Presenting a live 90-minute webinar with interactive Q&A
Anticipating Post-Closing EnvironmentalIssues in Real Estate DealsManaging and Avoiding Post-Closing Consequences; Setting the Rules of Play
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, FEBRUARY 28, 2017
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Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
Daniel A. Cantor, Partner, Arnold & Porter Kaye Scholer, Washington, D.C.
Cindy J. Karlson, Founder, Law Offices of Cindy J. Karlson, Groton, Conn.
Daniella D. Landers, Partner, Reed Smith, Houston
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Cindy J. KarlsonLaw Offices of Cindy J. Karlson
Direct Office: 860.245.4922Cell: 860.614.0184
PROGRAM AGENDAI. Anticipating and identifying potential
environmental issues which may occur post-closing
II. Negotiation strategy and contractual tools toaddress post-closing issues
III. Implications of court decisions and otherconsiderations
I. Anticipating and identifying potentialenvironmental issues which may occur post-closing
II. Negotiation strategy and contractual tools toaddress post-closing issues
III. Implications of court decisions and otherconsiderations
6
Rules of the Game1. Joint and several liability.
2. You cannot contract liability vis-à-vis the government
3. Environmental conditions are frequently latent andunknown at the time of closing
4. Most environmental issues run with the land
1. Joint and several liability.
2. You cannot contract liability vis-à-vis the government
3. Environmental conditions are frequently latent andunknown at the time of closing
4. Most environmental issues run with the land
7
Rules of the Game Real estate contracts often do not bind third parties
Some environmental agreements are not recorded onthe land records(access agreement, technical risk management plans)
Real estate contracts often do not bind third parties
Some environmental agreements are not recorded onthe land records(access agreement, technical risk management plans)
8
The Art of the Commercial Real Estate Deal- There is no boilerplate or default deal format
- Need to identify the environmental risks
- Allocate the risks- Pre-closing- Post-closing
- There is no boilerplate or default deal format
- Need to identify the environmental risks
- Allocate the risks- Pre-closing- Post-closing
9
The Spectrum of Liability
10
Types of Post-Closing Liabilities
Cleanup Liabilities Monetary Claims
11
Government1st
Party
Voluntary ContractConditions
3rd
PartyGovernment
Potential Cleanup Obligations
InvestigationRemediation
Post-remediation monitoringLand use restrictions
Ongoing operation & maintenanceFinancial assurance
InvestigationRemediation
Post-remediation monitoringLand use restrictions
Ongoing operation & maintenanceFinancial assurance
12
Investigation Considerations
Soil sampling Location Timing
Groundwater sampling Location of wells Repair and replacement of wells Removing or abandoning wells
Indoor air sampling Where and when
Soil sampling Location Timing
Groundwater sampling Location of wells Repair and replacement of wells Removing or abandoning wells
Indoor air sampling Where and when
13
Remediation Considerations- Specific level of cleanup- Who is responsible for government submittals- Who choices remediation option- Who pays for what costs and unknowns- Will land use restrictions be allowed as remediation- How will remediation impact post-closing existing or
future use of the property- Are financial assurances required?
- Specific level of cleanup- Who is responsible for government submittals- Who choices remediation option- Who pays for what costs and unknowns- Will land use restrictions be allowed as remediation- How will remediation impact post-closing existing or
future use of the property- Are financial assurances required?
14
Post-Remediation Monitoring Define length of monitoring program
Site access issues
Sharing data and information
Cooperation
Post-closing use of property potential impacts onremediation outcomes
Communications with government
Impacts on financial agreements
Define length of monitoring program
Site access issues
Sharing data and information
Cooperation
Post-closing use of property potential impacts onremediation outcomes
Communications with government
Impacts on financial agreements
15
Land Use Restrictions Agree on which restrictions may
be allowed by the parties
Who will pay for costs?
A2 surveys
Legal title work
Subordination agreements
What if remediation or land userestrictions not completed andproperty is sold again?
Agree on which restrictions maybe allowed by the parties
Who will pay for costs?
A2 surveys
Legal title work
Subordination agreements
What if remediation or land userestrictions not completed andproperty is sold again?
16
Odds and Ends
Operation and Maintenance Remediation systems Who pays for electric Equipment and structures
Engineering controls Cap repair and maintenance Trees and green cover
Operation and Maintenance Remediation systems Who pays for electric Equipment and structures
Engineering controls Cap repair and maintenance Trees and green cover
17
Complicating Factors
Tenants/Leases Lender conditions Third party claims Government
Tenants/Leases Lender conditions Third party claims Government
18
Issues to Parse Out Site access Obligation triggers Cleanup end points Notice requirements Information dissemination Agency communication parameters Cooperation requirements
Site access Obligation triggers Cleanup end points Notice requirements Information dissemination Agency communication parameters Cooperation requirements
19
Anticipating PostAnticipating Post--Closing Environmental Issues inClosing Environmental Issues inReal Estate Deals:Real Estate Deals:
Negotiation Strategies andNegotiation Strategies andContractual ToolsContractual Tools
February 28, 2017February 28, 2017
Anticipating PostAnticipating Post--Closing Environmental Issues inClosing Environmental Issues inReal Estate Deals:Real Estate Deals:
Negotiation Strategies andNegotiation Strategies andContractual ToolsContractual Tools
February 28, 2017February 28, 2017
Daniella D. LandersREED SMITH LLPPhone: 713.469.3654
Agenda Allocation and Management of Risks
Contractual Considerations And Tools
Techniques to Address Post-Closing EnvironmentalRisks
Allocation and Management of Risks
Contractual Considerations And Tools
Techniques to Address Post-Closing EnvironmentalRisks
21
Preliminary Considerations for Negotiation Do necessary due diligence
Identify as many issues as youcan to avoid surprises
Understand the keyplayers and theirobjectives Allocate risks
appropriately Allocate based on knowledge of
existing conditions at closing
Outline Key Concerns Carve out specific environmental
conditions
Do necessary due diligence Identify as many issues as you
can to avoid surprises
Understand the keyplayers and theirobjectives Allocate risks
appropriately Allocate based on knowledge of
existing conditions at closing
Outline Key Concerns Carve out specific environmental
conditions22
Preliminary Considerations for Negotiation What are the parties
relative rights pre- andpost- closing? Who can recover monies
(successors and assigns)? Define any terms? Length of indemnity
period? Which costs covered? Which costs are NOT
covered?
