Heads of terms The transaction will begin with agreement of the main commercial terms including details of the parties, lease term, rent and any specific provisions regarding use, assignment, underletting, service charge or required works. The commercial terms will usually be negotiated directly between clients or with their accountants or other professional advisers. If there are known or suspected environmental concerns, the heads of terms may include: • disclosure of environmental reports • requirement for a reliance letter mechanism

Environmental issues to consider Since environmental liability concerns can delay or frustrate transactions, the parties should consider if any environmental issues need to be raised at the heads of terms stage, such as: • whether the landlord will be providing any environmental reports (desktop, phase 1s, phase 2s), asbestos surveys or fire risk assessments? • who is the asbestos dutyholder? Is there any need to update the asbestos register, prepare an asbestos management plan or undertake asbestos remedial work? • does the Energy Performance Certificate (EPC) provided by the landlord indicate the need for energy efficiency improvements? • will the tenant want to carry out a phase 1 environmental audit or phase 2 baseline audit? • does the tenant require any environmental permits? • what is the agreed position for contaminated land liabilities—will the landlord be responsible for existing contamination? Should the tenant be liable for new contamination or also for mobilising existing contamination? • is there any need for tenant environmental covenants (for example to clean up pollution spills or allow the landlord

Technical due diligence If there are known or suspected non-compliance or land contamination concerns, the buyer or ideally its lawyers might instruct an environmental consultancy firm to undertake a phase 1 environmental, health and safety (EHS) compliance audit or intrusive phase 2 testing to assess the liability and financial risks. Types of environmental audits A summary of the different types of environmental audits is set out below. Type of report What is covered Typical price (exc VAT) Timescale Desktop search Historic usesLandfillsEnvironmental permitsPollution incidentsGround stabilityFlooding Contaminated land risk screening report £180 Combined contaminated land and flooding search £270–£320 1–3 days Basic phase 1 audit Desktop searchSite walk overManagement interviewRegulator replies £1,000–£2,000 5–10 days Detailed phase 1 environmental, EHS audit As phase 1 plus:Review of reportsReview of operational controls and systemsKey health and safety compliance issuesAssessment of capex investment £2,500–£4,000 5–10 days Asbestos survey Management Asbestos SurveyDemolition or Refurbishment SurveyAsbestos register £2,000–£5,000 5–10 days Phase 2 report Intrusive testingSoil,

Sellers will often use a virtual data room (a restricted access internet site set up by a service provider on behalf of the sellers, as distinct from a ‘physical’ data room) to co-ordinate the bidding process (if applicable) and the due diligence phase of the transaction. The data room will include financial, legal and technical due diligence documentation relating to the target’s business and may contain replies to the due diligence

EHS questionnaire The buyer’s solicitors prepare a legal due diligence questionnaire (DDQ) in the preliminary or due diligence phase. In some transactions replies are added to the seller’s data room. The legal DDQ should always include environment health and safety (EHS) questions. Even an office based business will be subject to general EHS laws such as waste management duty of care, energy management and health and safety obligations. These enquiries can be tailored for the specific transaction/type of business and added to the legal DDQ or further enquiries. For more information, see: • Environment, Health and Safety (EHS) due diligence questionnaire (DDQ)—share purchase • Environmental due diligence—share purchase If the transaction involves a manufacturing business or if additional health and safety information is required, the following can be used as a checklist on health and safety issues: • Precedent: Health and safety due diligence questionnaire • Practice Note: Health and safety due diligence—manufacturing business Note that criteria around environmental, social and governance (ESG) issues are

In the due diligence phase the buyer’s lawyers and other advisers have the opportunity to investigate the legal, technical and financial performance of the target. The purpose of environmental due diligence is to: • assess the risk of inheriting any contaminated land liabilities associated with properties or previous properties • identify material non-compliance with environment, health and safety (EHS) law or environmental permits or capital expenditure requirements that the buyer may become responsible for • assess what protections are necessary to help mitigate these risks as far as

