted closure on those similar properties in the neighborhood with higher contamination levels than my client’s.

Our consultant wanted to propose some limited sampling to satisfy TCEQ, but I wanted to push back and say the data were sufficient to support closure. I found TCEQ guidance to back me up and, after a few emails and letters, TCEQ finally agreed with me and closed the file.

Nobody likes to spend money on lawyers, but spending a few hours of my time cost significantly less than installing the additional wells requested.

Attorneys are ethically obligated to act in their client’s best interest, and sometimes that means playing Bad Cop. I’m not saying that consultants are not similarly ethically obligated, but sometimes they are hesitant to push back to a project manager they deal with on a regular basis.

Bringing in a lawyer to play hardball lets the consultants maintain the camaraderie they need to do their jobs without sacrificing the client’s goals or needs.