What are the partiesrelative rights pre- andpost- closing? Who can recover monies
(successors and assigns)? Define any terms? Length of indemnity
period? Which costs covered? Which costs are NOT
covered?
23
Preliminary Considerations for Negotiation Understanding the terms Term sheets Definitions – Avoid ambiguous terms
Representations and Warranties Limiting the scope of coverage Indemnities Conditions to closing/ conditions precedent Other unique considerations
Understanding the terms Term sheets Definitions – Avoid ambiguous terms
Representations and Warranties Limiting the scope of coverage Indemnities Conditions to closing/ conditions precedent Other unique considerations
24
Preliminary Considerations for NegotiationOn Site or Off-site Contamination Concerns Who is responsible – Buyer or Seller?
For what?
Pre-closing legacy contamination only?
Presumptions and baselines
Only government ordered cleanup?
Or anything required by laws?
Voluntary cleanup?
Cleanup of soil and groundwater only? Asbestos, lead paint, mold, drum removal, demolition
On Site or Off-site Contamination Concerns Who is responsible – Buyer or Seller?
For what?
Pre-closing legacy contamination only?
Presumptions and baselines
Only government ordered cleanup?
Or anything required by laws?
Voluntary cleanup?
Cleanup of soil and groundwater only? Asbestos, lead paint, mold, drum removal, demolition
25
Preliminary Considerations for NegotiationDrafting: Use general or specific language to addresspost-closing concerns?
Pros Avoid potential costly litigation Manage parties’ expectations
Cons Could incur additional transactional costs in negotiation Could unknowingly exclude costs if provisions too specific
Drafting: Use general or specific language to addresspost-closing concerns?
Pros Avoid potential costly litigation Manage parties’ expectations
Cons Could incur additional transactional costs in negotiation Could unknowingly exclude costs if provisions too specific
26
Contractual Considerations
Definitions are critical!!!
“Environmental Laws”- Understand what is and is not included (agency guidance,directives, orders?)
“Hazardous Substances”- Be careful if you only limit it to substances under CERCLA- Petroleum and its by-products, PCBs, asbestos, lead paint,urea formaldehyde (building materials), mold, microbialmatter- Also consider including solid waste, explosives, radioactivematerials
Definitions are critical!!!
“Environmental Laws”- Understand what is and is not included (agency guidance,directives, orders?)
“Hazardous Substances”- Be careful if you only limit it to substances under CERCLA- Petroleum and its by-products, PCBs, asbestos, lead paint,urea formaldehyde (building materials), mold, microbialmatter- Also consider including solid waste, explosives, radioactivematerials
27
Contractual ConsiderationsKey Terms
What is included in “material adverse condition” ?
What is “known environmental liability” ?
What is included as an “Environmental Matter” ? Definition could include – generation, storage, handling, treatment and disposal of hazardous
materials/substances (not just release of same) Compliance with permits Financial assurance requirements Deed restrictions Covenants Site access costs
Key Terms
What is included in “material adverse condition” ?
What is “known environmental liability” ?
What is included as an “Environmental Matter” ? Definition could include – generation, storage, handling, treatment and disposal of hazardous
materials/substances (not just release of same) Compliance with permits Financial assurance requirements Deed restrictions Covenants Site access costs
28
Contractual Considerations “Environmental Claims” –third party demand or can
buyer or seller make direct claims to reimburse coststhey incurred not at the request of thirdparty/government requirement? (what about a bank?)
“Release” – how broad you define a “release” willimpact the scope of the indemnity “spilling, leaking, pumping, pouring, emitting,
injecting, escaping or dumping” (what about “migration”? Potential or threatened
releases included?)
“Environmental Claims” –third party demand or canbuyer or seller make direct claims to reimburse coststhey incurred not at the request of thirdparty/government requirement? (what about a bank?)
“Release” – how broad you define a “release” willimpact the scope of the indemnity “spilling, leaking, pumping, pouring, emitting,
injecting, escaping or dumping” (what about “migration”? Potential or threatened
releases included?)
