Addressing environmental concerns which have arisen during deal due diligence is often one of the last hurdles prior to completing a merger or acquisition. When extensive environmental liabilities are discovered and quantified during due diligence, how those responsibilities and costs are to be assigned between parties can be the subject of extensive discussion. One solution can be the establishment of an environmental escrow account, which legal counsel takes the lead in developing. Here are some thoughts from the Environmental Consultant perspective:

Purchasers of property that are contaminated, suspected to be contaminated, or have regulatory compliance issues may require sellers to establish escrow accounts that could pay the cost of cleanup, address third party claims, and/or address regulatory compliance deficiencies. These accounts are often limited to specified dollar amounts and a limited period of time following the completion of the transaction. The devil is certainly in the details as to when and how the escrow moneys can be accessed and eventually revert back to the Seller, so like all such post-closing arrangements it is important to carefully craft and understand the fine print of the environmental escrow agreement.

WHO: Define who is responsible for what tasks and be specific! Who will take the lead on the project and be responsible for achieving the final outcome? Who will oversee the work on the project? Who will confirm conclusions and strategy for achieving the final outcome? Who are the parties who decide fund disbursement and what are the hurdles to access the escrow account? If the escrow includes addressing compliance deficiencies, who defines the scope, schedule, and cost? Who will be responsible for regulatory penalties which result from the situation to be remedied?

WHAT: Sounds simple, but our experience is that this questions is anything but simple. The question of how clean is clean and what condition triggers the obligations of the Sellers or Buyers is often left to post-closing discussion or negotiation. Is the goal of remediation getting to zero detection (restoration) or is it to receive a regulatory determination such as a No Further Action determination (risk based closure), or something in between? Even under Risk Based Closure, what institutional controls are acceptable for the property and what closure document is required to meet the party’s obligations. Regarding environmental compliance, consider listing each item of deficiency along with a scope of work, costs, schedule and the party responsible for the defined actions. Of particular importance is which party is charged with regulatory interaction and negotiation.

WHEN: Laying out and agreeing to a critical path to complete all items specified in the escrow agreement is crucial for the program’s success. Financial incentives for success and forfeitures for delays can be and often are established.

The Liesch Companies has extensive experience conducting pre-acquisition environmental due diligence and working with clients and their legal counsel in providing environmental advisory on environmental escrow agreements for investors, legal counsel, financial institutions and sellers that remove much of the ambiguity related to escrow agreement outcomes that can be presented.

Liesch would be pleased to provide environmental advisory in support of your next deal. Please contact Joe McGovern or Dana Wagner with your questions and for more information.

Joe McGovern
joe.mcgovern@liesch.com
480/ 421-0853

Dana Wagner
dana.wagner@liesch.com
763/ 489-3161