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Presenting a live 90-minute webinar with interactive Q&A

M&A Agreements: Drafting Real Estate

and Environmental Contract Provisions Structuring Environmental Liability Protections and Real Estate-Specific

Representations, Indemnification and Post-Closing Adjustments

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, SEPTEMBER 20, 2017

Leah J. Knowlton, Partner, Taylor English Duma, Atlanta

Brian D. Meacham, Partner, Smith Anderson Blount Dorsett Mitchell & Jernigan,

Raleigh, N.C.

Jonathan B. Wilson, Partner, Taylor English Duma, Atlanta

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M&A AGREEMENTS: DRAFTING REAL ESTATE AND ENVIRONMENTAL CONTRACT

PROVISIONS

Due Diligence Negotiation Strategies

Presented by Brian Meacham

©2017 Smith Anderson

M&A Agreements: Drafting Real Estate and Environmental Contract Provisions

Real estate issues in mergers and acquisitions can cause delays, increase

costs, and threaten closing. We’ll begin with a discussion of common due

diligence issues, and then later we will discuss strategies for negotiating

resolution of those issues.

Today’s Agenda

Due Diligence (Part I-A)

Verifying Condition of Title

Obtaining Surveys and Spotting Issues

Appraisals: Are They Accurate?

Confirming Zoning Designations

Tenant Estoppel Certificates

Contractually Allocating Real Estate Risks (Part I-B)

Negotiation Strategies (Part I-C)

Environmental Considerations (Part II)

OVERVIEW

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Title Investigation

Title Commitment

Attorney’s Title Opinion

Uncertified title searches

Title Commitment Schedule B-1 Requirements

Schedule B-2 Exceptions

Lease Reviews

VERIFYING CONDITION OF TITLE


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Types of Surveys

As-built

Boundary

Common issues Legal descriptions and boundary lines

Title commitment exceptions

Necessary easements

Encroachments

Improvements

Utilities

Access, parking, rights of way

Flood zone

OBTAINING SURVEYS AND SPOTTING ISSUES

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Issues affecting accuracy of appraisals

Time lapse

Pace of change in specific market

Type of property

General economic trends

Importance of appraisal Purchase price financed by a third party lender

Cash deal

APPRAISALS: ARE THEY ACCURATE?

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CONFIRMING ZONING DESIGNATIONS

Zoning Endorsement in Title Commitment

Zoning Notes on Survey

Local Government Confirmation Letter

Special Counsel / Legal Opinion

Rezoning Contingencies unlikely in M&A

context

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Standard factual confirmations

Copy of lease and amendments

Rent and security deposit

CAM charges and assessments

Lease term and renewals

No defaults or defenses to enforcement

Specific property issues

Upfit work completed and acceptable

Rights of first refusals and purchase options

Legal fees and timing issues

NEXT: Contractually allocating real estate risks

TENANT ESTOPPEL CERTIFICATES

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Jonathan Wilson Taylor English Duma LLP 1600 Parkwood Circle, Suite 400 Atlanta, Georgia [email protected]

Strategic Provisions

Representations and Warranties

Covenants and Conditions

Indemnification

Purchase Price Adjustments

Legal Opinions

Pre-Closing Checklist

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Asset Purchase Agreement

Stock Purchase Agreement

Stock versus Assets

Tax Issues

Procedural Questions

Asset Lists

Purchase Price Allocation

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Seller reps

Due Organization Organizational Documents

Capital Stock and Ownership Subsidiaries

Authority Good Title to Shares

Governmental Authorization Non-Contravention

Financial Statements No Undisclosed Liabilities

Absence of Changes Equipment and Other Tangible Personal Property

Real Property and Leases Assets and Title

Contracts Compliance with Laws / Permits

Environmental Matters Legal Proceedings

Intellectual Property Software

Insurance (including title insurance) Customers and Suppliers

Taxes Employee Benefit Plans / ERISA

Employment / Labor Matters Accounts Receivable

Products and Warranties Banking Matters

Powers of Attorney Books and Records

Affiliates / Insider Transactions Financial Advisors

Full Disclosure

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Limiting Exposure

Knowledge Qualifications

MAC (MAE) Qualification

Carve-outs and Schedules

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Buyer reps

Due Organization Organizational Documents

Authority No Contravention

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Pre-Closing Covenants

Operations in ordinary course

No purchases, sales, financings

Maintain in good working condition

Maintain work force

No dividends/distributions

Provide buyer access

Best efforts to obtain consents

No solicitation of competing offers

For real property:

Access to premises

Title searches

Environmental assessments

Other

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Conditions to Closing

Ancillary documents signed

Due diligence completed

Third party consents

Shareholder consents

HSR waiting period expired/waived

Other contingencies

Legal opinion

Closing certificates / deliverables

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Seller agrees to indemnify [and defend] Buyer against (a) any breach of Seller’s representations in this Agreement or any covenant in this Agreement, and (b) any third party claim asserted against Buyer based on allegations that, if true, would constitute a breach of any of Seller’s representations in this Agreement.