29
Seller’s General Position Wants specific and narrow definitions Will attempt to limit any representation and warranty by
adding certain qualifier language Add “to the best of [seller’s or borrower’s] knowledge” Want to require any adverse or issues of concern be
referred to in a “material adverse effect/condition”provision Attempt to add a disclaimer of warranty that the property
is being sold “AS IS” Will want specific limitations on the scope and locations
outlined in the agreement Limitation on survivability
Wants specific and narrow definitions Will attempt to limit any representation and warranty by
adding certain qualifier language Add “to the best of [seller’s or borrower’s] knowledge” Want to require any adverse or issues of concern be
referred to in a “material adverse effect/condition”provision Attempt to add a disclaimer of warranty that the property
is being sold “AS IS” Will want specific limitations on the scope and locations
outlined in the agreement Limitation on survivability
30
Buyer’s General Position Typically wants broad definitions and reps/warranties No limitations or qualifiers is preferred Want more general catchall environmental language in a
“material adverse effect/condition” provision Will want any representation or warranty to be supported
by an indemnity for the Seller No specific limitations on the scope and locations outlined
in the agreement Longer terms on survivability
Typically wants broad definitions and reps/warranties No limitations or qualifiers is preferred Want more general catchall environmental language in a
“material adverse effect/condition” provision Will want any representation or warranty to be supported
by an indemnity for the Seller No specific limitations on the scope and locations outlined
in the agreement Longer terms on survivability
31
Techniques to Limit Liability Disclosure Schedule Knowledge Qualifier Materiality Qualifier Specific Time
Limitations Limitations on scope
and locations Limitation on
survivability
Disclosure Schedule Knowledge Qualifier Materiality Qualifier Specific Time
Limitations Limitations on scope
and locations Limitation on
survivability
32
Addressing Post-Closing EnvironmentalRisks
Disclosure Schedules Detailed or broad language?
Knowledge Qualifier Whose knowledge? What is “knowledge” – actual or imputed? Specify a particular individual or impute knowledge to the company as
a whole?
Specific time, scope or location Is the scope limited by time period (i.e., “my watch, your watch”) Do you carve out certain types of liability or contamination? Do you carve out certain locations? Limitation on Survivability (e.g., 2 or 3 years after closing)
Disclosure Schedules Detailed or broad language?
Knowledge Qualifier Whose knowledge? What is “knowledge” – actual or imputed? Specify a particular individual or impute knowledge to the company as
a whole?
Specific time, scope or location Is the scope limited by time period (i.e., “my watch, your watch”) Do you carve out certain types of liability or contamination? Do you carve out certain locations? Limitation on Survivability (e.g., 2 or 3 years after closing)
33
Addressing Post-Closing EnvironmentalRisks
Materiality Triggers Single event or in the aggregate
What costs will be considered as part of materiality total
What if the parties do not agree on what conditions arematerial for purposes of triggering indemnity claims
Materiality Triggers Single event or in the aggregate
What costs will be considered as part of materiality total
What if the parties do not agree on what conditions arematerial for purposes of triggering indemnity claims
34
Addressing Post-Closing EnvironmentalRisks
Environmental Remediation Obligations• Who controls communications with government for past
contamination?
• What kind of cleanup?• Industrial/commercial versus residential?• Risked-based cleanup?
Use of institutional controls permitted? (e.g. site management plan)? How implemented and complied with? Deed restrictions? (e.g. for sensitive uses/site redevelopment)
Environmental Remediation Obligations• Who controls communications with government for past
contamination?
• What kind of cleanup?• Industrial/commercial versus residential?• Risked-based cleanup?
Use of institutional controls permitted? (e.g. site management plan)? How implemented and complied with? Deed restrictions? (e.g. for sensitive uses/site redevelopment)
35
Addressing Post-Closing EnvironmentalRisks
On-Site or Offsite Disposal of EnvironmentalContaminants
Both parties are liable under CERCLA. Parties can contractually allocate responsibility, but joint and several
liability remains as to the government.
Buyer generally prefers broad representations that there has been noon-site disposal of hazardous materials or other pollutants
Seller typically prefers narrow representations that extend only tothose substances or materials which pose a threat to human health ofthe environment in order to exclude de minimis deposits ofenvironmental contaminants
On-Site or Offsite Disposal of EnvironmentalContaminants
Both parties are liable under CERCLA. Parties can contractually allocate responsibility, but joint and several
liability remains as to the government.
