In structuring acquisitions, both buyers and sellers can become complacent in situations where the target company does not own, but only leases, real estate.

For potential buyers, it is important, even in these situations, to undertake proper due diligence, including engaging Phase I Environmental Site Assessments where there are indications of potential environmental concern. The acquirer of a business may be pulled in to the chain of liability even if it did not create the problem and even if the premises are leased. Businesses that lease property can be subject to liability under federal law as an ‘operator’ of the property. As a result, buyers of a business that will take over and operate leased facilities must be aware of key environmental issues and the associated liabilities.

A prepared seller may also benefit from keeping environmental risks top of mind, because being cognizant of environmental compliance well in advance of a potential sale can increase value and reduce transaction costs. Sellers should consider conducting their own pre-transaction environmental due diligence to identify and minimize potential problems. Unfamiliarity of these critical issues may lead, in addition to state or Federal fines, to lower purchase prices, increased transaction costs, delays, or even the complete collapse of a sale.

There are many state and Federal regulations that impact both owned and leased real estate, which include, notably, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). CERCLA imposes liability on parties responsible for, in whole or in part, the presence of hazardous substances at a site. It requires the responsible party to pay for the cleanup of the site. This liability is sweeping because it is retroactive to any event that happened since CERCLA was passed in 1980 and holds responsible parties strictly liable if any amount of hazardous substance is found at a site. Additionally, it imposes joint and several liability, so one potentially responsible party may be held liable for the cleanup of the entire site even if it was only partly responsible.

Under CERCLA, there are four classes of liable parties: (i) current owners and operators of a facility, (ii) past owners and operators of a facility at the time hazardous wastes were disposed, (iii) generators and parties that arranged for the disposal or transport of the hazardous substances, and (iv) transporters of hazardous waste that selected the site where the hazardous substances were brought. Current owners and operators of a facility may include business owners that bought or lease a facility that was previously contaminated.

Environmental issues may become a costly complication in an acquisition. Appropriate preparation and due diligence will help both sellers and buyers achieve their goals.

This post was written by George Thomas and Carrie Fox.

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