Chapter 6 - § 6.4 • BUYER'S DUE DILIGENCE

• Jurisdiction: Colorado

§ 6.4 • BUYER'S DUE DILIGENCE

The best way for a buyer to protect itself from liability associated with acquiring contaminated property is to investigate the property and determine the nature and scope of any environmental problems. The parties should agree beforehand on how environmental due diligence will be carried out and what will be done with the information gathered. Typically, the buyer will conduct a Phase I environmental site assessment, which may lead to a Phase II environmental site assessment if significant environmental questions remain after completing the Phase I assessment. See § 6.4.3, below.

§ 6.4.1—Non-Disclosure Agreement

For a more complex transaction, exchange of property information will begin with a confidentiality or non-disclosure agreement. The purpose is to assure that parties are aware of the confidential nature of the transaction and documents and advise any consultants of the confidentiality agreement. See Form 6D, "Non-Disclosure Agreement." In some circumstances, the non-disclosure agreement will also have a non-circumvention provision, which Form 6D includes.

§ 6.4.2—Letters Of Intent

In a more complex transaction, a letter of intent sometimes is issued by a buyer to express interest in the property and to set forth the general terms and conditions upon which the parties would agree to the transaction. Because the evaluation or management of environmental conditions can require substantial time and cost commitment, a non-binding letter of intent can be a useful tool for identifying and defining the parties' rights and responsibilities before the definitive purchase agreement is executed.¹¹ See Form 6E, "Letter of Intent." Parties need to evaluate the extent to which the letter of intent will be a binding contract or merely a non-binding statement of intent. Sometimes the letter of intent will provide that the seller will take the property off the market while the parties negotiate the purchase agreement. See Form 6F, "Exclusivity Provision."

§ 6.4.3—Purchase Agreement Terms

Within the purchase agreement, several issues should be addressed in defining the parties' responsibilities regarding environmental circumstances of the property. The standard and most simple process is for the contract to state that: (1) the seller must disclose all environmental information within its knowledge (at a minimum, using the mandated Seller's Property Disclosure Form) and provide relevant documents in its possession or control; (2) the buyer is responsible for determining the environmental acceptability of the property; (3) the buyer's due diligence must be completed by a date certain; and (4) the seller must respond to any deficiencies identified by the buyer by a date certain. See Form 6P, "Purchase Agreement Clauses — Due Diligence Process." Such provisions may be adequate for a property with no or only minor environmental issues. For a more complex environmental transaction, the environmental investigation and management will require more careful thought and delineation. For example, if a substantial manufacturing facility is being acquired, due diligence will be complex, likely iterative and lengthy.

Scope of Due Diligence

Normally, due diligence will be conducted with the assistance of legal counsel and consultant firms with appropriate skills and experience. Form 6G, "Due Diligence Checklist," illustrates the scope of environmental due diligence issues. The environmental issues include physical inspection of the property, environmental permits and licenses, environmental regulatory evaluation, potential liabilities from historical uses, and detailed documents review.

Controlling the Information

To protect sensitive information, the seller may want to limit who may be contacted by the buyer, especially during the early phases of the negotiation. For example, the seller may not desire to alert environmental regulatory agencies to a potential transaction.

Both parties will have an interest in the environmental contractor selected to perform due diligence and in managing the data and information produced. It is important to select an experienced contractor with appropriate skills related to the nature of the property. Often, it is desirable for the environmental contractor to be retained by counsel to utilize the attorney work product privilege to the extent available. The environmental consultant should be instructed on issues relating to confidentiality and how environmental information will be reported as described below. It is more common for the buyer to perform environmental due diligence and thus to select the environmental contractor. However, sellers sometimes desire to assess the environmental circumstances before marketing the property, in which case the sellers will initially retain the contractor.

Once data is developed during the due diligence process, parties will need to determine who is responsible for managing and responding to the data. Less knowledgeable sellers sometimes want the buyer to be fully responsible for any environmental evaluations and do not want to know the results. More sophisticated sellers will want a controlling hand once environmental data is produced. The data produced could identify a significant environmental issue that will affect the property's value or marketability. The environmental information or data could also indicate a potential regulatory violation, or worse, an environmental issue, that the seller may be obligated to report to a governmental entity. In those instances, the seller will want to include in the purchase agreement provisions that...