Environmental Issues in Commercial Transactions: Lessons Learned 1 - - PDF document

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Environmental Issues in Commercial Transactions: Lessons Learned1 Walter G. Wright, Jr. Mitchell Williams Law Firm wwright@mwlaw.com

The measures an attorney advises a client to undertake to address an environmental issue in a transactional context will obviously depend on:

• Type of transaction (lease, buy/sell/financing, asset v. stock, etc.)
• Party represented (buyer, seller, lessor, lessee, secured creditor, investor, etc.)
• Type and materiality of the environmental issue in the context of the transaction
• Relative leverage of the Client
• Tools reasonably (cost-effective?) available to allocate responsibility and/or

quantify issue The viability of any commercial transaction is dependent upon the resolution of a variety

• f operational, tax, financial and/or legal issues. Nevertheless, transactions such as the

redevelopment or transfer of an improved property may also trigger environmental liability and/or regulatory concerns of varying importance. A typical scenario might involve a potential purchaser that is reluctant to acquire an inactive industrial facility for commercial redevelopment because of the perceived risks related to the presence of low levels of soil contamination. Further, regardless of the purchaser’s fortitude, potential lenders and/or investors may be hesitant to participate in a transaction unless two issues are addressed. First, they will seek some quantification of the potential regulatory responsibilities and/or legal liabilities associated with the property. In addition, they will need some assurance that only the loan/investment amount will be forfeited in the event of default failure or a claim. Properties with current or historical industrial or commercial uses that are part of a transaction often pose a dilemma. Potential purchasers or lessees must assess the possibility that certain environmental statutes might impose responsibility on them for contamination that is present at the time of the acquisition or lease. They will typically consider the probability that contamination is present and, if so, the cost to definitively delineate and/or remediate it. Related issues could include the likelihood of third-party claims resulting from site conditions, ability to

• btain financing and availability of definitive cleanup standards.
• I. Understanding Transactional Environmental Issues

1 A blog addressing this and other issues

– Arkansas Environmental, Energy, and Water Law Blog – http://www.mitchellwilliamslaw.com/category/environmental-blog – Three posts five days a week

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A. What are the potential risks/liabilities? 1. Are there human health risks and if so, what type? By way of example, contaminated soil and groundwater health issues differ from vapor

• intrusion. Soil and groundwater will typically only impact human health through direct contact.

In contrast, vapor intrusion health potentially arises from inhalation. 2. Are there environmental risks and if so, what type? 3. Are there non-regulatory environmental issues? a. Did Bank’s collateral include water rights? Natural resource transactional issues can be just as important as environmental in some

• instances. An example in the transactional context is a case addressing whether an Arkansas

bank’s deed of trust on a property includes related water rights. An Arkansas bank filed a lawsuit to quiet title to disputed waters rights and stock relating to a residential development project (“the Project”) in Utah. See First Nat. Bank of Wynne v. Twin Creeks Special Service Dist.2 Arkansas National Bank (“ANB”) made three successive loans, in exchange for three deeds of trust, to a company for the Project. These loans were made to WS Sleeping Indian Ranch (“Sleeping Indian”). In 2006, Sleeping Indian signed a deed of trust in favor of ANB which secured a loan in the initial amount of $7,494,011 to purchase the property. Sleeping Indian bought the Project land, consisting of 295 acres, for $5,300,000. A few months later ANB extended another line of credit to Sleeping Indian to purchase more water shares and for other project expenses. The second loan was for $2,347,500. A third deed of trust was executed to secure a third loan from ANB which was obtained in late October 2007 for $2,700,000. Each of these loans were secured by identical collateral which included “all water and riparian rights, wells, ditches, reservoirs, and water stock…..that may now, or at any time in the future, be part of the real estate….” After the execution of the deeds of trust, ANB and Sleeping Indian both failed. The FDIC negotiated the sale of its acquired interest in the first of the ANB/Sleeping Indian deeds of trust to First National Bank of Wynne (“FNB”). FNB subsequently foreclosed on its collateral under the first deed of trust. The question was whether the water rights and water stock acquired by Sleeping Indian are part of the collateral FNB now possesses. First, the question is whether the water rights and stock obtained subsequent to the first deed of trust are “part of the real estate” securing the initial loan from ANB. If so, the next

2 2013 WL 5427528.

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question was whether FNB obtained those rights in first position when it purchased the deed of trust from the FDIC. Under Utah law, deeds of trust are analyzed similarly to contracts. Utah law states: “If the language within the four corners of the contract is unambiguous, the parties’ intentions are determined from the plain meaning of the contractual language, and the contract may be interpreted as a matter of law.” First Nat. Bank of Wynne v. Twin Creeks Special Service Dist.3 The court concluded that the first deed of trust governed the ownership of the disputed

• properties. Under the agreement between FNB and the FDIC-R, FNB purchased the collateral

secured by the first deed of trust and other items listed in the loan documents. The court felt compelled by the plain language of the deeds of trust. Each contract identified the same collateral in exchange for the respective loans. Furthermore, the court concluded that when FNB purchased FDIC’s interest in the first deed of trust, it became first in line to collect any collateral identified. FNB was first in line for all water rights and stocks. Since FNB foreclosed on that collateral, it is the owner of any rights identified in the first deed of trust. The court noted that the parties can

• nly contract based on the law and their agreed risk.

Next, the court decided that the disputed water properties were “part of the real estate” as defined as collateral under the first deed of trust. The FDIC first argued that because the waters rights at issue are not “appurtenant to the land’ then they cannot be part of the real property under the first collateral argument. In addition, the FDIC argued that the water stock was not transferred in the manner required by Article Nine of the Utah Code. However, the court rejected both of FDIC’s arguments. The court concluded the parties’ agreements were clear and the interpretation of the relevant language enabled the court to give effect to all of the agreements in the first deed of trust. FNB’s title to the water rights and water stock shares were quieted, and FNB became the lawful owner. b. Are there Potential Third Party/Common Liabilities Even if the Property or Facility’s Contamination has been Determined as Requiring No Further Action by an Agency? A facility may have contamination at levels an agency has determined warrant no further

• action. It is important to recognize that the movement of this contamination off-site could still

generate common law bodily injury or property damage claims regardless of this agency approval. c. Did An Appraisal Consider Material Environmental Issues?

3 2013 WL 5427528 at *7 (D. Utah September 26, 2013).

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Appraisals will usually contain broad exemptions for environmental issues. However, should value calculations be affected by proximity to such adjacent activities such as coal plant (ash disposal/cooling lines, etc.)? The FDIC recently sued an appraiser arguing the appraisal for a property should have reflected a reduced value based on these area activities. d. Addressing Activities/Events that were formerly Unregulated i. Pre-Regulatory Petroleum Underground Storage Tanks Petroleum underground storage tanks (“USTs”) have and continue to be a key issue to be addressed in a number of commercial transactions. An issue that has arisen over the years that can be a potential problem are properties from which USTs were removed prior to the effective date of the federal and state regulations. In other words, what is the status of a property with petroleum contamination from which the USTs were removed prior to the effective date of the UST regulations in the late 1980s? Consider a scenario in which an entity was buying a piece of commercial property. An ASTM Phase I environmental assessment was undertaken. There was an indication that USTs may have been present on the property at sometime in the past. However, the seller argues that the USTs had been removed in the early 1980s and therefore there were no issues associated with this equipment. In addition, the seller refuses to in any way warrant or otherwise certify that the USTs had not suffered a release or that any residual contamination remained. The current UST regulations of course require that tanks be assessed at the time of removal through sampling, etc. Because the USTs removed in the mid 1980s did not have to go through such closure requirements (in Arkansas like most states at the time), no sampling/closure records were available. Therefore, the potential buyer’s dilemma was whether or not to undertake sampling of the area in which the USTs were formerly located. Ultimately, the buyer chose to do so because of the realization that despite the fact that the USTs had previously been removed in compliance with then state law, if contamination was present, there would still be potential liability and/or responsibility (common law or otherwise) to address this contamination. Consequently, this scenario serves as a reminder that even if a property is being acquired that no longer has USTs, this issue should still be addressed in the appropriate circumstances because of the possibility of historical releases that may not have been identified. e. Ensuring Necessary Permits Are in Place for Historical/Current Activities Example Purchaser Attempt to Rescind Acquisition of Property to be Used for Unpermitted Wood Waste Landfill

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The Louisiana Court of Appeals recently decided a case involving the purchase of property that had been used as a landfill—without a permit—for forty years. In Smith v. Sonnier,4 the court held that in order to rescind the contract for sale, the purchasing party must show that the property was not fit for the intended use at the time the property was purchased. In August of 2009, David Smith purchased two acres of property in Jennings, Louisiana from Joseph Sonnier for $12,000 to use as a disposal site for wood waste from his tree cutting

• business. Sonnier had been using the property for a similar purpose for forty years prior to the
• sale. He disposed of his own wood waste on the property and also charged others, including the

City of Jennings, to dispose of waste on the property. Sonnier never sought a permit for the property and explained that he was unaware that it was necessary to do so. Other than one visit from the Department of Environmental Quality (“DEQ”) about hydraulic fluid leaking from a bulldozer, Sonnier had never received any other visits from the DEQ about the landfill. He also claimed that the DEQ had never informed him that his use of the property was improper. In January 2010, five months after Sonnier sold the property, Smith received a visit from the DEQ and was informed that he must cease using the property as a landfill. He was also instructed that the property must be “cleaned up/closed out.” After receiving additional correspondence from the DEQ in June of that year regarding the use of the property, Smith filed suit against Sonnier on the grounds that the property was not suited for the intended purpose. The court rejected Smith’s claims stating that he offered no evidence to show that the property was not suited for use as a landfill at the time of purchase. Even though Smith pointed to several cases where courts approved rescission of a contract when the property was not suited for a particular use, all of these cases involved situations where the property was not suited for the intended purpose at the time of the actual sale. Smith did not present any evidence to show that a permit was required to operate the property as a landfill at the time of purchase, but instead

• nly provided evidence to show that the property was not suited for use as a landfill at the time
• f the DEQ’s visit five months after the sale.

