Five Common Environmental Due Diligence Pitfalls

  1. Reviewing Only Select Environmental Laws. Most environmental consultants consider the potential application of CERCLA, RCRA, and the Clean Water Act, the Clean Air Act, and the Toxic Substances Control Act (TSCA), in conducting due diligence. However, in corporate acquisitions, some consultants overlook the potential application of the Occupational Safety and Health Act, and relevant state health and safety laws and regulations.
  2. Failing to Make Due Diligence Specific to the Transaction. Because the environmental liabilities potentially transferred to a buyer vary based on the type of transaction (i.e., raw land purchase, asset acquisition, stock acquisition, merger), due diligence should be made specific to the transaction at hand. Environmental consultants need to examine the unique circumstances of each particular transaction to ensure that all potential significant environmental concerns are adequately addressed.
  3. Hiring the Lowest Bidder. As most readers would agree, using a reputable environmental consulting firm is critical. Unfortunately, buyers can be tempted to choose the lowest bidder to perform environmental due diligence.
  4. Not Reviewing Leases. Although well-versed in real estate law, real estate attorneys may not have the environmental expertise to properly assess the potential environmental liabilities to a buyer arising out of the lease. Some leases contain provisions that require the lessee to restore the property to pre-lease conditions at the end of the lease term or prohibitions on the types of activities that may take place on the property. During due diligence, it is important to confirm that the buyers intended use of the leased property is allowable under the terms of the lease.
  5. Not Allowing Sufficient Time for Due Diligence. Phase I environmental site assessments and compliance audits generally take three to four weeks to complete. Phase II environmental site assessments can take six weeks or more depending on the scope of the investigation. Therefore, in an ideal world, there would be at least 90 days between signing and closing to conduct environmental due diligence.