Time limits

Basket / Deductible

Liability Caps

Bar to Consequential Damages

Pro-rata Liability

Net of Insurance and Taxes

No Double Recovery

Duty to Mitigate

Bar Against Claims of which Buyer has Knowledge

Exclusive Remedy

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Target Working Capital =

Cash, plus

AR (60 days or less), minus

AP

Post-closing adjustment process Seller’s certification Buyer’s review/challenge Resolution/mediation Consider post-closing adjustments related to pro-rated taxes and other real estate items

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Other Possible Adjustments

Real estate valuations

Appraisals

Third party settlements

Results of pending periods

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When advisable

Contents

Right reason / wrong reason

Local counsel for real property issues

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[email protected] 678.336.7185

Jonathan Wilson is a corporate partner at Taylor English Duma LLP. He regularly advises clients in M&A transactions and securities matters. He is the former general counsel of Web.com (NASDAQ: WWWW) and EasyLink Services International Corporation (NASDAQ: ESIC).

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mailto:[email protected]


Overall transaction timing is the biggest factor For items than can be cured, does the deal structure include

a sufficient period between signing and closing?

For items that are not capable of cure before closing,

traditional M&A approaches will likely be needed

Representations and warranties; disclosure schedules

Indemnification and escrows

Caps and baskets

Post-closing adjustments

Insurance Title Insurance

Environmental Insurance

Representations and Warranties Insurance

NEGOTIATION STRATEGIES

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STANDARD APPROACHES TO RESOLVING DUE

DILIGENCE ISSUES

Real Estate Transactions vs. M&A Transactions

Cure or walk away • Environmental/Title

Concerns • Permits/Approvals

vs. Address due diligence risks in agreement • Escrow/Indemnity

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TRANSACTION TIMING

Real Estate Transactions vs. M&A Transactions

Traditional Inspection Period (i.e. 60-90 days), often followed by a lengthy permit/approval period; generally known that the property is for sale

vs. Much shorter period between signing and closing (sometimes even simultaneous signing and closing); generally not known that the business is for sale

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Legal counsel must learn key business and economic details

regarding the real estate in order to develop an appropriate

negotiation strategy. Essentially, legal counsel must

understand how important the real estate is to the buyer, to

the seller, and to the transaction as a whole.

Is the real estate critical to the operation of the business

after closing?

Is the current use the highest and best use?

For leased properties, are the financial terms of the lease

market?

Does either buyer or seller have any emotional

attachment to the real estate or specific personal issues

or preferences regarding real estate transactions?

Work with your client to prioritize real estate issues among the

many other M&A deal points the parties need to negotiate.

DEVELOP A NEGOTIATION STRATEGY

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“We’re buying/selling a business – the real estate is just one

component of it.”

OR

“We can’t run this business without the real estate.”

If at all possible, focus on traditional M&A approaches

(reps/indemnity/caps/baskets). If time allows, traditional real

estate inspection and cure might also be an option.

When traditional approaches don’t resolve the differences, get

creative.

Short term licenses/leases

Put rights

Subleases

Seller financing

NEXT: ENVIRONMENTAL CONSIDERATIONS

EXECUTE THE NEGOTIATION STRATEGY

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Environmental Due Diligence and Contract Provisions in M&A Deals

Leah J. Knowlton, Partner

Taylor English Duma LLP

1600 Parkwood Circle, Suite 400

Atlanta, Georgia 30319

Overview

IV. Environmental Due Diligence and Contract Provisions

A. Special Considerations in Environmental Due Diligence

B. Environmental Reports – how to spot a fake Phase I and other exceptional situations

C. Liability Protections for Purchasers of Contaminated Property

D. Contaminated Property and Brownfield Tax Credits

E. Checklist of Environmental Contract Provisions

F. Recent Court Decisions on the Efficacy of Environmental Contract Provisions

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Preparing for Environmental Due Diligence

Evaluate the deal at the LOI stage

• Environmental issues can become a driving force in many deals.