In holding for Sonnier, the court acknowledged that when evaluating the fitness of any property for a particular use, it will look to the status of the property’s fitness at the time of contract. f. Transfer of Permits The transfer of environmental permits, licenses, and authorizations are often a critical aspect of the sale of a facility. The issues that needed to be considered are the time it may take to transfer such permits, etc. or if they are even transferable. g. Ensuring That An Agreement Addresses Non-Permit Requirements Example

4 2012-1408 (La. App. 3 Cir. 4/17/13).

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Was a Developed Wind Project Purchase and Sale Agreement Breached if the Whooping Cranes and Piping Plovers Potential Take Issues Were Not Resolved by the Closing Date? The Plaintiffs, enXco Development Corporation (“enXco”), was a company involved with renewable energy products, including solar and wind projects. enXco is an electric and natural gas company, and a subsidiary of Xcel Energy, Inc. (“Xcel”). enXco developed certain property located in North Dakota for the purpose of constructing a wind energy generation project that would be capable of supporting the installation and operation of 100 1.5 megawatt wind turbine generators (“Project”). enXco and Xcel entered into a Developed Wind Project Purchase and Sale Agreement for the project (“Agreement”) wherein enXco agreed to sell its wind energy development assets to NPS (i.e. Xcel). These facts were described in enXco Development Corporation vs. Northern States Power Company.5 The opinion indicates that as a consequence of the state of the country’s economy, enXco asserted there was a lower demand for electricity which caused investor-owned utilities such as Xcel to reconsider their commitments at that point to wind projects under contract and to terminate wind projects similar to the Project. During the development

• f

the Project, enXco contracted with an environmental/engineering firm to assist with environmental assessments which included issues associated with the U.S. Fish and Wildlife Service (“USFWS”). Apparently, at some point, the U.S. Fish and Wildlife Service provided comments concerning measures to be taken to mitigate the Projects impact on migratory birds, specifically whooping cranes and piping plovers. The Plaintiff’s, enXco, followed all of the U.S. Fish and Wildlife Service recommendations and argued that it addressed the agency’s concerns. The court noted: Although the USFWS had stated in its February 2010 letter that the risk of lethal take to whooping cranes as a result of the Merricourt Project was unknown, the USFWS asserted that it believed an adverse effect to whopping cranes was likely. The USFWS then recommended that the Project not commence until enXco has applied for and received an Incidental Take Permit. enXco alleges that although the potential for adverse impacts from development projects is not unique, NSP used the USFWS’s February 2010 letter concerning the whooping cranes to be a breach of representations and warranties contained in the agreement. At that time, NSP also provided notice of a “Material Adverse Effect” under the agreement. enXco argued that the Incidental Take Permit was not a seller permit and that NSP’s contentions of alleged breaches of the agreement were premature. enXco acknowledges that USFWS, for the first time, recommended that enXco obtained a project-specific Incidental Take Permit based on the belief that “take a piping plovers due to turbine strikes is likely at some point

5 2011 U.S. Dist. LEXIS 129060 (Nov. 8, 2011).

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in the life of the project”. NSP asserted that this constituted Material Adverse Effect under the agreement. NSP ultimately terminated the agreement alleging that these issues constituted Material Adverse Effect. enXco sued arguing breach of contract and NSP responded that the action must be dismissed as a claim for breach could not be stated. Defendant NSP argued that a deadline had not been met and therefore a Motion to Dismiss should be granted. In response to Motion to Dismiss, enXco raised the doctrine of temporary impracticability, or impossibility. The court noted that enXco had alleged that its ability to

• btain a Certificate of Site Compatibility was temporarily made impossible due to the effects to

the unrelated acts of others. enXco argued that NSP suffered no prejudice from the temporary delay and that enXco has a Certificate and but for NSP terminating the contracts, enXco could have met all of its obligations thereunder. The federal district court ultimately held that whether the delay in obtaining the Certificate of Site Compatibility is reasonably foreseeable or whether enXco was at fault are fact questions that need not be decided at this time. h. Understanding Risk: Is Compliance Enough? A colleague in another Little Rock law firm discussed an issue he was addressing in a commercial transaction. Specifically, his client was in the process of buying a facility that included underground storage tanks to determine if there had been a release. The seller of the facility had agreed, at its expense to perform a UST closure (i.e. remove the tanks and sample) in compliance with the applicable federal and Arkansas regulations. Such closure would entail sampling adjacent or around the USTs. In the event the samples were below action numbers specified by the Arkansas Department of Environmental Quality (“ADEQ”) for certain constituents, then the closure would likely be deemed approved by the agency. It is entirely possible that the samples obtained would of course be above zero. The question we discussed was whether such non-background results should still be considered some type of material issue despite the fact the ADEQ deemed the closure complete and this particular aspect of the facility in compliance with the applicable federal and Arkansas regulations? We both agreed that the answer depends upon whether such results might now or in the future materially affect the value of the property, impact future uses, the client’s appetite for risk, and the potential for movement (particular across property lines) of such contamination. In other words, we both agreed that despite the agency approving the closure, the client should at least still be apprised of the possibility of some effect on property value, etc. in the event the numbers were somewhat above background. i. Picking and Choosing Assets

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Some purchase agreements have broad language stating the buyer is purchasing all (i.e., a general reference) property, fixtures, equipment, etc. associated with a particular business. It is critical to ensure that all equipment or properties encompassed by such language are identified and any environmental liabilities assessed. An example might be the purchase of a gasoline

• jobbership. Such jobberships may have supplied above and underground tanks to businesses and

farms in the area for years. Does the buyer understand what tanks are being purchased and whether these have any environmental problems?

• II. Negotiating and Structuring the Agreement

The use of contractual verbiage to address environmental liabilities/requirements is governed by some key principles. First, the value of the warranty, indemnity or related provisions is obviously dependent upon the future financial viability of the party providing it. As a practical matter, many transactions will involve the purchase of commercial or industrial properties from owners who have limited financial worth. This is important since contractual provisions will not protect a party from an environmental governmental enforcement action. The courts have interpreted the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) as allowing parties to transfer the responsibility among themselves but prohibit any party from escaping the underlying liability to the government. Olin Corp. v. Consolidate Aluminum Corp.6 See also Smith Kline Beecham Corp. v. Rohm & Haas Co.,7 (concluding that parties may lawfully allocate CERCLA costs among themselves while remaining jointly and severally liable to the government for the entire cleanup.) Second, drafting provisions that clearly allocate responsibility for various environmental concerns can require some specificity.8 An example of the need for specificity is a seller desiring to transfer a facility absolved from any future environmental responsibilities (regulatory, governmental/third party liability, etc.). There are judicial decisions holding that a seller of a facility may not contractually allocate to the purchaser liability flowing from CERCLA by use of an “as is” clause.9 Instead, sellers whose objective is to transfer all environmental liability (however

• riginated) should do so pursuant to broad release language.10

6 5 F.3d 10, 14 (2nd Cir. 1993). 7 89 F.3d 154, 158 (3rd Cir. 1996) 8 See Jones v. Sun Carriers, Inc., 856 F.2d 1091 (8th Cir. 1988) (dispute between purchaser and seller of truck

terminal over responsibility for addressing dioxin contamination dependent on scope of terms [i.e., “liabilities,” etc.] in the stock purchase agreement); Lion Oil Co. v. Tosco Corp., 90 F.3d 268 (8th Cir. 1996) (defendant seller of Arkansas refinery was not required to indemnify plaintiff purchaser where the purchase agreement contained a clear indemnification clause, but a subsequent amendment contained a clear release from indemnification); and Fina, Inc.

