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Anticipating Post-Closing Environmental Issues in Real Estate Deals

Managing 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. Karlson Law Offices of Cindy J. Karlson Direct Office: 860.245.4922 Cell: 860.614.0184 Cindy@Karlsonlawfirm.com

PROGRAM AGENDA

I. Anticipating and identifying potential environmental issues which may occur post- closing II. Negotiation strategy and contractual tools to address post-closing issues III. Implications of court decisions and other considerations I. Anticipating and identifying potential environmental issues which may occur post- closing II. Negotiation strategy and contractual tools to address post-closing issues III. Implications of court decisions and other considerations

6

Rules of the Game

• 1. Joint and several liability.
• 2. You cannot contract liability vis-à-vis the government
• 3. Environmental conditions are frequently latent and

unknown 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 and

unknown 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 on

the land records

(access agreement, technical risk management plans)

 Real estate contracts often do not bind third parties  Some environmental agreements are not recorded on

the 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

Government

1st Party

Voluntary Contract Conditions

3rd Party

Government

Potential Cleanup Obligations

Investigation Remediation Post-remediation monitoring Land use restrictions Ongoing operation & maintenance Financial assurance Investigation Remediation Post-remediation monitoring Land use restrictions Ongoing operation & maintenance Financial 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 on

remediation 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 on

remediation 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  

  

 A2 surveys  Legal title work  Subordination agreements

 What if remediation or land use

restrictions not completed and property 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 Post Anticipating Post-Closing Environmental Issues in Closing Environmental Issues in Real Estate Deals: Real Estate Deals:

Negotiation Strategies and Negotiation Strategies and Contractual Tools Contractual Tools

February 28, 2017 February 28, 2017

Anticipating Post Anticipating Post-Closing Environmental Issues in Closing Environmental Issues in Real Estate Deals: Real Estate Deals:

Negotiation Strategies and Negotiation Strategies and Contractual Tools Contractual Tools

February 28, 2017 February 28, 2017 Daniella D. Landers REED SMITH LLP

Phone: 713.469.3654 dlanders@reedsmith.com

Agenda

 Allocation and Management of Risks  Contractual Considerations And Tools  Techniques to Address Post-Closing Environmental

Risks

 Allocation and Management of Risks  Contractual Considerations And Tools  Techniques to Address Post-Closing Environmental

Risks

21

Preliminary Considerations for Negotiation

 Do necessary due diligence

 Identify as many issues as you

can to avoid surprises

 Understand the key

players and their

• bjectives

 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 key

players and their

• bjectives

 Allocate risks

appropriately

 Allocate based on knowledge of

existing conditions at closing

 Outline Key Concerns

 Carve out specific environmental

conditions

22

Preliminary Considerations for Negotiation

 What are the parties

relative rights pre- and post- 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 parties

relative rights pre- and post- 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 Negotiation

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

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 Negotiation

Drafting: Use general or specific language to address post-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 address post-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, microbial matter

• Also consider including solid waste, explosives, radioactive

materials

 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, microbial matter

• Also consider including solid waste, explosives, radioactive

materials

27

Contractual Considerations

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

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 costs they incurred not at the request of third party/government requirement? (what about a bank?)

 “Release” – how broad you define a “release” will

impact 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 can

buyer or seller make direct claims to reimburse costs they incurred not at the request of third party/government requirement? (what about a bank?)

 “Release” – how broad you define a “release” will

impact 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

• utlined 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

• utlined 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 Environmental Risks

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 Environmental Risks

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 are

material 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 are

material for purposes of triggering indemnity claims

34

Addressing Post-Closing Environmental Risks

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 Environmental Risks

On-Site or Offsite Disposal of Environmental Contaminants

 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 no

• n-site disposal of hazardous materials or other pollutants

 Seller typically prefers narrow representations that extend only to

those substances or materials which pose a threat to human health of the environment in order to exclude de minimis deposits of environmental contaminants

On-Site or Offsite Disposal of Environmental Contaminants

 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 no

• n-site disposal of hazardous materials or other pollutants

 Seller typically prefers narrow representations that extend only to

those substances or materials which pose a threat to human health of the environment in order to exclude de minimis deposits of environmental contaminants

36

Addressing Post-Closing Environmental Risks

“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 Environmental Risks

Release Provisions

 Purpose: Used by Seller/Owner to shift liability to Buyer/Tenant in

“as is” deals. Also, serves as a waiver and potentially prevents comeback 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 prevents comeback 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 Environmental Risks