Buyer generally prefers broad representations that there has been noon-site disposal of hazardous materials or other pollutants
Seller typically prefers narrow representations that extend only tothose substances or materials which pose a threat to human health ofthe environment in order to exclude de minimis deposits ofenvironmental contaminants
36
Addressing Post-Closing EnvironmentalRisks
“As Is” Clauses Purpose: Used as a tool for Seller/Owner to shift liability to
Buyer/Tenant Must be conspicuous in the agreements Limitations Does not preclude Buyer’s statutory contribution claims under
CERCLA Some courts may apportion CERCLA liability or allow claims of
breach of implied representations/warranties
“As Is” Clauses Purpose: Used as a tool for Seller/Owner to shift liability to
Buyer/Tenant Must be conspicuous in the agreements Limitations Does not preclude Buyer’s statutory contribution claims under
CERCLA Some courts may apportion CERCLA liability or allow claims of
breach of implied representations/warranties
37
Addressing Post-Closing EnvironmentalRisks
Release Provisions Purpose: Used by Seller/Owner to shift liability to Buyer/Tenant in
“as is” deals. Also, serves as a waiver and potentially preventscomeback claims
Must be conspicuous in the agreements Limitations Cannot alter or change underlying CERCLA or cost recovery
liability to the government (e.g., EPA or state) Can only be used to change who ultimately pays the response costs Mardan v. C.G.C Music, 804 F.2nd 1454 (9th Cir. 1986)
Release Provisions Purpose: Used by Seller/Owner to shift liability to Buyer/Tenant in
“as is” deals. Also, serves as a waiver and potentially preventscomeback claims
Must be conspicuous in the agreements Limitations Cannot alter or change underlying CERCLA or cost recovery
liability to the government (e.g., EPA or state) Can only be used to change who ultimately pays the response costs Mardan v. C.G.C Music, 804 F.2nd 1454 (9th Cir. 1986)
38
Addressing Post-Closing EnvironmentalRisks
Cost Allocation andLimitations
Basket Buyer maintains a running total of
the post-closing environmentalliabilities it has incurred; when thetotal exceeds the agreed thresholddollar amount, buyer may make anindemnity claim against seller
Cap Dollar amount limit on a party’s
liability (or can act as trigger forshared liability after the capamount is reached)
Cost Allocation andLimitations
Basket Buyer maintains a running total of
the post-closing environmentalliabilities it has incurred; when thetotal exceeds the agreed thresholddollar amount, buyer may make anindemnity claim against seller
Cap Dollar amount limit on a party’s
liability (or can act as trigger forshared liability after the capamount is reached)
39
Addressing Post-Closing EnvironmentalRisks
Indemnities Purpose: Serves as a promise to safeguard against existing or future
liabilities It is only as good as the party providing the indemnity (indemnitor) Has no effect on an environmental agency’s rights to sue or seek ting
recovery Express Negligence Rule:
Indemnity for a party’s own negligence must be expressly spelled out inthe agreement. See e.g., Fina v. Arco, 200 F.3d 266 (5th Cir. 2000)
Drafting Considerations: One size does not fit all – Tailor specifically for the deal Indicate the effective period and the trigger for the applicability Use conspicuous language (bold, all caps)
Indemnities Purpose: Serves as a promise to safeguard against existing or future
liabilities It is only as good as the party providing the indemnity (indemnitor) Has no effect on an environmental agency’s rights to sue or seek ting
recovery Express Negligence Rule:
Indemnity for a party’s own negligence must be expressly spelled out inthe agreement. See e.g., Fina v. Arco, 200 F.3d 266 (5th Cir. 2000)
Drafting Considerations: One size does not fit all – Tailor specifically for the deal Indicate the effective period and the trigger for the applicability Use conspicuous language (bold, all caps)
40
Addressing Post-Closing EnvironmentalRisks
Indemnities Default arrangement: Seller indemnifies buyer for all pre-closing liabilities Buyer indemnifies seller for all post-closing liabilities
Because buyers become liable for environmental costs upon purchase,the seller is usually asked to indemnify the buyer for liabilities thatarise post-closing but are related to pre-closing events
Buyers may be willing in some cases to assume environmentalliabilities in return for a reduced purchase price or othercompensation
Indemnities Default arrangement: Seller indemnifies buyer for all pre-closing liabilities Buyer indemnifies seller for all post-closing liabilities
Because buyers become liable for environmental costs upon purchase,the seller is usually asked to indemnify the buyer for liabilities thatarise post-closing but are related to pre-closing events
Buyers may be willing in some cases to assume environmentalliabilities in return for a reduced purchase price or othercompensation
41
Addressing Post-Closing EnvironmentalRisks
Environmental Insurance There are a variety of products available to protect against certain
environmental liabilities. Should be scrutinized before the deal closes
Pollution Legal Liability Policy Covers liabilities that are unknown and unexpected Not always available, depending on market conditions,
size of potential claims Costly & Time consuming
Cleanup Cost Cap policy Covers specific plan to clean up
known contamination Not available when site poorly
characterized Expensive, risky
Environmental Insurance There are a variety of products available to protect against certain
environmental liabilities. Should be scrutinized before the deal closes
Pollution Legal Liability Policy Covers liabilities that are unknown and unexpected Not always available, depending on market conditions,
size of potential claims Costly & Time consuming
Cleanup Cost Cap policy Covers specific plan to clean up
known contamination Not available when site poorly
characterized Expensive, risky
42
Addressing Post-Closing EnvironmentalRisks
Escrow These provisions are useful when there are ongoing remediation expenses that
are expected post-closing. Purchasers of property that is contaminated, suspected to be contaminated, or
have regulatory compliance issues may require sellers to establish escrowaccounts that could pay the cost of cleanup, address third party claims, and/oraddress regulatory compliance deficiencies.
These accounts are often limited to specified dollar amounts and a limitedperiod of time following the completion of the transaction.
Escrow These provisions are useful when there are ongoing remediation expenses that
are expected post-closing. Purchasers of property that is contaminated, suspected to be contaminated, or
have regulatory compliance issues may require sellers to establish escrowaccounts that could pay the cost of cleanup, address third party claims, and/oraddress regulatory compliance deficiencies.
These accounts are often limited to specified dollar amounts and a limitedperiod of time following the completion of the transaction.
43
Addressing Post-Closing EnvironmentalRisks
Escrow – Devil is in the details: WHAT (SCOPE)?
The question of how clean is clean and what condition triggers the obligations ofthe Sellers or Buyers is often left to post-closing discussion or negotiation.
Is the goal of remediation getting to zero detection (restoration) or is it to receive aregulatory determination such as a No Further Action determination (risk basedclosure), or something in between? Even under Risk Based Closure, whatinstitutional controls are acceptable for the property and what closure document isrequired to meet the party’s obligations.
Regarding environmental compliance, consider listing each item of deficiency alongwith a scope of work, costs, schedule and the party responsible for the definedactions.
