By Gus N. Paras, attorney, The Scali Law Firm
In our experience, buy sell agreements often involve the purchase of the dealership real estate. If that is the plan, there are some important considerations for buyers and sellers to take into account. Not doing so can result in extra costs or even a failed agreement.
Our previous two articles over-viewed title provisions in real estate purchase agreements (“REPAs”) and the buyer’s review of a preliminary title report. This article addresses the environmental due diligence provisions of a REPA. Typically, these provisions address the property’s condition, the buyer’s inspection rights, and a defined due diligence period. Buyers and sellers should carefully review and negotiate these provisions, which can materially affect whether a buyer will commit to purchasing the subject property.
Although buyers would prefer provisions where a seller warrants that the property does not suffer from any environmental problems, many dealership properties are sold in “as is” condition. This means that all of the property’s environmental risks lie with the buyer, who should carefully inspect the property before committing to purchase it.
- Inspection Provisions
REPAs should spell out the buyer’s inspection rights, which include rights to conduct physical inspections as well as review relevant documents (such as leases, licenses, permits, and government approvals). Inspection provisions normally require the seller to provide the buyer with all documents and information reasonably requested. Physical inspection provisions may allow a buyer to enter the property at any time during the due diligence period, or instead may allow them to inspect during normal business hours. Some provisions even require buyers to provide advance notice before any inspection, which may be desired if a physical inspection could disrupt an ongoing business.
- Due Diligence Period
REPAs typically provide a set period of time for buyer to complete its due diligence. This period is often a set number of days from the signing of the REPA. Although sellers desire shorter due diligence periods to close as quickly as possible, sellers may be open to provisions that give buyers reasonable extensions if environmental problems are discovered. During the due diligence period, the buyer should take reasonable steps to mitigate or eliminate its risks, such as performing a Phase I Environmental Site Assessment (“ESA”) and reviewing relevant documents.
A REPA could, for example, provide a sixty day due diligence period that can be extended for an additional sixty days if the buyer requests an extension before the initial period expires. If a Buyer is subject to such provisions, the initial period could be used to conduct a Phase I ESA. If that assessment reveals any environmental concerns, the extension period could be used to conduct a Phase II ESA. Buyers will want provisions where extension provisions are automatically granted if requested in a timely manner. But sellers can insist on a provisions that stipulate extensions are granted only if good cause is shown or even only in the seller’s sole discretion.
- Due Diligence Period Expiration
Many REPAs allow the buyer to terminate the REPA for any reason before expiration of the due diligence period. This essentially gives the buyer a right to a “free look” at the property (and its environmental issues) before committing to a purchase. Due to environmental issues being complicated and potentially difficult to quantify, buyers will want to avoid a provision that requires a “material” issue with the property before they are entitled to terminate the REPA.
Provisions governing the expiration of the due diligence period are also often related to the buyer’s deposit. Most typically, a buyer’s deposit is refundable until the expiration of the due diligence period, at which time it becomes non-refundable. This encourages buyers to conduct due diligence quickly, before they are potentially forced to decide between forfeiting their deposit or committing to purchase a property with environmental (or other due diligence) issues. Sellers often require that “time is of the essence” in these expiration provisions to ensure a clear deadline for when buyers become committed to purchase a property and/or their deposit becomes non-refundable.
Dealerships must handle numerous automotive waste products and other hazardous materials that can be mishandled, spilled, leaked, or even intentionally dumped onto dealership property (with or without the knowledge of the dealership’s owners). In the buy-sell context, the risks of these environmental issues are often allocated to the buyer.
Buyers should carefully review and negotiate REPA provisions that affect their environmental inspection rights and remedies. We recommend utilizing experienced real estate counsel in analyzing and negotiating these provisions, especially since undiscovered environmental issues can be especially costly for automotive dealers. Buyers should also promptly conduct physical inspections (including any environmental site assessments) with due diligence deadlines in mind.
The Scali Law Firm, with offices in Los Angeles and San Diego, is a full service dealership defense firm and represents dealers in matters ranging from transactions and corporate compliance to litigating franchise claims and disputes between dealers and among owners. Gus N. Paras can be reached at 213-239-5622 or GParas@scalilaw.com