• Does the buyer, lender or equity partner have environmental criteria for deals?

• It’s best to consider the potential range of environmental issues and deal with them in the LOI first and in the contract. – General allocation of liability in LOI, if not default.

– Default is Seller keeping pre-Closing and Purchaser taking post-Closing environmental liability.

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Past and Present Uses of the Land

Even land uses far in the past can cause serious contamination found today.

• Many chemicals are persistent in soil and groundwater. • A property with any past history of manufacturing should be closely scrutinized. • Don’t forgo due diligence based on past reports. • Examples: any industrial property or any property with a

dry cleaner, gas station, underground storage tanks, old photo developing shop, septic system

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Dry Cleaners and Gas Stations

All old dry cleaners leak Most old gas stations leak

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Phase I Environmental Reports

Retaining a Consultant

• Both Buyer and Seller have strong incentives to hire qualified environmental consultants. – Bad consultants can make a record of non-existent

problems (adv Seller) or fail to find bad contamination (adv Buyer)

– Both Buyer and Seller should have their own consultants if contamination is known or suspected

– Expanded scope of Phase I may require added expertise of consultants.

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Retaining Consultants

• Retain environmental consultant through counsel to better maintain attorney work product privilege. – Recite purpose of assisting attorney in consultants’

contract.

– If same consultant will do a Phase II, make sure insurance levels are appropriate to the risks.

• Buyer should not hire a consultant who has previously worked on the property for Seller or Lender, as a general rule.

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Scope of Phase I Assessment

Standard Scope

• Must comply with the ASTM E 1527-13 to qualify for defenses to liability under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §9601 et seq.(CERCLA or the Superfund law).

– innocent landowner defense to CERCLA liability (§101 (35)); – contiguous property exemption to CERCLA liability (§107 (q)); – bona fide prospective purchaser exemption to liability (§107 (r)(1) and

(§101 (40).

• Common out-of-scope issues:

– Lead in drinking fountains - Mold – Wetlands - Lead based paint – Asbestos - Historic artifacts

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Expanded Scope of Phase I

For acquisitions of on-going businesses, mergers, stock deals:

• Add permit review

• Add review of off-site activities

• Add regulatory compliance review of key operations o OSHA HazCom, GHS labeling

o TSCA and emerging regulations

o International standards, trends, REACH

• Consider future need to expand operations, and whether major permits can be modified to accommodate expanded operations.

• Example: Title V air permit in a major metro area

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How to Spot a Fake Phase I

• Cost – In major metro areas, the cost for large commercial sites (> 1 acre) will

be more than $3,000.

• Quasi-legal conclusions – “ [Agency action] is the equivalent of a No Further Action letter.”

– “EPA would not require remediation.“

– In a Phase I the consultant should provide facts and state whether those facts meet ASTM definitions.

• Conveniently manipulated facts, such as groundwater flow direction.

– A court may review this report to decide if you

had sufficient reason to accept the findings.

– Use common sense!

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Liability Protections for Landowners

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• Under CERCLA, owners and operators are liable. • 2002 Brownfields Amendments provided protections

to landowners who met certain criteria. – Innocent landowner – Contiguous property owner – Bona fide prospective purchaser

• Two key criteria are 1) all appropriate inquiry (i.e. met ASTM standard), and 2) no affiliation with the liable party.

• Guidance: Treatment of Tenants under CERCLA's Bona Fide Prospective Purchaser (BFPP) https://www.epa.gov/enforcement/guidance-treatment-tenants-under-cerclas-bona-fide-prospective-purchaser-bfpp-provision

https://www.epa.gov/enforcement/guidance-treatment-tenants-under-cerclas-bona-fide-prospective-purchaser-bfpp-provision






















Brownfield Tax Credits

• Tax incentives to clean up contaminated sites – State programs implementing federal law

– A BFPP can recoup money spent on investigating and remediating contaminated property, including $ for $ property tax abatement.

– For qualified expenses, not including attorneys fees.

– To recoup costs, BFPP cannot be affiliated with responsible party.

– Consider asset purchase of contaminated land in M&A deal.

• Brownfield Tax Incentives Fact Sheet https://www.epa.gov/sites/production/files/2014-08/documents/ti_factsheet.pdf

• ABA 50-state survey of Brownfield programs, 2013 http://www.gfrlaw.com/files/upload/FINAL%20SWEL%2050-state%20survey.pdf

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https://www.epa.gov/sites/production/files/2014-08/documents/ti_factsheet.pdf





http://www.gfrlaw.com/files/upload/FINAL SWEL 50-state survey.pdf



Environmental Contract Provisions

• Definitions – “Environmental Law”

– “Environmental Remediation” if cleanup will happen post-Closing.