• v. Arco, No. 98-41021, 2000 U.S. App. LEXIS 32 (Jan. 4, 2000) (noting that an indemnity must clearly and

unequivocally states that it covers CERCLA claims.)

9 See Southfund Partners III v. Sears Roebuck & Co., 57 F. Supp. 2d 1369, 1374 (N.D. Ga. 1999) (citing decisions

holding that “as is” clause only precluded liability for breach of contract and did not release transferee’s CERCLA claim).

10 For example, see FMC Corp. v. Northern Pump Co., 668 F. Supp. 1285, 1292 (D. Minn. 1987) (finding that

release absolved defendant from potential CERCLA liability by releasing defendant “from all claims, demands, and causes of action which [seller] has, had, or may have” arising from sale.)

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Third, allocating potential environmental regulatory requirements and liabilities is equally important in the leasing context.11 Finally, insurance is increasingly considered a potential tool to address some or all of the exposure associated with a given transaction. A. Environmental Assessment Issues 1. A facility may have areas that suffered historical releases resulting in soil and/or groundwater contamination. The current owner may not know if such conditions are present. The seller must recognize that a buyer may request authority to sample for such conditions. If such contamination is discovered is the risk associated with this scenario understood and planned for in the agreement? For example, is there a confidentiality agreement in place and/or does the seller want to know the results? 2. Is a Potential Purchaser Entitled to Cancel a Transaction Based on the Environmental Assessment Results? An entity known as 15 Hoover Street, LLC (“Hoover 15”) contracted to sell property to an entity known as Hoover 8, LLC (“Hoover 8”) for $2,550,000. The property is located in Inwood, New York. Paragraph 7 of the contract provided that the purchaser had 14 days from the execution of the contract to conduct “Phase II environmental testing.” In addition, the paragraph provided that the purchaser was entitled to cancel the contract for a reason discovered by purchaser “as a result

• f” the Phase II testing upon written notice on or prior to the 14 day “Diligence Date.”

Hoover 8 (the potential purchaser) undertook a Phase I Environmental Assessment and Phase II Investigation (including soil/groundwater sampling) and identified the presence of asbestos containing material in a building and petroleum in the groundwater above applicable regulatory standards. The potential purchaser notified Hoover 15 (the seller) it was cancelling the contract. The Supreme Court of New York in Hoover 8, LLC v. 15 Hoover Street, LLC, et al,12 addressed Summary Judgment motions by the parties addressing whether the potential purchaser was entitled to cancel the agreement and retrieve its deposit. The court concluded that the potential purchaser’s Notice of Cancellation was timely. Further, the court addressed whether the language that the purchaser could cancel for a reason discovered “as a result of” phase 2 testing to mean that the purchaser could not cancel based

11 For example, see Hoyt St. Properties, L.L.C. v. Burlington N. & Sante Fe Ry. Co., 38 F. Supp. 2d 1185 (D. Or.

1999) (determining the responsibility between developer/lessor and former owner/lessee under lease terms for historical contamination located at railway station.)

12 2012 N.Y. Misc. LEXIS 3784 (August 1, 2012).

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upon a known environmental condition, unless the testing revealed the contamination was significantly worse than understood at the time of the contract. The opinion addresses whether the potential purchaser established an entitlement to cancel the contract based upon lack of knowledge of the environmental contamination. The seller argued that the asbestos and petroleum did not constitute “recognized environmental conditions” because the asbestos could be addressed during renovation and the petroleum did not exceed applicable New York Department of Environmental Conservation quality standards. As a result, the seller argued there was no contamination and therefore, “no reason” which would allow the potential purchaser to cancel the contract. The court stated in response to the seller’s argument: Defendant’s argument would have more force, if the contract had provided that purchaser could cancel based upon an objective condition, such as reportable environmental contamination, as determined by a reputable environmental contractor. The contract at bar provided for cancellation based upon a subjective condition, i.e. a reason discovered by the purchaser as a result of the phase 2 environmental report. 3. Can you rely (legally) on the environmental consultant’s work in a particular transaction? Sometimes both the buyer and seller will use a consultant’s work. However, can each party rely on it if there is a mistake? In Makallon Atlanta Huntington Beach LLC v. Chevron Land and Development Company, et al.,13 a State of California Court of Appeals addressed a scenario in which over $100 million worth of former oil field and other properties were sold by the seller to a buyer for future use as residential

• properties. The contract included detailed provisions in which the buyer would

undertake various investigative and/or remediation activities designed to bring the properties into compliance with applicable environmental laws. These provisions also allocated liability to the buyer and seller based with a liability cap for the buyer. The buyer subsequently undertook various stages of work retaining two consultants at different periods of time. The seller alleged that it was ultimately forced to expend additional monies because of mistakes made by the two

• consultants. However, the buyer had retained the consultants and therefore they

argued in response to allegations regarding negligent performance of the contracts that no duty was owed to the seller. In other words, the consultants argued that it had no privity of contract with the seller.

13 Super. Ct. No. 06CC06961 (March 14, 2011).

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The specific mistakes that one or more of the consultants allegedly made included: “…took more than 200 soil samples in 1999 but failed to test those samples for hazardous substances, as required by the 1995 Agreement and the government agencies supervising remediation.” The seller also alleged that both consultants’ negligence included inadequately implementing the remediation plans. The Court undertook an extensive analysis as to whether or not a duty was

• wed to the seller since it had not retained the consultants and concluded

that no duty was owed under the facts. Some commercial transactions involving real property will include environmental issues whose scope will be subsequently (after closing) quantified and if necessary, remediated. Clearly, if one of the parties (whether seller or buyer) will depend on the work of an environmental consultant and/or engineer and this professional is retained by someone else, there may not be an ability to seek redress in the event of mistakes. As a result, the party that is not retaining the professional may need to negotiate a document that allows it rely upon the environmental consultant or engineer’s work. 4. Scope of Environmental Assessment Work a. Need to Satisfy Superfund All Appropriate Inquiries (“AAI”) for BFP, etc. Defenses b. Need to Expand AAI or ASTM Scope to Address Non-Scope Issues Relevant to a Transaction Example of non-scope issues might include: i. Bank financing commercial development on property that will require Corps 404 wetland permit to initiate construction. ii. Buyer

• f
• ffice

buildings calculation

• f

reconstruction/remodeling costs may vary materially on the amount of friable asbestos present. iii. Buyer/Lessor of multi-family apartment complex is attempting to budget for repairs that may be driven by water intrusion/mold issues. 5. Environmental Consultants: Did a General Release Bar Claims Related to Alleged Wetland Delineation Errors?

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Riverbend Community, LLC, et al v. Green Stone Engineering, LLC14 addressed whether a general release barred various claims for an alleged mistake in a wetlands delineation. Riverbend Community, LLC and Parkway Gravel (“Riverbend”) jointly owned a parcel

• f land (“Property”) which they intended to develop into residential real estate. A prior owner

had obtained a jurisdictional delineation from the United State Army Corps of Engineers which identified federal wetlands on the Property. Riverbend retained Green Stone Engineering, LLC pursuant to a contract prior to purchasing the Property. The contract required Green Stone to perform various tasks associated such as site evaluation and regulatory review, wetlands restoration conceptual design, wetlands enhancement conceptual layout, and regulatory meetings and presentations. The parties subsequently signed a second contract which required Green Stone to provide design services for the site and roadways, stormwater collection conveyance systems, the sanitary sewer systems, the water supply piping systems, the stormwater management plans, the sediment and erosion control plans, and the landscape plans. Green Stone subcontracted with JCM Environmental, Inc. to flag additional federal waters and wetlands on the Property. Green Stone also prepared to submit a plan to various city and county agencies that depicted the various wetlands areas. The Supreme Court of Delaware opinion states that the plans did not indicate that the wetlands were connected and that any construction on an onsite Causeway might interfere with protected wetlands. The opinion further indicates that based on Green Stone’s depictions, Riverbend proceeded. Green Stone subsequently left the project and would not release its work product unless Riverbend executes a “release.” The release stated in relevant part: Fox Chase Realty, LLC (“FCR”) for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration, the receipt of which is hereby acknowledged, for itself and its successors, and assigns hereby remises, release, [sic] acquits, and forever discharges Green Stone Engineering, LLC and its respective agents, officers, employees, representatives, successors and assigns and any and all other persons, associations, and/or corporations, whether herein referred to or not, (“Releasees”), of and from all known or unknown, suspected or unsuspected, past, present, and future claims, demands damages, interest, penalties, legal fees and all other actions, third-party actions, causes of action, or suites [sic] at law or in equity, including claims for contribution and/or indemnity or/of whatever nature, for or because of any matter or thing done, omitted, or suffered to be done, on account of or arising from Green Stone’s use or reliance upon any plans, engineering calculations, drawings, specifications, surveys or any other work product of any nature whatsoever produced by Green Stone Engineering, LLC in connection

14 2012 Del. LEXIS 547 (October 17, 2012).