Escrow – Devil is in the details: WHAT (SCOPE)?
The question of how clean is clean and what condition triggers the obligations ofthe Sellers or Buyers is often left to post-closing discussion or negotiation.
Is the goal of remediation getting to zero detection (restoration) or is it to receive aregulatory determination such as a No Further Action determination (risk basedclosure), or something in between? Even under Risk Based Closure, whatinstitutional controls are acceptable for the property and what closure document isrequired to meet the party’s obligations.
Regarding environmental compliance, consider listing each item of deficiency alongwith a scope of work, costs, schedule and the party responsible for the definedactions.
44
Addressing Post-Closing EnvironmentalRisks
Escrow – Devil is in the details: WHO?
Define who is responsible for what tasks and be specific! Who will take the lead onthe project and be responsible for achieving the final outcome? Who will overseethe work on the project? Who will be responsible for coordination with agencies?Who will confirm conclusions and strategy for achieving the final outcome? Whoare the parties who decide fund disbursement and what are the hurdles to accessthe escrow account? If the escrow includes addressing compliance deficiencies, whodefines the scope, schedule, and cost? Who will be responsible for any regulatorypenalties that might result from the situation to be remedied?
WHEN? Laying out and agreeing to a critical path to complete all items specified in the
escrow agreement is crucial. Financial incentives for success and forfeitures fordelays can be and often are established.
Escrow – Devil is in the details: WHO?
Define who is responsible for what tasks and be specific! Who will take the lead onthe project and be responsible for achieving the final outcome? Who will overseethe work on the project? Who will be responsible for coordination with agencies?Who will confirm conclusions and strategy for achieving the final outcome? Whoare the parties who decide fund disbursement and what are the hurdles to accessthe escrow account? If the escrow includes addressing compliance deficiencies, whodefines the scope, schedule, and cost? Who will be responsible for any regulatorypenalties that might result from the situation to be remedied?
WHEN? Laying out and agreeing to a critical path to complete all items specified in the
escrow agreement is crucial. Financial incentives for success and forfeitures fordelays can be and often are established.
45
Addressing Post-Closing EnvironmentalRisks
Other Considerations Dispute Resolution?
How will disputes be resolved post-closing – court or ADR? Specialized knowledge in real estate as well as environmental law or
remediation technologies Predecessor operations covered? First-party claims covered? Time limit for payment? Copies of reports, communications with regulators? Access/recorded easement? Deed restrictions?
Other Considerations Dispute Resolution?
How will disputes be resolved post-closing – court or ADR? Specialized knowledge in real estate as well as environmental law or
remediation technologies Predecessor operations covered? First-party claims covered? Time limit for payment? Copies of reports, communications with regulators? Access/recorded easement? Deed restrictions?
46
Final Take-Aways Early due diligence
before the deal closes isimportant tounderstanding post-closure obligations Understand and
memorialize the exactrisk allocation
Consider eternity – therewill be changes
Early due diligencebefore the deal closes isimportant tounderstanding post-closure obligations Understand and
memorialize the exactrisk allocation
Consider eternity – therewill be changes
47
Anticipating PostAnticipating Post--Closing EnvironmentalClosing Environmental
Issues in Real Estate DealsIssues in Real Estate Deals::
PostPost--Closing DisputesClosing DisputesFebruary 28, 2017
Anticipating PostAnticipating Post--Closing EnvironmentalClosing Environmental
Issues in Real Estate DealsIssues in Real Estate Deals::
PostPost--Closing DisputesClosing DisputesFebruary 28, 2017
Daniel A. CantorArnold & Porter Kaye Scholer LLP
Phone: [email protected]
48
Background
• Post-closing environmental issues cannot always bepredicted.
• Sometimes the issue is clearly addressed by theunderlying property conveyance agreement. In othercases, issue is a surprise or does not fit neatly intocontract terms.
• Resolution of dispute will be driven by a combinationof contract, statutory, and common law.
• Post-closing environmental issues cannot always bepredicted.
• Sometimes the issue is clearly addressed by theunderlying property conveyance agreement. In othercases, issue is a surprise or does not fit neatly intocontract terms.
• Resolution of dispute will be driven by a combinationof contract, statutory, and common law.
4949
Legal Principles Parties may contractually allocate liabilities, but may not
shed liability to government by contract. Beazer East,Inc. v. Mead Corp., 34 F.3d 206 (3d Cir. 1994).(“agreements to indemnify or hold harmless areenforceable between the parties but not against thegovernment”). “A plaintiff suing to recover on an indemnity contract must
prove, inter alia, that it has suffered a loss within themeaning of the parties’ indemnification agreement, aswell as the amount of the loss sustained.” Carson HarborVillage, Ltd. v. Unocal Corp., 287 F. Supp. 2d 1118 (C.D.Cal. 2003).
Parties may contractually allocate liabilities, but may notshed liability to government by contract. Beazer East,Inc. v. Mead Corp., 34 F.3d 206 (3d Cir. 1994).(“agreements to indemnify or hold harmless areenforceable between the parties but not against thegovernment”). “A plaintiff suing to recover on an indemnity contract must
prove, inter alia, that it has suffered a loss within themeaning of the parties’ indemnification agreement, aswell as the amount of the loss sustained.” Carson HarborVillage, Ltd. v. Unocal Corp., 287 F. Supp. 2d 1118 (C.D.Cal. 2003).