Cost Allocation and Limitations

Basket

 Buyer maintains a running total of

the post-closing environmental liabilities it has incurred; when the total exceeds the agreed threshold dollar amount, buyer may make an indemnity claim against seller

Cap

 Dollar amount limit on a party’s

liability (or can act as trigger for shared liability after the cap amount is reached)

Cost Allocation and Limitations

Basket

 Buyer maintains a running total of

the post-closing environmental liabilities it has incurred; when the total exceeds the agreed threshold dollar amount, buyer may make an indemnity claim against seller

Cap

 Dollar amount limit on a party’s

liability (or can act as trigger for shared liability after the cap amount is reached)

39

Addressing Post-Closing Environmental Risks

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 in

the 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 in

the 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 Environmental Risks

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 that arise post-closing but are related to pre-closing events

 Buyers may be willing in some cases to assume environmental

liabilities in return for a reduced purchase price or other compensation

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 that arise post-closing but are related to pre-closing events

 Buyers may be willing in some cases to assume environmental

liabilities in return for a reduced purchase price or other compensation

41

Addressing Post-Closing Environmental Risks

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 Environmental Risks

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 escrow accounts that could pay the cost of cleanup, address third party claims, and/or address regulatory compliance deficiencies.

 These accounts are often limited to specified dollar amounts and a limited

period 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 escrow accounts that could pay the cost of cleanup, address third party claims, and/or address regulatory compliance deficiencies.

 These accounts are often limited to specified dollar amounts and a limited

period of time following the completion of the transaction.

43

Addressing Post-Closing Environmental Risks

Escrow – Devil is in the details:

 WHAT (SCOPE)?

 The question of how clean is clean and what condition triggers the obligations of

the 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 a regulatory determination such as a No Further Action determination (risk based closure), or something in between? Even under Risk Based Closure, what institutional controls are acceptable for the property and what closure document is required to meet the party’s obligations.

 Regarding environmental compliance, consider listing each item of deficiency along

with a scope of work, costs, schedule and the party responsible for the defined actions.

Escrow – Devil is in the details:

 WHAT (SCOPE)?

 The question of how clean is clean and what condition triggers the obligations of

the 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 a regulatory determination such as a No Further Action determination (risk based closure), or something in between? Even under Risk Based Closure, what institutional controls are acceptable for the property and what closure document is required to meet the party’s obligations.

 Regarding environmental compliance, consider listing each item of deficiency along

with a scope of work, costs, schedule and the party responsible for the defined actions.

44

Addressing Post-Closing Environmental Risks

Escrow – Devil is in the details:

 WHO?

 Define who is responsible for what tasks and be specific! Who will take the lead on

the project and be responsible for achieving the final outcome? Who will oversee the work on the project? Who will be responsible for coordination with agencies? Who will confirm conclusions and strategy for achieving the final outcome? Who are the parties who decide fund disbursement and what are the hurdles to access the escrow account? If the escrow includes addressing compliance deficiencies, who defines the scope, schedule, and cost? Who will be responsible for any regulatory penalties 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 for delays 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 on

the project and be responsible for achieving the final outcome? Who will oversee the work on the project? Who will be responsible for coordination with agencies? Who will confirm conclusions and strategy for achieving the final outcome? Who are the parties who decide fund disbursement and what are the hurdles to access the escrow account? If the escrow includes addressing compliance deficiencies, who defines the scope, schedule, and cost? Who will be responsible for any regulatory penalties 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 for delays can be and often are established.

45

Addressing Post-Closing Environmental Risks

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 is important to understanding post- closure obligations

 Understand and

memorialize the exact risk allocation

 Consider eternity – there

will be changes

 Early due diligence

before the deal closes is important to understanding post- closure obligations

 Understand and

memorialize the exact risk allocation

 Consider eternity – there

will be changes

47

Anticipating Post Anticipating Post-Closing Environmental Closing Environmental Issues in Real Estate Deals Issues in Real Estate Deals:

Post Post-Closing Disputes Closing Disputes Post Post-Closing Disputes Closing Disputes

February 28, 2017 Daniel A. Cantor Arnold & Porter Kaye Scholer LLP

Phone: 202.942.5765 Daniel.Cantor@apks.com

48

Background

• Post-closing environmental issues cannot always be

predicted.

• Sometimes the issue is clearly addressed by the

underlying property conveyance agreement. In other underlying property conveyance agreement. In other cases, issue is a surprise or does not fit neatly into contract terms.