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with professional engineering services provided Fox Chase Realty, LLC for the Riverbend at Old New Castle project (the “Work Product”). This document further confirms FCR’s receipt of all Work Product produced [by] Green Stone Engineering, LLC on behalf of Joseph L. Capano, Sr. and FCR. This release is made with advice of counsel or after knowingly declining advice of counsel. The United States Army Corps of Engineers subsequently issued two Cease and Desist Letters against Riverbend because of the work in wetlands. The Delaware State agency also filed a complaint. Riverbend alleged it could not sell houses, and a lender foreclosed and purchased the Property at a sheriff’s sale. Riverbend sued Green Stone for breach of contract, professional negligence, and simple

• negligence. Green Stone argued in a summary judgment motion that the general release barred

all claims. The Delaware Appellate Court upheld a trial judge’s holding that the release is unambiguous because it “clearly states” that Riverbend “remiss[es], release[s], acquits and forever discharges” Green Stone “from all claims in connection with services provided for the Old New Castle Subdivision.” The Appellate Court held that considering the release as a whole, it unambiguously constituted a general release. 6. Interpretation of Environmental Due Diligence Provision Timeline In G & C Holdings, LLC v. Rexam Beverage Can Company, the United States District Court for the Western District of Oklahoma granted the plaintiff’s Motion for Summary Judgment in a claim involving a Real Estate Purchase Agreement. Plaintiff, G& C Holdings (“G&C”), and defendant, Rexam Beverage Can Company (“Rexam”), entered into a Real Estate Purchase Agreement (“Agreement”) for commercial property in Oklahoma County. The Agreement required earnest money to be held in escrow by the title company and also required a “Due Diligence Period” that included completion of “Restoration Work.” Rexam was to complete the Restoration Work, which included dismantling manufacturing equipment and repairing buildings. Rexam was also required to consult with G&C regarding the scope of the Restoration Work. G&C could terminate the contract for any reason with written notice during the Due Diligence Period. The Agreement stated that if the contract was terminated as such then G&C would be entitled to the earnest money. However, if the contract was terminated after the Due Diligence Period then Rexam would be entitled to the earnest money as liquidated damages. The Agreement also stated the closing date would take place after the Restoration Work was completed but not later than a certain date. An environmental assessment had been completed prior to the Agreement, and G&C was provided with a Phase I report, which indicated some conditions identified by the environmental

• consultant. A Phase II investigation was to be completed by Rexam according to the Agreement.

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G&C wrote to Rexam in April 2010 and stated that it was still conducting its inspection of the Restoration Work and that issues still existed. However, six days later, Rexam wrote to G&C stating that the Restoration Work was complete, that G&C had inspected it, and that G&C accepted the Restoration Work per the Agreement because no written notice of unacceptable work had been sent. Therefore, Rexam claimed that the Due Diligence Period had ended and that it should receive the earnest money. G&C objected and claimed the Due Diligence Period included completion of the Phase II report. G&C then provided written acceptance of the Restoration Work subject to six exceptions. In June 2010, Rexam provided copies of laboratory data, analyses, and reports to G&C and stated that it had satisfied the requirements to receive the earnest money. However, G&C expressed concern over some of the findings and wanted further testing and remediation. After not receiving a reply from Rexam, G&C sought to mutually terminate the Agreement and sought to receive the earnest money. The court found that provisions within the Agreement regarding the Due Diligence Period were unambiguous and a matter of law for the court to decide. The court stated that the Restoration Work to be completed included a specific set of tasks and that the provisions provided specifically for environmental matters. The court found that language in one of the provisions “clearly link[ed] Plaintiff’s ‘due diligence’ to both Phase I and Phase II assessments.” Therefore, the court rejected Rexam’s argument that the Due Diligence Period could end prior to the Phase II investigation and report and found that G&C “properly exercised its unconditional right of termination within the Due Diligence Period.” Subsequently, the court granted G&C’s Motion for Summary Judgment and ordered G&C to be paid the earnest money. 7. Delineating the Roles

• f

the Attorney and Technical Professional/Environmental Consultant The responsibility for supervising the environmental due diligence and determining the appropriate assessment activities can become a source of contention. An example is found in Coves of the Highland Community Development District v. McGlinchey Stafford, P.L.L.C.15 A law firm was engaged as counsel to a district in connection with organizational, bond issuance, and compliance activities for real estate development. Plaintiff filed a Complaint alleging the law firm verbally promised “to guide and oversee the entire process: and ensure necessary work was performed for the project.” The U.S. Corps of Engineers issued public notice after some work was done stating the area had been used as a bombing range. The agency prohibited issuance of permits until risks of unexploded ordinance and contamination had been addressed.

15 (E.D. La. 2011).

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The Plaintiff alleged the law firm had duty to conduct a reasonable investigation into environmental issues that may delay development. Plaintiff further alleged that a basic environmental assessment would have identified the rite as within bombing range. The case is a reminder that the allocation of responsibilities for deciding what, if any, environmental assessment work should be undertaken is a critical issue. 8. Did Lease Language Providing Tenant An Opportunity to Request An Environmental Assessment Eliminate Its Rights Related to Leasehold Contamination? In Ultimate Precision Metal Products, Inc. v. GSM LI LLC, a Suffolk County New York court denied the defendant’s motion to dismiss on Ultimate’s breach of contract and negligent misrepresentation claims and granted the motion on the claim of alter ego liability. Ultimate Precision Metal Products, Inc. (Ultimate) leased property “as is” from the defendants in February 1996, knowing of the possibility of pre-existing contamination on the property by Lincoln Graphic Arts (Lincoln), a prior tenant. Provisions were added to the lease regarding the contamination, and the parties agreed to a process to investigate the contamination. In June 2005, a joint investigation by the Suffolk County Department of Health Services and the Suffolk County District Attorney’s Office was conducted after a routine inspection showed signs of hazardous materials. Criminal action against Ultimate resulted from the investigation, and Ultimate pled guilty to disorderly conduct and a civil forfeiture order of $100,000. Ultimate was required to conduct remedial measures due to the contamination, which cost the business $531,634.82. Ultimate claims that it only entered the plea because the criminal investigations were hurting its business and that it never admitted guilt to being the source of the

• contamination. Ultimate also submitted evidence that Lincoln released contaminants into the

groundwater and that the chemicals present were inconsistent with Ultimate’s business

• perations in manufacturing sheet metal.

The defendants argued that Ultimate waived its right to hold others responsible for the contamination because it did not request an environmental assessment after 75 days. This claim is based on the defendant’s reading of a paragraph in the lease, which states: As an additional inducement to the tenant to enter into this lease, the landlord agrees to contract and pay for at the landlord’s sole expense, a phase I environmental assessment

• f the entire premises of which the demised premises forms

a part. The assessment will be conducted by a licensed environmental engineering firm. The tenant will be supplied with a complete copy of the phase I assessment no later than 75 days from the date of the execution of the lease. In the event that the tenant is not supplied with a complete copy of the Phase I assessment within 75 days of the date of the

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lease, the tenant may cause to be conducted a Phase I assessment by a licensed environmental engineering firm of the tenant’s own choosing, but at the expense of the landlord. The court disagreed with the assertion that this paragraph of the lease set a 75 day limit to request an environmental assessment or else waive the right for a claim and assume responsibility for the contamination. The court also disagreed with the defendants’ claim that Ultimate admitted guilt when it agreed to the plea agreement regarding the criminal charges. The court reviewed the plea and found no admission of guilt to the contamination and also noted the voluminous documented records of Lincoln’s history of contamination that Ultimate included in its pleadings. 9. Environmental Assessment Work often Driven by Financial Institution Requirements: If client/buyer is required to pay for an assessment is it important to tailor work to relevant issues instead of using bank’s cookie cutter assessment formula? 10. Is there a logical system in place that tailors the scope of the assessment to relevant collateral issues? a. Should storage tank trust fund eligibility for tanks be an add-on to Phase I for transaction in which convenience store will be collateral? b. Should some type mold/water intrusion survey be included for collateral consisting of nursing homes that have many occupants with respiratory issues? 11. ASTM Recognized Environmental Conditions (“REC”) a. Note variability/discretion Example – Underground storage tanks closed a month ago with closure accepted by agency.