50
Legal Principles (cont’d)
Indemnities are contracts subject to the laws ofcontract.
But, court hesitate to construe indemnities broadlyunless they are express and unambiguous.
Indemnities are contracts subject to the laws ofcontract.
But, court hesitate to construe indemnities broadlyunless they are express and unambiguous.
51
Legal Principles (cont’d)
See, e.g., Tara Corp. v. NL Indus., Inc., 73 F.3d 738(7th Cir. 1996): “Illinois interprets indemnityagreements according to its general principles ofcontract law. Yet Illinois law also provides thatindemnity agreements must be set forth in clear andexplicit language, so that the indemnitor’s obligationsare manifest. Moreover, since indemnityagreements are not favored in Illinois, they must bestrictly construed against the indemnitee.” See alsoKiewit Eastern Co., Inc. v. L&R Construction Co., 44F.3d 1194 (3d Cir. 1995).
See, e.g., Tara Corp. v. NL Indus., Inc., 73 F.3d 738(7th Cir. 1996): “Illinois interprets indemnityagreements according to its general principles ofcontract law. Yet Illinois law also provides thatindemnity agreements must be set forth in clear andexplicit language, so that the indemnitor’s obligationsare manifest. Moreover, since indemnityagreements are not favored in Illinois, they must bestrictly construed against the indemnitee.” See alsoKiewit Eastern Co., Inc. v. L&R Construction Co., 44F.3d 1194 (3d Cir. 1995).
52
Legal Principles (cont’d)
Where indemnification shifts liability for indemnitee’snegligence to indemnitor, indemnity must be clear onthis point. See, e.g., Fina Inc. v. ARCO, 200 F.3d 266(5th Cir. 2000).
State law limitations on indemnities include punitivedamages, fines, and certain construction contracts.
Where indemnification shifts liability for indemnitee’snegligence to indemnitor, indemnity must be clear onthis point. See, e.g., Fina Inc. v. ARCO, 200 F.3d 266(5th Cir. 2000).
State law limitations on indemnities include punitivedamages, fines, and certain construction contracts.
53
Hypothetical 1 Fact Pattern Seller has indemnified buyer for pre-existing
contamination. Two years after closing, buyer decides to redevelop
property. In connection with redevelopment, buyer willexcavate large volumes of contaminated soil at depth.Environmental law does not require removal of soilunless it is disturbed. Buyer submits indemnity claim for incremental costs of
handling and disposing of contaminated soil as well asdewatering.
Fact Pattern Seller has indemnified buyer for pre-existing
contamination. Two years after closing, buyer decides to redevelop
property. In connection with redevelopment, buyer willexcavate large volumes of contaminated soil at depth.Environmental law does not require removal of soilunless it is disturbed. Buyer submits indemnity claim for incremental costs of
handling and disposing of contaminated soil as well asdewatering.
54
Hypothetical 1 (cont’d) Does the contract cover first-party costs? How does the voluntary nature of the redevelopment
impact the indemnity obligation? Will turn on specificlanguage of indemnity. G.J. Leasing Co., Inc. v. Union Elec. Co., 54 F.3d 379 (7th
Cir. 1995) (stating that CERCLA’s limitation of recoveryto those response costs that are “necessary” acts as a“check on the temptation to improve one’s property andcharge the expense of improvement to someone else”) 24 Leggett Street LTD v. Beacon Indus., Inc., 239 Conn.
284 (1996) (indemnity applied to metal shavings belowregulatory action levels).
Does the contract cover first-party costs? How does the voluntary nature of the redevelopment
impact the indemnity obligation? Will turn on specificlanguage of indemnity. G.J. Leasing Co., Inc. v. Union Elec. Co., 54 F.3d 379 (7th
Cir. 1995) (stating that CERCLA’s limitation of recoveryto those response costs that are “necessary” acts as a“check on the temptation to improve one’s property andcharge the expense of improvement to someone else”) 24 Leggett Street LTD v. Beacon Indus., Inc., 239 Conn.
284 (1996) (indemnity applied to metal shavings belowregulatory action levels).
55
Hypothetical 1 (cont’d)
Must the buyer incur the costs before indemnity is ripe?
See, e.g., Carson Harbor Village, Ltd. v. Unocal Corp., 287F. Supp. 2d 1118 (C.D. Cal. 2003): “Where an indemnity contractprotects against loss, as opposed to liability, the indemnitee maynot recover without payment of the amount of the loss. Wherethe contract protects against liability, however, the indemnitor’sobligation arises when the liability of the indemnitee isestablished.”
Must the buyer incur the costs before indemnity is ripe?
See, e.g., Carson Harbor Village, Ltd. v. Unocal Corp., 287F. Supp. 2d 1118 (C.D. Cal. 2003): “Where an indemnity contractprotects against loss, as opposed to liability, the indemnitee maynot recover without payment of the amount of the loss. Wherethe contract protects against liability, however, the indemnitor’sobligation arises when the liability of the indemnitee isestablished.”
56
Hypothetical 2 Fact pattern Property contains soil contamination from Seller’s
operations. Purchase contract contains a “my watch, your watch”
allocation of environmental liability. Post-closing, Buyer re-grades property, redistributing
contamination. Post-closing, EPA issues PRP letter to both Seller and
Buyer. Buyer asserts bonafide purchaser defense and makes
indemnity demand against Seller. Seller asserts indemnity demand against Buyer.
