What Does Environmental Liability Mean?
An environmental liability, in the context of a purchase and sale of a company, refers to potential environmental costs that may be incurred post-transaction related to some or all of the assets being acquired or leased. Buyers will search for potential environmental issues during due diligence, particularly in share purchases where they are buying not just the assets of a company, but also the liabilities (accrued and not accrued).
Divestopedia Explains Environmental Liability
Environmental liabilities are of particular concern for buyers when the target's assets are directly used in an industrial or resource application (i.e. energy, agriculture, manufacturing, etc.), or indirectly where real estate is being acquired or leased and there is a possibility of contamination.
Sellers must be prepared for buyers conducting environmental assessments during due diligence. An environmental assessment should be conducted, whereby a review of all potential hazards and a quantification of remediation costs is completed. If the land and building is being purcahsed, buyers will look to reduce the purchase price for the estimated remediation costs. They also will require a seller indemnity for any environmental costs that are incurred post-transaction related to pre-transaction activities.