• USTs removed in early 80s with limited documentation

Example – Does a drain in an office building that formerly housed a chiropractic office constitute a REC? Film development in area of drain, etc. 12. Clients Deferring Assessments as a Reasonable “Business Risk” May Simply Be Forestalling Future Lender/Purchaser Driven Work A transaction was undertaken in which a client was proposing to purchase a small multi- family residential complex (“Complex”). The Complex was held by a lender who had undertaken an environmental assessment in the prior twelve months. The environmental assessment had identified environmental issues such as the possible presence of lead based paint and friable asbestos along with some indication of mold/fungi infestation. The assessment was probably appropriately characterized as a “Phase 1” since the issues were simply identified and

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neither delineated nor quantified. The lender was, of course, selling the property on a strict “as is” basis. Regardless, the client was eager to purchase the property because of the belief that the price was extremely low. The initial purpose of an environmental assessment is, of course, to identify potential

• issues. However, the client and its advisors then often have a decision to make. Should

additional assessment work be undertaken to quantify and/or delineate the environmental conditions or issues at the property or facility (if any)? The delineation and/or quantification of the issue or condition may focus on the cost to remediate likelihood of third-party property damage/bodily injury claims, impact on the value of the collateral, etc. Whether such delineation and/or quantification is important may depend on the

• circumstances. For example, the purchaser considering the acquisition of a building that is to be

demolished should be focused on whether asbestos is present. The renovation, remodeling and demolition of buildings and structures containing asbestos or lead-based paint may trigger certain federal and state regulatory requirements that could increase the cost of the work. Needless to say, potential purchasers often balk at spending money on anything above the most minimal assessment cost. This is especially true in a transaction involving lower value

• properties. In many instances, what drives the potential purchaser to obtain an assessment is the

lender’s mandate that this work be undertaken. However, this scenario financing was not needed to acquire this facility. In this instance, it was obviously critical to advise the client of the options (i.e. the types

• f assessment work, etc.). The client needed to understand whether the presence of asbestos,

lead-based paint, or mold/fungi may or may not ultimately be a material issue. Nevertheless this could not be determined based on the assessment work to date and there was no guarantee that at some point these conditions might not be found to materially affect the value of the property and/or potentially result in lessee claims. Further, there may be certain regulatory responsibilities associated with the presence of asbestos or lead-base paint. Besides the previously described issues, there was an additional concern that needed to be addressed with the client. The client needed to understand that even if it wished to take a “business risk” and purchase the property without undertaking additional assessment work, there was a potential additional problem. Specifically, at some point the client may decide to seek financing, etc. The client had to understand that every lender, despite the fact that this was simply a small multi-family complex, would require that initial environmental work and disclosures be undertaken. The prior assessment would need to be disclosed and it is highly likely that the lender would require that the three issues (asbestos, lead-base paint and mold) be delineated or quantified in some manner prior to funding. As a result, it was critical for the client to understand that it may simply be delaying an assessment that would ultimately be undertaken in the future. Further, this assessment will be undertaken and the problems identified after the property had already been purchased. B. Warranty/Indemnity/Disclosure/Contingency

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1. Are All Relevant Risks/Liabilities Encompassed? Vapor Intrusion Should a warranty include indoor air pollutants or tenant/occupant complaints? 2. Disclosure Provisions/Issues a. Sale of a recycling facility The Delaware Federal Court in Greenston, LLC, et al v. Todd A. Heller, et al addressed a contractual dispute related to sale of a recycling facility. The agreement included the following language: Section 3.21 Environmental Matters. K. The Seller has provided the Buyer with copies of all reports, correspondence (internal and external), analytical data, and other documents and records related to the environmental condition of the Seller

• r the Business facilities, their compliance with Environmental Laws,

and/or Environmental Claims. A dispute arose over stockpiles of glass at recycling facility. Agency correspondence was in the files regarding an investigation of piles. Testimony from agency personnel indicated that the facility was not out of compliance. The agency apparently assumed the glass would be removed in the applicable time period. 3.21(k) was not deemed to be breached because applicable regulation was not within the scope of 3.21 and stockpiles were not determined to be an environmental issue. b. Dispute Between “Sophisticated” Commercial Seller and Buyer Regarding Buyer’s Knowledge of Pre-Closing Environmental Conditions A federal district court in North Carolina, in Metropolitan Group, Inc. vs. Meridian Industries, Inc.,16 addressed a conflict between what it characterized as two sophisticated corporate entities, that were at all times represented by counsel, and employed experts to assist them in reviewing the environmental aspects of a transaction. Specifically, Metropolitan Group,

• Inc. (“Metropolitan”) bought a textile mill from Meridian Industries, Inc. (“Meridian”) after

nearly two years of due diligence, intending to demolish the buildings and residential units on the site. The decision indicates that less than a year after closing, Metropolitan’s demolition contractor ruptured a fuel line on the site resulting in contamination of a river. An investigation related to this spill revealed chemicals and other hazardous materials on the property. Some of the chemicals were stated to have been stored behind a wall of the plant. Further, the opinion

16 2012 U.S. Dist. LEXIS 57064 (April 23, 2012).

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indicates that neither the buyer, nor the seller, nor their environmental experts were aware of their existence. Metropolitan filed a lawsuit against Meridian alleging a number of causes of action such as fraud, unfair and deceptive practices, trespass, breach of contract, and breach of warranty. A key issue associated with Metropolitan’s claims were whether Meridian had “actual knowledge”

• f chemicals, asbestos and fuel oil on the property at the time of its sale – but made

representations to the contrary. The opinion undertakes a detailed analysis of the prior use and sale of the plant property, inspection and remediation, contractual terms, exchange of information, purchase agreement, presale discovery, disclosure of groundwater contamination, and a number of related matters. The court states that the buyer failed to provide any facts that the seller had actual knowledge regarding the presence of chemicals, etc. beyond what it had disclosed. It noted that buyer was advised by both counsel and environmental consultants and had unfettered access to the property prior to the sale. Ultimately, the defendants’ sellers Motion for Summary Judgment in regards to various causes of action was granted with one exception. c. Disclosures Addressing Regulatory Questions The purchase and sale of residential and commercial properties sometimes involve the discovery of problematic environmental issues after the acquisition is completed. Those issues

• ften involve contamination, storage tanks, etc. However, in the Court of Appeals of Indiana

decision of Wise v. Hayes, et al.,17 the issue involved the presence of regulated wetlands. A buyer had filed a complaint against the sellers of real estate for fraud and negligence. Apparently, in 2007, the plaintiff-buyer was interested in purchasing a residence and the surrounding 16.5 acres. The opinion notes that, after viewing the property, the plaintiff e-mailed specific inquiries about the residence and surrounding real estate. The opinion states that the queries involved, whether the wetlands would affect the development of the property, and the following question was noted: Where exactly is the wetland designation of the property? How many acres of wetlands are there compared to “liveable” ground? Are the wetlands registered and/or recognized by city/state/army corps? . . . [I]s any of it buildable for a possible driveway across county line road? Are the wetlands not usable at all? Property has a survey on file? The Defendants allegedly responded that the property could be developed for additional residential housing. The transaction was ultimately consummated and the opinion discusses issues such as how the sellers’ residential real estate disclosure form was filled out, correspondence from the enforcement branch of the Army Corps of Engineers, and a professional engineer’s inspection of the residence.

17 No. 76A03-1006-PL-323 (Feb. 15, 2011).

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It is important to recognize that the possible presence of “wetlands” is not within the scope of an ASTM phase I environmental assessment. As a result, if wetlands are a potential issue the scope should be broadened to include them. d. “As Is”/Mutual Mistake/Disclosure: Non-Disclosure of Environmental Assessment In Ridge Seneca Plaza, LLC, v. First Allied Shopping Center, L.P., the United States District Court in the Western District of New York granted the defendant’s motion for summary judgment in a case where the plaintiff claimed several causes of action after petroleum was found on its property. Ridge Seneca Plaza, LLC (“Ridge”) purchased property from First Allied Shopping Center, L.P. (“First Allied”) in February 2001, after Sylvan Enterprise Corp. (“Sylvan”) assigned its contract to Ridge. The purchase agreement contained a paragraph that the property was being purchased “as is, where is and with all faults.” The environmental condition of the property was never discussed during negotiations between Sylvan or Ridge and First Allied. Prior to closing, Sylvan had a Phase I environmental study conducted on the property but did not have a Phase II environmental study conducted. In 2005, Ridge attempted to obtain a new mortgage, whereupon petroleum was found under the property. The source of the petroleum contamination was likely from a former gas station nearby. First Allied claimed that there was no evidence that the contamination affected the property prior to the closing date. The court held that First Allied could not be found negligent by not disclosing a prior EGG Phase I Report conducted on the property because Ridge did not show that First Allied actively concealed the report or the conditions therein. The court next found that Sylvan assigned the entire Purchase Agreement to Ridge that included the “as is, where is and with all faults” provision and thereby bound Ridge to all of the terms of the agreement. Finally, the court also rejected Ridge’s claim of mutual mistake because the contract specifically stated that it was the purchaser’s responsibility to determine the condition of the property and whether or not to purchase. 3. Warranty/Indemnity

• a. Dispute Regarding Post-Closure Cleanup Obligations of Seller of

Convenience Store The purchase or sale of a commercial or industrial property sometimes involves the discovery or disclosure of a preexisting environmental condition. A common example is the presence of soil or groundwater contamination that may require delineation and/or remediation. Even if such issues are significant or material, the parties may choose to address them through purchase price adjustments, post-closing cleanup obligations, etc.