Fact pattern Property contains soil contamination from Seller’s
operations. Purchase contract contains a “my watch, your watch”
allocation of environmental liability. Post-closing, Buyer re-grades property, redistributing
contamination. Post-closing, EPA issues PRP letter to both Seller and
Buyer. Buyer asserts bonafide purchaser defense and makes
indemnity demand against Seller. Seller asserts indemnity demand against Buyer.
57
Hypothetical 2 (cont’d)
Does Buyer’s re-grading of contaminated soilconstitute a release by Buyer and thus defeat bonafidepurchaser protection? Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 791 F.
Supp. 2d 431 (D.S.C., 2011): “Disposals are not limited toone-time occurrences, but instead include times whenhazardous materials are moved or dispersed. A‘disposal’ “may occur when a party dispersescontaminated soil....”
Indemnity is not a defense against EPA action. Factual issue of what contamination occurred under
each party’s watch.
Does Buyer’s re-grading of contaminated soilconstitute a release by Buyer and thus defeat bonafidepurchaser protection? Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 791 F.
Supp. 2d 431 (D.S.C., 2011): “Disposals are not limited toone-time occurrences, but instead include times whenhazardous materials are moved or dispersed. A‘disposal’ “may occur when a party dispersescontaminated soil....”
Indemnity is not a defense against EPA action. Factual issue of what contamination occurred under
each party’s watch.58
Hypothetical 3 Fact pattern Seller agrees to indemnify Buyer for contamination
arising from pre-existing contamination for a period of 5years. Agreement does not contain a release of liability. On day before expiration of indemnity period, Buyer
sends Seller a report, performed voluntarily,documenting presence of certain soil and groundwatercontamination. Subsequent testing discovers additionalpresence of same types of contamination.
Fact pattern Seller agrees to indemnify Buyer for contamination
arising from pre-existing contamination for a period of 5years. Agreement does not contain a release of liability. On day before expiration of indemnity period, Buyer
sends Seller a report, performed voluntarily,documenting presence of certain soil and groundwatercontamination. Subsequent testing discovers additionalpresence of same types of contamination.
59
Hypothetical 3 (cont’d)
Fact pattern
Buyer makes indemnity claim against seller.
Seller asserts that indemnity claim is time barred.
Buyer argues that claim is timely, and in any event it canclaimant in the alternative under CERCLA.
Fact pattern
Buyer makes indemnity claim against seller.
Seller asserts that indemnity claim is time barred.
Buyer argues that claim is timely, and in any event it canclaimant in the alternative under CERCLA.
60
Hypothetical 3 (cont’d)
Issues to consider Must all costs be “incurred” by sunset or is
identification of issue sufficient?
24 Leggett Street LTD, 239 Conn. at 310: “Although aplaintiff has the evidentiary burden of proving its damages atthe time of trial, there is no additional requirement that theplaintiff must satisfy this evidentiary burden prior to theexpiration of the applicable limitations period.”
Issues to consider Must all costs be “incurred” by sunset or is
identification of issue sufficient?
24 Leggett Street LTD, 239 Conn. at 310: “Although aplaintiff has the evidentiary burden of proving its damages atthe time of trial, there is no additional requirement that theplaintiff must satisfy this evidentiary burden prior to theexpiration of the applicable limitations period.”
61
Hypothetical 3 (cont’d)
Issues to consider Given the absence of a release, may Buyer bring a
statutory or common law claim after the indemnitysunsets? C.P. Chemicals, Inc. v. Exide Corp., Inc., 14 F.3d 594 (4th Cir.
1993) (indemnity by seller to buyer does not constitute a fullrelease on behalf of buyer after indemnity expires)
Hulbert v. Port of Everett, 159 Wn. App. 389 (2011): Holdingthat indemnity unaccompanied by release did not state lawclaims.
Issues to consider Given the absence of a release, may Buyer bring a
statutory or common law claim after the indemnitysunsets? C.P. Chemicals, Inc. v. Exide Corp., Inc., 14 F.3d 594 (4th Cir.
1993) (indemnity by seller to buyer does not constitute a fullrelease on behalf of buyer after indemnity expires)
Hulbert v. Port of Everett, 159 Wn. App. 389 (2011): Holdingthat indemnity unaccompanied by release did not state lawclaims.
62
Hypothetical 4 Fact Pattern Seller indemnified Buyer for pre-existing hazardous
substances. Post-closing, Buyer makes indemnity claim to Seller
seeking cost of removing asbestos and lead paint inconnection with remodeling of old buildings.
Fact Pattern Seller indemnified Buyer for pre-existing hazardous
substances. Post-closing, Buyer makes indemnity claim to Seller
seeking cost of removing asbestos and lead paint inconnection with remodeling of old buildings.
63
Hypothetical 4 (cont’d)
Issues What is the scope of the indemnity? Limited to soil and
groundwater? Releases to the environment? Sycamore Indus. Park Assocs. v. Ericsson, Inc., 546 F.3d 847
(7th Cir. 2008): “We reaffirm that when there is no emissioninto the outside environment, but rather any hazard resultingfrom emission of asbestos fibers would be confined inside abuilding, there is no release or threatened release, and thusthere can be no liability under CERCLA.”
Issues What is the scope of the indemnity? Limited to soil and
groundwater? Releases to the environment? Sycamore Indus. Park Assocs. v. Ericsson, Inc., 546 F.3d 847
(7th Cir. 2008): “We reaffirm that when there is no emissioninto the outside environment, but rather any hazard resultingfrom emission of asbestos fibers would be confined inside abuilding, there is no release or threatened release, and thusthere can be no liability under CERCLA.”
