When Borrowers and their lenders think about environmental due diligence, they immediately focus on Phase I/Phase II/ Environmental Site Assessments. That’s a good thing, and is an essential requirement when acquiring real estate. However, when the deal involves an on-going business operation, another type of evaluation – a compliance audit – is needed.
Most readers already know that ESA’s (Environmental Site Assessments) are designed to determine if property has been or is likely to be contaminated. Such information is crucial to assure Buyers and Lenders that their fundamental assumptions regarding transaction are in place:
- That the “true value” of the collateral, net of any remediation costs, is sufficient;
- That limits on the future use of the property due to active remediation or use restrictions will not significantly reduce the expected economic performance;
- That requirements governing conveyances of certain types of property (e.g., the CT Transfer Act) either do not apply or can be complied with; and
- That legal liability exemptions for “innocent land-owners”, “bona fide prospective purchasers” or the “secured lenders” are available.
However, none of the information in an ESA will confirm whether any on-going operations comply with applicable environmental laws, and therefore have the legal right to continue. Borrowers and Lenders need to know this because violations of the law can result in:
- Civil penalties, in some cases, of up to $75,000 per day for each violation. At that rate, the fines can get very large very quickly and cripple the business; and
- Injunctions prohibiting future operations until compliance is assured.
Environmental Compliance Audit
The scope of any compliance audit will depend on the nature of the operation being assessed. Many businesses are subject to:
- Air Pollution Control Regulations. Depending on the operation, these laws impose emissions limits, require control equipment and may necessitate a permit beginning construction or operation.
- Water Pollution Regulations – ditto
- Waste Management Regulations. These may include detailed requirements for the handling, treatment and disposal of waste materials, including detailed record-keeping obligations.
- Underground Storage tanks. More record-keeping, testing and life expectancy requirements.
Whenever a transaction involves the acquisition of an on-going business operation, an Environmental Compliance Audit should be on the due diligence checklist.