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One scenario may involve the seller agreeing to investigate and/or remediate contamination subsequent to closing. Documenting this post-closing obligation will require the parties to address such issues as: *At what point is the seller’s obligation to remediate completed? *Is there a timing requirement as to how quickly the seller must accomplish investigation and/or remediation? *May the seller at its own discretion choose the investigative and/or remediation methods? The Supreme Court of the State Of Idaho recently addressed an appeal involving the seller of a convenience store. See Echo Vanderwal and JLZ Enterprises, Inc. v. Albar, Inc.18 Albar, Inc. (“Albar”) had entered into a Consent Order with the Idaho Department of Environmental Quality to remediate a gasoline release from its underground storage tanks (“UST”). The Consent Order required Albar to remediate the contamination and any impact to adjacent property until it met cleanup levels established by the Idaho agency. Albar subsequently listed the property for sale with a property disclosure form which stated: Memorial Day weekend 2003 a leak in gas tanks discovered, DEQ and state insurance fund notified immediately and tank pulled next day, suspect soil removed and replaced. DEQ continue monitoring. Prior to purchasing the facility JLZ Enterprises, Inc. (“JLZ”) was told by a representative

• f Albar that the soils had been remediated and were cleared and that the only task left in

the remediation was two monitoring sessions that would be completed by January, 2006. The Appellate Court states that both this statement and the property disclosure form were

• false. Albar and JLZ entered into an agreement in which Albar undertook:

…all responsibility and liability for recent gasoline spill on property and adjoining property. The appellate opinion describes work undertaken by Albar to remediate both the soil and

• groundwater. However, the opinion indicates that Albar did not determine the lateral extent of

contamination even though such testing was required by the Idaho Department of Environmental Quality before it would “clear the property.” Further, the Idaho agency, JLZ and Albar discussed a more expeditious and accepted way to achieve remediation of the property. JLZ subsequently demolished the building on site and soil contamination was discovered. Albar’s contractor did not remediate the soil below the building site. The opinion indicates that contractor undertaking remediation on behalf of Albar had made no further progress and simply proposed to continue the previous type of work. JLZ undertook the remediation itself and continued this work until it ran out of money. It had completed remediation and the principal task left was monitoring.

18 2013 Appeal No. 72 (June 20,2013).

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JLZ filed an action against Albar to recover damages for breach of contract and to rescind the contract. Albar argued on appeal that JLZ did not bargain for any specific remediation result citing the language from the agreement which stated: Seller has all responsibility and liability for recent gasoline spill on property and adjoining property. The Appellate Court noted that the trial court had determined that the provision was ambiguous and Albar did not challenge that finding. It upheld the trial court’s finding that Albar was obligated to remediate all the affected property until it met the standard imposed set by the Idaho Department of Environmental Quality for clearance. Albar’s assertion was that it was not liable “for any set period of remediation” (whether within a reasonable time or not.) The trial court had noted that the contract did not specify time for performance. Regardless, it held that Idaho law imposed an obligation to perform within a reasonable time. It found that 16 or 18 months would have been reasonable time to remediate the property and that Albar breached the contract by failing to remediate the property in a reasonable time. b. Did Failure to Remove Tanks/Soil Contamination Result in a Lease Holdover? Carroll Independent Fuel Company v. Washington Real Estate Investment Trust19 addresses lease agreements between Washington Real Estate Investment Trust (“WRIT”) and Carroll Independent Fuel Company (“CIF”). WRIT leased two service stations located in Maryland from CIF. After the leases ended, a dispute arose between the two parties regarding: 1) the responsibility for cleaning up contamination found in the soil and groundwater surrounding the service station buildings; and 2) whether CIF failed to surrender possession of the premises, requiring it to pay a holdover fee that was three times the annual rent. The trial court found that CIF was not liable for the environmental contamination, but CIF was a holdover tenant and required to pay $624,621.09, plus attorney’s fees for $25,000. The following questions were presented to an appellate court: * Did the trial court err in finding that CIF was a holdover tenant because it failed to (a) remove gas tanks, (b) deliver an environmental inspection certificate, and (c) remove a third party from its property? * Was the imposition of holdover fees an unenforceable penalty? * Did the circuit court err in failing to award prejudgment interest to WRIT? * Did the circuit court err in awarding WRIT $25,000 in attorneys’ fees, and amount substantially less than requested?

19 2011 Md. App. Lexis 161.

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CIF contended that the circuit court erred in its finding that it was a “holdover tenant” by arguing that a tenant must be physically present on the premises to be a holdover tenant. The question was whether tenant’s physical presence includes the company’s failure to remove gas tanks, deliver an environmental inspection certificate, or remove a third-party form its property. The trial court asserted CIF was in physical possession of the property through conduct other than continued physical presence. The appellate court reasoned that the typical way that a tenant retains possession of leased premises is to physically remain on the premises at the expiration of the lease term. CIF vacated the premises when the lease ended. CIF actions were held not to constitute a holdover. WRIT claimed that CIF was still present because they failed to remove the fuel tanks, deliver the inspection certificate, and remove B & E Automotive Services. First, the court held that WRIT was the owner, and CIF’s failure to remove the tanks owned by WRIT did not render CIF a holdover tenant. Further, CIF’s failure to deliver the inspection certificate may constitute a breach, but the evidence was held provided does not to support a finding that such a failure interfered with WRIT’s possession and control of the premises. Finally, B & G automotive services began occupying the site during the CIF’s lease term; however, a contract did not exist between CIF and B & E. For that reason, B & E’s action in remaining on the property as a trespasser after CIF had vacated the premises could not be attributed to CIF. Therefore, it did not result in a holding over by CIF in violation of the lease. 4. Lease Provisions a. Lease Repair/Remediation In Bitler Inv. Venture II, LLC v. Marathon Ashland Petroleum, LLC,20 gasoline stations’ lessors sued lessees for breach of contract and waste to different pieces of commercial property in Indiana, Michigan, and Ohio. The lessors accused the lessees of neglect and destruction of commercial properties, which injured the owners’ rights and interests in the properties. The properties, per lessors’ claim, were left in a damaged condition with remaining environmental uncertainties. After the parties signed the lease, federal regulations regulating petroleum UST were

• promulgated. The regulations required upgrades or replacement of existing USTs and piping.

Responding to the change, the parties amended their lease agreement responsibilities on USTs removal and related cleanup obligations. Under the amendments, the lessees indemnified the lessors and assumed responsibility for removing the USTs and all related piping from the premises, prior to the expiration of the lease. One of the amendments provided a rent-free occupancy period in the event the lessee chose to discontinue the business operations on the premises on or before the termination date of the lease: [Lessors] shall extend to [lessees] a rent-free Occupancy Period to be calculated as specified in this Paragraph during which Occupancy Period

20 1:04-CV-477-TS, 2011 WL 4601047.

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[lessees] shall retain the right of possession of the Premises. [Lessees] shall be obligated to notify [lessors] in writing of the exact date of discontinuance of the business operation on the Premises, and the commencement of the Occupancy Period shall be the first day of the next calendar month following the closing of the business. [Lessees] shall pay [lessors] the full amount of rent for the month in which the business is discontinued. Another amendment directed the lessee to follow certain clean up and remediation work at the properties prior to vacating: [Lessees] agree that prior to vacating the Premises, [they] shall, at [their]

• wn expense, clean up any petroleum related or petroleum caused

contamination discovered at the Property. . . . All remediation work in this regard, including, but not limited to, that work required by the removal of the underground storage tanks, shall be performed in accordance with all laws, rules and regulations applicable to such remediation, and [lessees] shall return the Premises to [lessors] as nearly as possible in the same condition as it was in prior to such remediation work, subject only to the removal of the contamination and normal wear from reasonable use of the property. Subsequently, the lessees discontinued operating gasoline station businesses in Indiana and Michigan. The lessees removed the USTs and related piping. However, the Indiana Department of Environmental Management and the State of Michigan did not approve regulatory closure of the properties. The lessees continued to pay rent on the properties, but the lessors filed suit alleging breach of the lease agreement and waste. The lessors interpreted the terms of the aforementioned amendments to provide them protection: they claimed that the lessees violated the amendment of the cleanup requirement because the lessees vacated the stations before finishing remediation and removing any petroleum related contamination. The court ruled in favor of the lessees. The court read all the amendments together and held that, even though the lessees were required to perform clean up before vacating the property, they were allowed to discontinue their business first, in advance of the vacating. The court explained that ceasing business operations, emptying the buildings on the properties, or not using them did not necessarily mean “vacating” the premises. Further, the court noted that the remediation was still continuing. Finally, the lessees still performed some activities on the premises. Therefore, the court ruled that the lessees discontinued their business, rather than vacated the property because the cleanup was still

• ngoing.

b. Are Lessee Releases Addressed in Terms of Holding Over?