• Resolution of dispute will be driven by a combination
• f contract, statutory, and common law.

49 49

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 are enforceable between the parties but not against the government”).

 

enforceable between the parties but not against the government”).

 “A plaintiff suing to recover on an indemnity contract must

prove, inter alia, that it has suffered a loss within the meaning of the parties’ indemnification agreement, as well as the amount of the loss sustained.” Carson Harbor Village, 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 of

contract.

 But, court hesitate to construe indemnities broadly

unless they are express and unambiguous.

 Indemnities are contracts subject to the laws of

contract.

 But, court hesitate to construe indemnities broadly

unless 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 indemnity agreements according to its general principles of contract law. Yet Illinois law also provides that indemnity agreements must be set forth in clear and



indemnity agreements must be set forth in clear and explicit language, so that the indemnitor’s obligations are manifest. Moreover, since indemnity agreements are not favored in Illinois, they must be strictly construed against the indemnitee.” See also Kiewit Eastern Co., Inc. v. L&R Construction Co., 44 F.3d 1194 (3d Cir. 1995).

52

Legal Principles (cont’d)

 Where indemnification shifts liability for indemnitee’s

negligence to indemnitor, indemnity must be clear on this point. See, e.g., Fina Inc. v. ARCO, 200 F.3d 266 (5th Cir. 2000).

 State law limitations on indemnities include punitive

damages, fines, and certain construction contracts.

 Where indemnification shifts liability for indemnitee’s

negligence to indemnitor, indemnity must be clear on this point. See, e.g., Fina Inc. v. ARCO, 200 F.3d 266 (5th Cir. 2000).

 State law limitations on indemnities include punitive

damages, 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 will

excavate large volumes of contaminated soil at depth. Environmental law does not require removal of soil unless it is disturbed.

 Buyer submits indemnity claim for incremental costs of

handling and disposing of contaminated soil as well as dewatering.

 Fact Pattern

 Seller has indemnified buyer for pre-existing

contamination.

 Two years after closing, buyer decides to redevelop

• property. In connection with redevelopment, buyer will

excavate large volumes of contaminated soil at depth. Environmental law does not require removal of soil unless it is disturbed.

 Buyer submits indemnity claim for incremental costs of

handling and disposing of contaminated soil as well as dewatering.

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 specific language of indemnity.

 G.J. Leasing Co., Inc. v. Union Elec. Co., 54 F.3d 379 (7th

• Cir. 1995) (stating that CERCLA’s limitation of recovery

to those response costs that are “necessary” acts as a “check on the temptation to improve one’s property and charge the expense of improvement to someone else”)

 24 Leggett Street LTD v. Beacon Indus., Inc., 239 Conn.

284 (1996) (indemnity applied to metal shavings below regulatory action levels).

 Does the contract cover first-party costs?  How does the voluntary nature of the redevelopment

impact the indemnity obligation? Will turn on specific language of indemnity.

 G.J. Leasing Co., Inc. v. Union Elec. Co., 54 F.3d 379 (7th

• Cir. 1995) (stating that CERCLA’s limitation of recovery

to those response costs that are “necessary” acts as a “check on the temptation to improve one’s property and charge the expense of improvement to someone else”)

 24 Leggett Street LTD v. Beacon Indus., Inc., 239 Conn.

284 (1996) (indemnity applied to metal shavings below regulatory 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., 287

• F. Supp. 2d 1118 (C.D. Cal. 2003): “Where an indemnity contract

protects against loss, as opposed to liability, the indemnitee may not recover without payment of the amount of the loss. Where the contract protects against liability, however, the indemnitor’s

• bligation arises when the liability of the indemnitee is

established.”

 Must the buyer incur the costs before indemnity is ripe?

 See, e.g., Carson Harbor Village, Ltd. v. Unocal Corp., 287

• F. Supp. 2d 1118 (C.D. Cal. 2003): “Where an indemnity contract

protects against loss, as opposed to liability, the indemnitee may not recover without payment of the amount of the loss. Where the contract protects against liability, however, the indemnitor’s

• bligation arises when the liability of the indemnitee is

established.”

56

Hypothetical 2

 Fact pattern

 Property contains soil contamination from Seller’s

• perations.

 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

• perations.

 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 soil

constitute a release by Buyer and thus defeat bonafide purchaser protection?

 Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 791 F.

