Environmental Due Diligence: An Essential Step in M&A Transactions

Troutman Sanders LLP
Andrew J. Perel and M. Buck Dixon

September 1, 2019

This publication was originally published in the Troutman Sanders Law Blog

The risk of shortcutting environmental due diligence cannot be overstated. There is a tendency during mergers and acquisitions (M&A) transactions to view such due diligence as simply another box to check before closing. It is not. What might appear to be a time-consuming, costly and burdensome process, will not be fully appreciated until businesses are faced with the consequences of not doing so. 

This overview highlights several important benefits of proper environmental due diligence, discusses risk allocation and mitigation strategies, and identifies emerging issues.

Protect Your Investment

Regardless of which side of the deal you are on, environmental due diligence is essential to identifying environmental risks and mitigating adverse exposure. For buyers, due diligence helps minimize and/or avoid post-closing surprises and identifies existing conditions that may be used to negotiate purchase price or other deal provisions. For sellers, environmental due diligence allows quantification of current environmental risks to limit future liability. It also allows them to conduct additional remediation to preserve an agreed-upon purchase price, to refine deal terms and to appropriately assign mitigation responsibility. Further, conducting proper environmental due diligence affords sellers the opportunity to market their property as eligible for certain voluntary remediation programs, such as Brownfield Cleanup Programs that encourage private-sector site cleanups to promote their redevelopment.

In addition, proper environmental due diligence that satisfies U.S. Environmental Protection Agency (EPA) All Appropriate Inquiries (AAI) allows parties to qualify for certain liability protections, including the bona fide prospective purchaser (BFPP) liability protection.1 A buyer who qualifies as a BFPP may not be liable for releases or threatened releases solely by becoming a property’s owner or operator.2

Satisfying AAI requires an inquiry by an environmental professional (EP).3 As part of its inquiry, the EP must—among other things— interview past and current owners, review historical information and government records, and physically inspect the property.4 The EP must also consider information provided by individuals with specialized knowledge of the property, and information related to purchase price, fair market value and environmental liens.5 Timing is critical because AAI actions must generally be performed within one year before the acquisition date, but some components—including owner interviews, lien searches, government records searches, visual inspections and EP declarations—must be conducted or updated within 180 days of the intended transaction date.6

Once its review is complete, the EP documents his or her findings in a Phase I Environmental Site Assessment (Phase I), a foundation of environmental due diligence.7 The current EPA-endorsed industry standard practice for Phase I is ASTM International Standard E1527- 13.8 If a Phase I identifies certain conditions, further environmental due diligence, including but not limited to a Phase II Environmental Site Assessment (Phase II), may be warranted. Phase IIs involve invasive soil and soil vapor and/or groundwater sampling to further assess whether a property has been environmentally impacted. Unlike a Phase I, a Phase II may not be required before the acquisition date. However, there are benefits to conducting a Phase II before closing. For example, a buyer may use Phase II results indicating a property has been impacted to negotiate a lower purchase price.

Allocating Environmental Risks 

Once parties conduct proper environmental due diligence, they can use the findings to properly allocate environmental risks. Parties may allocate risk through familiar contractual tools, such as covenants, indemnities, holdharmless provisions, and representations and warranties. Parties may also consider other approaches, such as incorporating postclosing remediation obligations into an agreement or requiring buyers to maintain due diligence as confidential. Ultimately, it is important to choose an approach that fits the particular transaction and equitably allocates responsibility.

Mitigation Strategies

There are a number of tools parties may use to ensure environmental impacts are remediated and that the costs of conducting the remediation are mitigated, including:

Environmental Escrow Account: At closing, a party places funds into an escrow account to be used to mitigate environmental cleanup and remediation costs. Opinions of Probable Cost, which EPs prepare to estimate the reasonable worst-case scenario for environmental issues, are used as the technical base in setting escrow amounts.

Environmental Impairment Liability (EIL) Insurance Policy: Provides coverage for costs associated with cleanup and remediation of environmental impacts for an off-site pollutant, protection against third-party liability and protection for non-owned disposal site, among other coverage parts. It is important to note that coverage may be available for pre-existing conditions. Types of coverage include EIL coverage, cost cap coverage and finite risk coverage. These policies should be tailored to fit the specific site and conditions at issue.

In addition to these tools, state or federal regulators may require certain types of operations to demonstrate that they have the financial resources necessary to properly close a facility when the facility’s operational life is complete. For example, the Resource Conservation and Recovery Act requires owners of hazardous waste treatment, storage and disposal facilities to demonstrate financial assurance.9

States may also have funds that pay for remediation costs associated with environmental impacts resulting from specific activities. For example, many states have underground storage tank (UST) trust funds that provide reimbursement for costs associated with remediation of soil and groundwater impacts resulting from UST releases. These programs typically require operators to pay into such funds in order to be eligible for receiving reimbursement. As with allocating risk, it is important to tailor a strategy specifically for the particular transaction.

Indoor air quality, particularly vapor encroachment, is an area of due diligence that has garnered significant attention.

 Emerging Issues

Indoor air quality, particularly vapor encroachment, is an area of due diligence that has garnered significant attention. For the first time, the 2013 revisions to the ASTM E1527 guidelines expressly contemplated vapor. Specifically, the “migrate/migration” definition was amended to include vapor migration.10 While vapor migration was often considered in the course of environmental due diligence prior to this change, such consideration was not a requirement until the 2013 revisions. This change reflects the importance of ensuring vapor migration concerns are adequately contemplated.

To this end, radon has recently attracted greater attention. Radon is a gas that can upwardly move through foundational cracks and holes into living spaces. According to EPA, radon gas is the leading cause of lung cancer among nonsmokers.11 Radon gas is particularly a concern for residential properties, and while technically it is a non-scope item under ASTM E1527-13, parties will often require that radon gas be assessed, generally through determination of whether the property is located in a low-, moderate- or high-potential radon gas area.12

While ASTM International Standard E1527-13 is the current standard for environmental due diligence, these guidelines sunset in 2021. However, an update to the guidelines may come before then.


Conducting proper environmental due diligence has tremendous upside. Doing so allows parties to enter a transaction with a fuller picture of the property involved, potentially qualify for liability protections, appropriately allocate risks and adequately remediate environmental impacts. These benefits substantially outweigh the time, costs and burdens the due diligence process may present, not to mention the consequences of not identifying such issues early.

This article is being provided for informational purposes only and not for the purposes of providing legal advice or creating an attorney-client relationship. You should contact an attorney to obtain advice with respect to any particular issue or problem you may have. In addition, the opinions expressed herein are the opinions of Mr. Dixon and Mr. Perel and may not reflect the opinions of Synergy Environmental, Inc., Troutman Sanders LLP or either of those firms’ clients.

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