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Lessee activities will sometimes trigger regulatory requirements such as investigation and remediation of releases that cannot be completed prior to expiration of the lease term. Addressing this scenario in the lease term is important. Will this failure to complete these tasks (if required by the lease) be treated as a holdover? c. Should an Environmental Baseline be set by Lessor Prior to Occupancy By Lessee Who Will Undertake Similar Activities? d. Care should be undertaken to ensure Lease prohibition of “hazardous materials,” etc. are reasonably defined or drawn. 5. Addressing Post Closing Releases/Remediation Transactional sale documents sometimes contain language allocating how pre and post- closing environmental contamination or releases are addressed. This is particularly important when pre-closing soil or subsurface contamination is identified. Often, the Seller agrees to remediate it. However, the contractual language may include an exception to the Seller’s liability if there is “new contamination” discovered after closing attributable to Buyer’s activities. It may be particularly problematic when a particular facility will continue the same type of activities that caused the prior environmental releases. A typical example is the transfer of a retail motor fuel outlet that utilizes petroleum underground storage tanks. A federal district judge in New York recently addressed the interpretation of a contract containing language attempting to set up a process to allocate responsibility for pre and post- closing releases from a retail motor fuel outlet’s UST, in Sunoco, Inc. v. 175-33 Horace Harding Realty Corp.21 The Plaintiff Sunoco, Inc. (“Seller”) commenced an action against Defendant, 175-33 Horace Harding Realty Corp. (“Buyer”). Buyer purchased Seller’s facility in New York. The Seller and Buyer entered into an “Agreement of Sale” (“Agreement”). It was apparently an

• perating retail motor fuel outlet.

Both parties were aware that the facility was contaminated with petroleum. The Seller agreed to be responsible, at its cost and expense, for remediation of the pre-closing release to the satisfaction of the New York State Department of Environmental Conservation. However, the Agreement also provided that if there was a “New Release” of contamination while the Seller was conducting environmental activity after the closing date, Buyer would be responsible for additional costs of remediation attributable to the New Release. Further, if there was a dispute regarding a New Release, the agreement provided in 12 (g) that: BUYER AND SELLER will mutually agree on an environmental consultant to make a determination as to the quantity of contamination resulting from the New Release and (i) whether there is a New Release,

21 E.D.N.Y. (September 4, 2013).

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and if a New Release, (ii) the increase in the cost of remediation due to the New Release…. The method of selection of the environmental consultant will be as follows: Initial consideration will be given to the consultant hired by the SELLER to conduct a remediation [sic] or monitoring. If BUYER and SELLER do not agree to use this consultant, SELLER will submit to BUYER a list of four consultants from which BUYER will select one within ten days after receiving the list. The Buyer took title to the property and operated the facility. A contractor for the Buyer subsequently began investigating a possible leak. At least two leaks were investigated and a spill report was made to the state agency. The Buyer argued that there was no indication that petroleum was released. The Seller notified the Buyer that it believed a New Release had occurred at the site and therefore, invoked the provision in Paragraph 12 (g) of the Agreement. The Buyer disputed the existence of a New Release and did not agree with the environmental consultant hired by the Seller. The remainder of the opinion addresses the parties conflicting interpretations of the language addressing New Releases. The issues include the Buyer’s assertion that the environmental consulting firm was to determine only the quantity of contamination, if a New Release had occurred, and the increased cost of remediation attributable to the New Release. 6. Language Addressing Permits/Licenses/Authorizations in Place? a. Court Addresses Parties Dispute Over the Phrase “Feedlot Permit” in a Real Property Sale Contract A prudent purchaser of a facility will determine whether the facility has obtained and is

• perating in compliance with all local, state and federal permits or other required authorizations.

If the purchaser will operate the facility in a different manner and/or expand it, the permits or authorizations to do so must be determined. Equally important, the governmental agencies that grant such permits almost always have specific procedures for their transfer in the event of the sale (or sometimes leasing/foreclosure)

• f the facility. It is, therefore, necessary to address these issues with some specificity. The

failure to do so can result in litigation. In Stitch Ranch, LLC v. Double B. J. Farms, Inc.22 the Court of Appeals of Nebraska addressed a dispute between parties that entered into a contract for the transfer of real property in Dawson County, Nebraska. Stitch Ranch, LLC (“Stitch”) and Double B.J. Farms, Inc. (“DBJ”) entered into a contract which included a provision requiring Stitch to obtain a “feedlot permit”

• n the property and to assign the permit to DBJ.

22 See No. A-12-547 (October 1, 2013).

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DBJ agreed to pay $1.2 million, including an earnest money deposit of $50,000. DBJ also agreed to deliver the balance of the purchase price at closing, upon delivery of a warranty deed and other documents needed to properly transfer title. The contract provided that closing “shall occur on or about December 15, 2010.” The property included farm ground and land that had previously been operated as a

• feedlot. The real estate sale contract included a provision that:

… Seller agrees to obtain a feedlot permit on Dawson County property and to assign permit to Purchaser by January 1, 2011. A dispute arose between the parties concerning what was required to satisfy the “feedlot” provision and the parties never completed closing. Stitch brought suit, alleging breach of contract and seeking monetary damages, declaratory judgment, and/or rescission or cancellation of the contract. The district court concluded that each party had attached reasonable but materially different meanings to the term “feedlot permit,” characterizing the issue as one of “mistake” and ordered that the contract be cancelled. DBJ argued on appeal that the district court erred in finding that the parties attached different meanings to the term “feedlot permit” and finding that there was a “mistake” and in cancelling the contract. The Court of Appeals of Nebraska found that the evidence adduced by the parties demonstrated that there was never any meeting of the minds about the term “feedlot permit” and affirmed the district court’s cancellation of the contract. 7. Did Three Individuals Have to Indemnify Bank Under a Hazardous Substances Indemnity Agreement (Bank Environmental Indemnity (Individual) Lenders sometimes require borrowers to execute separate indemnity agreements addressing potential environmental issues arising from the mortgaged property. A federal district court recently addressed such an indemnity agreement. In Wells Fargo Bank v. Trolley Industrial, L.L.C., the court had to determine whether Trolley Industrial, L.L.C., Larey and Robert Dresner, and Mark Lewis (the “Defendants”) were liable for costs caused by environmentally hazardous substances because they had previously entered into a Hazardous Substances Indemnity Agreement (“Indemnity Agreement”) with Column Financial, Inc. (“Column”) when obtaining a loan from Column. The Indemnity Agreement required that the Defendants would have certain obligations with respect to hazardous wastes on, in, under, or affecting the property. Wells Fargo Bank (the “Plaintiff”) is the successor in interest to the $5.4 million commercial loan and the Indemnity

• Agreement. The Defendants obtained the loan for certain real property and light industrial

buildings in Taylor, Michigan, which sit on a landfill from the 1950s and 1960s.

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On May 5, 2012, Wells Fargo filed suit against Trolley Industrial, L.L.C. (“Trolley”) in

• rder to recover on the promissory note. Prior to 2012, Enviro Business, Inc. investigated the

property in question and discovered methane gas on the property. In November of 2010, Applied Geotechnical Service, Inc. reported to Defendant Lewis that remedial measures should be taken immediately due to the high levels of methane gas located on the property. During the transition of the property to the Plaintiff’s receiver, they obtained a copy of the reports indicating the existence of high levels of methane gas on the property. Thus, in July

• f 2012, the Plaintiff amended the complaint, alleging that the Defendants should be held liable

for damages resulting from the presence of methane gas on the property because they had signed the Indemnity Agreement. The Defendants argued that unless there is a third party claim their duty to indemnify does not arise. This argument stems from language in the Indemnity Agreement, which states that the Defendants are only liable for costs that are “actually incurred in investigating, defending, settling or prosecuting any claim, litigation, or proceeding.” The court ruled, however, that the Defendants took this language out of context and that the language does not limit liability to third party claims. The Defendants also tried to argue that the Plaintiff was estopped from bringing a claim because the loan documents expressly disclosed to the Plaintiff the environmental conditions of the property. “A party triggers equitable estoppel by conduct inconsistent with a position later adopted that prejudices the rights of the other party who detrimentally relied on the prior conduct.” Horton v. Ford Motor Co.23 The court found that the evidence did not present any representations wrongfully made by the Plaintiff that would cause the Defendants to believe they would be shielded from liability for environmental costs arising from the landfilling. The court ultimately held that, pursuant to the agreement, the Defendants are required to pay for any diminution in value to the property resulting from environmental hazardous wastes. In order to trigger liability, however, the Plaintiff needs to prove an actual diminution in value of the property. Issues of fact still remain as to whether the original value of the property accounted for the presence of methane as a natural byproduct of the landfilling. The value of the property at that point would need to be compared to the conditions of the property at the time of the loan origination. The court ruled that if there was an actual diminution in value, it would be determined once the property is sold. The case was stayed until that time. 8. Environmental Condition Precedent: Closure Letter Potential environmental issues in a property transaction are often addressed using contingency language requiring the Seller to provide some sort of closure or no further action letter authored by a governmental environmental agency.