• Supp. 2d 431 (D.S.C., 2011): “Disposals are not limited to
• ne-time occurrences, but instead include times when

hazardous materials are moved or dispersed. A ‘disposal’ “may occur when a party disperses contaminated 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 soil

constitute a release by Buyer and thus defeat bonafide purchaser protection?

 Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 791 F.

• Supp. 2d 431 (D.S.C., 2011): “Disposals are not limited to
• ne-time occurrences, but instead include times when

hazardous materials are moved or dispersed. A ‘disposal’ “may occur when a party disperses contaminated 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 5 years.

 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 groundwater

• contamination. Subsequent testing discovers additional

presence of same types of contamination.

 Fact pattern

 Seller agrees to indemnify Buyer for contamination

arising from pre-existing contamination for a period of 5 years.

 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 groundwater

• contamination. Subsequent testing discovers additional

presence 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 can

claimant 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 can

claimant 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 a

plaintiff has the evidentiary burden of proving its damages at







plaintiff has the evidentiary burden of proving its damages at the time of trial, there is no additional requirement that the plaintiff must satisfy this evidentiary burden prior to the expiration 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 indemnity sunsets?

 C.P. Chemicals, Inc. v. Exide Corp., Inc., 14 F.3d 594 (4th Cir.

1993) (indemnity by seller to buyer does not constitute a full release on behalf of buyer after indemnity expires)

 Hulbert v. Port of Everett, 159 Wn. App. 389 (2011): Holding

that indemnity unaccompanied by release did not state law claims.

 Issues to consider

 Given the absence of a release, may Buyer bring a

statutory or common law claim after the indemnity sunsets?

 C.P. Chemicals, Inc. v. Exide Corp., Inc., 14 F.3d 594 (4th Cir.

1993) (indemnity by seller to buyer does not constitute a full release on behalf of buyer after indemnity expires)

 Hulbert v. Port of Everett, 159 Wn. App. 389 (2011): Holding

that indemnity unaccompanied by release did not state law claims.

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 in connection 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 in connection 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 emission into the outside environment, but rather any hazard resulting from emission of asbestos fibers would be confined inside a building, there is no release or threatened release, and thus there 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 emission into the outside environment, but rather any hazard resulting from emission of asbestos fibers would be confined inside a building, there is no release or threatened release, and thus there 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 subsurface

contamination to remain in place but require a deed restriction prohibiting residential use and prohibiting subsurface excavation without a soil management plan.

 Buyer resists deed restrictions, taking the position that

they will diminish value of property and shift remediation 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 subsurface

contamination to remain in place but require a deed restriction prohibiting residential use and prohibiting subsurface excavation without a soil management plan.

 Buyer resists deed restrictions, taking the position that

they will diminish value of property and shift remediation 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 the indemnity and release in land record.

 Buyer then sells property.  New owner discovers contamination on property and

makes claim against Seller. Seller cross-claims, asserting that 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 the indemnity and release in land record.

 Buyer then sells property.  New owner discovers contamination on property and

makes claim against Seller. Seller cross-claims, asserting that indemnity and release bind new owner.

67

Hypothetical 6 (cont’d)

 Issues

 Are indemnity and release enforceable against

subsequent purchaser even though subsequent purchaser is not party to the indemnity and release agreement?

 Calabrese v. McHugh, 170 F. Supp. 2d 243 (D. Conn. 2001):

“The major difficulty that we have with defendants' argument that the Scovill Foundation/McHugh release is a covenant running with the land is that it does not ‘touch or concern the land’ nor is it ‘appurtenant’ to the land, as those terms have been used by the Connecticut courts.”

 Issues

 Are indemnity and release enforceable against

subsequent purchaser even though subsequent purchaser is not party to the indemnity and release agreement?

 Calabrese v. McHugh, 170 F. Supp. 2d 243 (D. Conn. 2001):

“The major difficulty that we have with defendants' argument that the Scovill Foundation/McHugh release is a covenant running with the land is that it does not ‘touch or concern the land’ nor is it ‘appurtenant’ to the land, as those terms have been used by the Connecticut courts.”

68

Financing Terms and Conditions

 When loan is secured by “impaired real property” lenders will often include

specific terms and conditions in the financing documents for extra protection for them

 Breach = default  Evaluate and understand the implications of the post-closing conditions



  



  Evaluate and understand the implications of the post-closing conditions

 Lenders may have more strict requirements and internal policies for

environmental compliance than governmental agencies

 Cleanup endpoint for a bank may be different than the regulatory

standard

 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

70

Financing T&Cs Tips

• 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-closing

environmental 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-closing

environmental 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