When is an indemnity needed? In a share purchase transaction, all the environmental liabilities associated with the target and its subsidiaries will become the responsibility of the buyer. If contaminated land liability concerns or specific environment, health and safety (EHS) non-compliance issues are revealed during the due diligence phase, the buyer might seek an environmental indemnity in the share purchase agreement (SPA) or a stand alone environmental deed. The seller could also potentially seek an indemnity from the buyer if, for example directors or managers associated with the target remain with the seller. See the following Precedents: • Environmental indemnity for a share purchase agreement • Asbestos indemnity for when seller is in breach Checklist for environmental indemnity When the principle of an environmental indemnity is agreed, lawyers and their clients should discuss the scope of the indemnity before drafting commences. Indemnities are bespoke to a particular transaction. The table below highlights the key issues that should be considered. Issue Comments Indemnifying parties The buyer may want the seller’s parent

When is environmental insurance appropriate? Environmental insurance may need to be considered in the following situations: • an environmental report identifies significant concerns regarding contamination • there is stalemate in environmental indemnity negotiations • there are concerns over the covenant strength of the indemnifying party • insurance is required by funders, tenants or to help the saleability of a high risk site See Practice Note: Environmental insurance—why take out environmental insurance? What type of policy? The usual type of insurance in share purchase transactions is a ten-year fixed site policy often called an Environmental Impairment Liability (EIL) Policy or Premises Pollution Lability (PPL) Policy. This can protect the insured parties against regulatory

For more information, see Checklist: Post-completion environmental issues (share purchase)—checklist. Deal with any environmental health and safety (EHS) issues highlighted in the legal due diligence report Legal due diligence reports and share purchase agreements (SPAs) will sometimes set out specific issues that need to be dealt with post-completion. Actions can include the following: • carrying out a baseline phase 2 environmental audit • undertaking a phase 1 compliance audit to rectify items raised during due diligence • preparing an asbestos management plan • addressing recommendations in a fire risk assessment or legionella report The buyer will undertake these tasks having control of the property. The SPA can include mechanisms for the seller’s lawyers to have input in the post-completion work, such as: • agreeing the scope of work for any environmental audits • having access rights to complete certain works, and/or • for the seller to pay the costs incurred by the buyer See Precedent: Environmental rectification work clause. Address any EHS issues that have been identified

The majority of the completion and post-completion tasks in a share purchase transaction are undertaken by the corporate lawyers, such as: • completion meeting • filing notices at Companies House • stamping of the stock transfer form • preparing the transaction bible of signed documents • making any adjustments to the purchase price The buyer becomes beneficial owner of the target company’s shares after all completion formalities have been completed or waived. Transfer of the

Heads of terms The acquisition of a private company will begin with agreement of the main commercial terms including price, deal structure, due diligence arrangements, exclusivity terms and timescale. The commercial terms will usually be negotiated directly between clients or with their accountants or other professional advisers and recorded in heads of terms, also known as a ‘letter of intent’ or ‘memorandum of understanding’. See Practice Note: Heads of terms—share and asset purchases. If there are known or suspected environmental concerns, the heads of terms may include: • disclosure of existing environmental report(s) to the buyer • requirement for a reliance agreement or collateral warranty so the buyer will get the benefit of the environmental report(s) • mechanism for the buyer to carry out a phase 1 environmental audit or phase 2 ground investigations • key terms for an environmental indemnity or environmental insurance What happens during the preliminary phase? The corporate lawyers in the preliminary phase will: • decide

Reviewing technical reports If a technical environmental report was obtained by the buyer during the due diligence phase (or provided by the seller in the data room), it will need to be interpreted and then practical advice provided to the client regarding potential liability issues and suggested recommendations to mitigate the risks. Key issues for the lawyers to consider are: • does the report provide clear evidence of environment health and safety (EHS) non-compliance issues, capex requirements or potential liabilities? • should an independent environmental consultant review and challenge the conclusions of the environmental report? • will a conference call or meeting between the two environmental consultants (with clients and lawyers) help to resolve any issues of concern? • are any further investigations or enquiries required and if so, what are the timing and cost implications? • what are the most realistic options available to address the concerns—specific warranties, environmental indemnity, rectification deed, price adjustment, escrow account, environmental insurance? See