Reducing Environmental Risk

Material Adverse Effect and Adverse Environment Condition

Material Adverse Effect: In a sale of any ongoing business, one way to address the difficulty of being absolute in the representations and warranties when in fact the parties are not concerned about the de minimis presence of hazardous materials or damages, is to define Material Adverse Effect. 

a. Although the buyer may not want such a clause, for the seller it provides some assurance that it will not be harassed with demands on insignificant issues or that de minimis inaccuracies in the representation and warranties will not trigger a breach of contract action.

b. Material Adverse Effect on an ongoing business may be defined by SEC standards, by a stated dollar amount, or other means. This provision, if used, must be consistent with a deductible amount, or basket, in the indemnity.

Adverse Environment Condition. This definition will be useful in contracts where buyer or lender has the right to perform an environmental site assessment, and to walk from the deal upon discovery of an Adverse Environment Condition. It can be adjoining as: “The presence of Hazardous Materials on the property or on adjoining properties in violation of any Environmental Requirements or in a condition which has caused or is reasonable likely to cause Environments Damages.”



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