– “Environmental Claim” and procedures if indemnity may be triggered.

– “Hazardous Materials” – do not limit to CERCLA definition or just list certain laws.

• Add petroleum products, PCBs, asbestos, lead paint, urea formaldehyde, explosives, radioactive materials, etc.

• Or, define the function of the laws generally – i.e. protecting human health, safety and the environment . . .

• Carve out consumer products like cleaning fluids

– “Release” – add passive migration (for Purchaser)

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Contract Provisions – Cont.

• Seller’s reps and warranties for M&A deals include: – Compliance with all Environmental Laws, including permits – Reps re: past and current assets, on-site and off-site contamination – Transport, storage, disposal, use, handling etc. of HazMats in compliance

with Environmental Law. • Qualify reps as to “materiality” or “best knowledge”? • How far back in time re: past compliance? • Which corporate predecessors can give successor liability?

• Covenants • Survival • Disclosure Schedules – best practice is to define the

existing condition, not just list prior reports. Does reference in a report to a prior report constitute disclosure?

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Allocation of Environmental Liability

• How to allocate between Buyer and Seller?

– Seller keeps environmental conditions first identified pre-Closing, Buyer takes post-closing

– Buyer takes identified pre-Closing liabilities, and Seller retains unidentified pre-Closing liabilities

– All environmental liability stays with Seller

– All environmental liability shifts to Buyer **note tricky drafting issue

– Any conceivable variation

• For acquisition of an on-going business, how will you determine pre- and post- releases? Must have a baseline assessment

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Defining the Liability

• Contamination found on or emanating from the Property

• All losses arising from past operations – on-site and off-site

• Third party claims

– Person injury, e.g. toxic tort claims

– Property damage, e.g. to neighbors

– Natural resources damages

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Post-Closing Remediation

• Who will do the work?

• Who bears liability to the government or third parties if the remediation fails, or worse?

– In situ chemical process can explode

– Utility lines can be damaged

– Streets, parking lots can be blocked or damaged

• Who controls reporting to government?

• Who communicates with tenants?

– What should tenants or others be told?

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Scope of Remediation

• What triggers remediation obligation?

– in Buyer’s sole discretion – Remediation recommended by consultants – “Commercially reasonable” cleanup – Government “required” cleanup

• Remediation to what standard?

– Residential vs. commercial/industrial – Risk-based standard

• Deed restrictions and institutional controls

– Limit use of the property – Usually require monitoring and maintenance – May lower resale value – Refinancing may be difficult

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Environmental Indemnification

• An owner or operator of contaminated land becomes liable by statute. 42 USC §9601 et seq.

– Purchasers seek indemnification because they become liable after Closing by virtue of ownership.

– Purchasers try to meet bona fide purchaser defense to mitigate this liability.

• Indemnification agreements do not protect a property owner from liability to the government or third parties (like future owners).

• However, courts will enforce a properly drafted indemnity to shift environmental costs.

• An “AS-IS” clause alone is not sufficient to shift costs.

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Recent Court Decisions

• A private party contract cannot alter or excuse underlying CERCLA

liability, but can only change who ultimately pays that liability. Ashley II of

Charleston, LLC v. PCS Nitrogen, Inc., 791 F. Supp. 2d 431 (D. S.C. 2011).

• Responsible parties may not transfer their CERCLA liability, but may

obtain indemnification for that liability. Peoples Gas Light and Coke Co. v.

Beazer East, Inc., 802 F.3d 876 (7th Cir. 2015).

• Environmental indemnity construed as limited to only third-party claims.

VCF Partners 26, LLC v. Cadlerocks Centennial Drive, LLC, 735 F.3d 25

(1st Cir. 2013).

• “As-Is” did not waive purchaser’s right to recover from seller under

CERCLA or [State analog] but only released seller from liability on

warranty claims. Southfund Partners III v. Sears, Roebuck and Co., 57 F.

Supp. 2d 1369 (N.D. Ga. 1999).

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Contact Me If You Have Questions!

Leah J. Knowlton

Taylor English Duma LLP

1600 Parkwood Circle, Suite 400

Atlanta, Georgia 30339

(678) 426-4642

[email protected]

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