64
Hypothetical 5 Fact pattern Seller indemnifies Buyer for known pre-existing
contamination. Post-closing, Seller completes government required
remediation. Regulators will allow deep subsurfacecontamination to remain in place but require a deedrestriction prohibiting residential use and prohibitingsubsurface excavation without a soil management plan. Buyer resists deed restrictions, taking the position that
they will diminish value of property and shiftremediation obligations back to Buyer.
Fact pattern Seller indemnifies Buyer for known pre-existing
contamination. Post-closing, Seller completes government required
remediation. Regulators will allow deep subsurfacecontamination to remain in place but require a deedrestriction prohibiting residential use and prohibitingsubsurface excavation without a soil management plan. Buyer resists deed restrictions, taking the position that
they will diminish value of property and shiftremediation obligations back to Buyer.
65
Hypothetical 5 (cont’d)
Issues Does contract affirmatively obligate Buyer to record a
deed restriction? If so, what are the terms? Does contract require Buyer to cooperate with Seller in
performance of remediation? Does contract give Seller the right to select remedy? Is cooperation by Buyer an implied condition of
indemnity?
Issues Does contract affirmatively obligate Buyer to record a
deed restriction? If so, what are the terms? Does contract require Buyer to cooperate with Seller in
performance of remediation? Does contract give Seller the right to select remedy? Is cooperation by Buyer an implied condition of
indemnity?
66
Hypothetical 6 Fact pattern Buyer agrees to release and indemnify Seller from
liability for all contamination pre-dating the sale. Buyer and Seller agree that the indemnity and release
will run with the land and record notice of theindemnity and release in land record. Buyer then sells property. New owner discovers contamination on property and
makes claim against Seller. Seller cross-claims, assertingthat indemnity and release bind new owner.
Fact pattern Buyer agrees to release and indemnify Seller from
liability for all contamination pre-dating the sale. Buyer and Seller agree that the indemnity and release
will run with the land and record notice of theindemnity and release in land record. Buyer then sells property. New owner discovers contamination on property and
makes claim against Seller. Seller cross-claims, assertingthat indemnity and release bind new owner.
67
Hypothetical 6 (cont’d)
Issues Are indemnity and release enforceable against
subsequent purchaser even though subsequentpurchaser is not party to the indemnity and releaseagreement? Calabrese v. McHugh, 170 F. Supp. 2d 243 (D. Conn. 2001):
“The major difficulty that we have with defendants' argumentthat the Scovill Foundation/McHugh release is a covenantrunning with the land is that it does not ‘touch or concern theland’ nor is it ‘appurtenant’ to the land, as those terms havebeen used by the Connecticut courts.”
Issues Are indemnity and release enforceable against
subsequent purchaser even though subsequentpurchaser is not party to the indemnity and releaseagreement? Calabrese v. McHugh, 170 F. Supp. 2d 243 (D. Conn. 2001):
“The major difficulty that we have with defendants' argumentthat the Scovill Foundation/McHugh release is a covenantrunning with the land is that it does not ‘touch or concern theland’ nor is it ‘appurtenant’ to the land, as those terms havebeen used by the Connecticut courts.”
68
Financing Terms andConditions
When loan is secured by “impaired real property” lenders will often includespecific terms and conditions in the financing documents for extraprotection for them
Breach = default
Evaluate and understand the implications of the post-closing conditions
Lenders may have more strict requirements and internal policies forenvironmental compliance than governmental agencies
Cleanup endpoint for a bank may be different than the regulatorystandard
Could the bank’s conditions mean extra costs for you? FDIC guidance & SBA
When loan is secured by “impaired real property” lenders will often includespecific terms and conditions in the financing documents for extraprotection for them
Breach = default
Evaluate and understand the implications of the post-closing conditions
Lenders may have more strict requirements and internal policies forenvironmental compliance than governmental agencies
Cleanup endpoint for a bank may be different than the regulatorystandard
Could the bank’s conditions mean extra costs for you? FDIC guidance & SBA
69
Financing T&Cs (Cont.)• Withholding an escrow sum from the loan proceeds
• Limitations on property use
• Representations and warranties regarding environmental compliance
• Additional costs to purchase secured creditor insurance policies
• Consultant reliance letters
• Personal guarantee
• Indemnity
• Withholding an escrow sum from the loan proceeds
• Limitations on property use
• Representations and warranties regarding environmental compliance
• Additional costs to purchase secured creditor insurance policies
• Consultant reliance letters
• Personal guarantee
• Indemnity
70
Financing T&Cs Tips1. Consult with lender early to get an idea of their requirements
2. If lender requires a holdback/escrow to cover the costs for post-closingenvironmental work, two things to negotiate: The cost estimate for the work (the bank will use this number as
basis for escrow amount) The amount of the buffer the bank adds to the cost estimate
3. Have clear release points for escrow monies Banks will drag their feet on allowing milestone payments and
prefer lump sum payout at the completion of all the work
1. Consult with lender early to get an idea of their requirements
2. If lender requires a holdback/escrow to cover the costs for post-closingenvironmental work, two things to negotiate: The cost estimate for the work (the bank will use this number as
basis for escrow amount) The amount of the buffer the bank adds to the cost estimate
3. Have clear release points for escrow monies Banks will drag their feet on allowing milestone payments and
prefer lump sum payout at the completion of all the work
71