23 427 F.3d 382, 388 (6th Cir. 2005).

29

3265684.1

The Minnesota Court of Appeals addressed contingency language in the sale of a fuel-oil business in the case of Hager’s of Cohasset, Inc. v. Charles F. Nelson, et al.24 The Seller agreed, in the purchase document, that the sale was contingent on: Hager giving Nelson a letter from the Minnesota Pollution Control Agency (“MPCA”) stating the land is free from any future cleanup. A disagreement arose subsequent as to the adequacy of the document from MPCA relied

• n by the Seller. The Seller argued that the language in the purchase document concerning the

Buyer’s requirements were ambiguous because “neither respondents nor appellants knew what type of letter would satisfy such a condition”. The Court disagreed stating that the only document obtained from MPCAS was issued in conjunction with the previous removal of two underground storage tanks. The Court agreed that the condition precedent language was not ambiguous and the condition had not been fulfilled. III. Risk Management Provisions A. Environmental Insurance 1. Use of Environmental Insurance in the Commercial Loan Context Specialized insurance products are sometimes used to cover exposure to certain environmental liabilities. Such insurance products were developed to cover risks that are not typically addressed by the routine products such as a Comprehensive General Liability policy. The policies usually contain language broadly excluding both governmental and common law related environmental liabilities. The need for environmental insurance continues to evolve as new exposures arise. For example, a key insurance issue for contractors and architects over the past several years has been the need to address the gap in their liability policies excluding mold related risks. Environmental insurance can sometimes play a role in addressing potential environmental exposures associated with commercial transactions. The relevant policies are known by names such as Pollution Legal Liability and Secured Creditor. However, the utility of a policy depends,

• f course, on the policy terms (which are often the subject of negotiation), the cost, and risk

tolerance. In the transactional context, environmental insurance may be of interest to a party such as a borrower or seller that is reluctant to provide (or incapable of doing so) environmental warranties and/or indemnities. This may be particularly important because the costs to quantify

• r eliminate the possibility of an environmental issue may jeopardize a transaction. For example,

can such insurance be utilized to address the perceived exposure potentially associated with an industrial facility. Note that the insurance company underwriting process will often include some type of record review and/or assessment work.

24 2011 Minn. App. Lexis 156 (Feb. 15, 2011).

30

3265684.1

A recent example involved a transaction in which a financial institution was considering a loan for the development of a large multi-family complex on a former industrial site. The financial institution would not provide the loan unless the borrower personally guaranteed the environmental warranties and indemnities. The borrower was not willing to provide such a

• guaranty. The companies involved agreed to the substitution of a Pollution Legal Liability

policy in lieu of providing a personal guaranty. The negotiation of the policy involved the resolution of several provisions. For example, the financial institution questioned whether the proposed policy covered diminution of the property’s (collateral) value. The term “property damage” was defined to include physical injury to tangible property, including all resulting loss of use of that property. A key measure of property damage is a diminution in value. Therefore, it would be logical to assume that a reduction in the value of the property because of a pollution condition, etc. would be covered. Regardless, it was deemed prudent to request that the company include diminution of the value of the real property as included within the phrase “property damage”. Insurers sometimes resist the inclusion of “diminution of value”. Another question was whether coverage included change in law/government re-openers. The term “Environmental Law” in the policy simply incorporated laws, regulations, etc. pursuant to which an insured has or may have an obligation to incur cleanup costs. In other words, assume a cleanup has already been undertaken and the work was blessed or otherwise given a “no further action” letter by an agency. Assume the agency subsequently decides additional work needs to be done. The agency would logically utilize such “environmental laws” to mandate additional work. If so, such work would clearly be covered by this policy. There was not an exclusion for an exemption for previously blessed work at a property that is deemed deficient or in need of additional attention by the government in the future. 2. State Storage Tank Trust Funds a. Eligibility Issues A number of states have petroleum storage tank trust funds(“trust funds”) which provide reimbursement for the remediation and/or third party damage claims related to releases from petroleum underground storage tanks. Arkansas has a trust fund that covers both corrective action and third part claims for certain underground and aboveground tanks. Almost every trust fund preconditions reimbursement on meeting certain eligibility requirements. These state trust funds have often play a role in addressing real or perceived liability tank issues in transactions involving facilities utilizing tanks. However, it is important to note that the federal and state underground storage tank regulations have certain minimum requirements for required response (reporting, investigation, corrective action) in the event of a leak or a spill that

• perate independently of the trust fund reimbursement process.

31

3265684.1

An underground storage tank owner or operator that discovers a release in Arkansas will typically submit a request to the Arkansas Department of Environmental Quality for a determination that the Arkansas Petroleum Storage Tank Fund (“trust fund”) is applicable to this

• release. The ADEQ Regulated Storage Tank division will then make a determination as to

whether or not the trust fund will reimburse investigative and/or corrective action costs incurred to address the release. Regardless of that outcome, the federal and Arkansas underground storage tank regulations will have separate requirements that operate independently to require measures to address the release. A critical issues in commercial transactions in which underground storage tanks are involved may be whether or not the tanks are trust fund eligible. In other words, if a given tank is trust fund eligible, a particular purchaser or lender may discount and/or be more comfortable with the risk posed by the property. However, the situation occasionally arises in which a release from an underground storage tank is discovered during due diligence. The parties to a transaction need to recognize that in the event from an underground storage tank is discovered that the investigative and/or corrective action requirements (and the related timelines) must be met regardless of whether the trust fund eligibility determination has been rendered by ADEQ. Under the current trust fund statute and regulations, there is not a set time period for the agency to issue determination regarding trust fund eligibility.

Environmental Issues in Commercial Transactions: Lessons Learned Walter G. Wright, Jr. Mitchell Williams Law Firm wwright@mwlaw.com

1

• A blog addressing this and other issues

– Arkansas Environmental, Energy, and Water Law Blog – http://www.mitchellwilliamslaw.com/category/enviro nmental-blog – Three posts five days a week

• May cases cited in this presentation can be

downloaded from the blog.

2

Role of Environmental Issues in a Commercial Transaction

• Materiality will obviously vary from deal to

deal.

• Perception of issue as material is as important

as reality. (examples – mold or asbestos)

• Trap to be avoided is reducing efforts to

address environmental issues based on lower value of facility or property.

– Client must make that choice being fully advised

• f risks.

3

Commercial Transactions Historical Perspective

• Twenty five years ago environmental issues often proved to be a

serious impediment to various commercial transactions.

• This was often due to a perception that these issues posed

extraordinary or unquantifiable risks.

• As a result, transactions often failed or the value of the property or

facility was significantly reduced.

• By way of example, the simple presence of a friable asbestos in a

structure was frequently deemed a material issue.

• Similarly, any level of soil or subsurface contamination was

considered a major impediment to a property sale or lease.

• In both instances, the liabilities arising from the issue were

considered difficult to quantify or perceived to be significant.

4

Addressing Environmental Issues Today

• It is arguable that many environmental issues that were formerly deemed potential “deal breakers” or

unquantifiable are now routinely addressed in the same manner as other transactional tasks such as title searches, appraisals, et.

• This is due, in part, to developments such as:

– Familiarity; – Improved ability to quantify environmental issues; – Experience; – Revised or clarified liability principles; – Improved assessment techniques; – Easier access to government records; – Standardized assessment; – Efforts by the federal and state agencies to reduce, to the extent possible, the environmental regulatory/liability impediments to financing and/or acquiring/leasing existing facilities (“brownfields” programs); and – Governmental trust funds

• A number of tools and/or information unavailable 25 years ago have placed transactional players in a

position to better identify, quantify, manage and resolve environmental issues.

• However – Some of these tools or routines can pose risks if there is not consideration of issues that may

not be addressed or identified.

5

Environmental Transactional Objectives

• Depending upon the type of transaction and/or

the issue, early identification and creative work is still sometimes needed to close a transaction.

• The objective is to utilize cost effective tools to

assess and/or quantify potential concerns.

• There is a tendency to deal with some issues in a

“cookie cutter” manner which may overlook subtle problems that pose material risks.

• It is also important to be prepared to anticipate

and address new issues that inevitably arise in the transactional context.

6

Environmental Liability Quantification and/or Clarification

• Amount of corrective action/third party claim
• Potential value of project/property
• Costs associated with permits/authorization
• Costs to determine/quantify/clarify the

previous three items

– Legal, technical, etc.

7

• The measures an attorney advises a client to undertake to address

an environmental issue in a transactional context will obviously depend on:

– Type of transaction (lease, buy/sell/financing, asset v. stock, etc.) – Party represented (buyer, seller, lessor, lessee, secured creditor, investor, etc.) – Type and materiality of the environmental issue in the context of the transaction – Relative leverage of the Client – Tools reasonably (cost-effective?) available to allocate responsibility and/or quantify issue – Client appetite for risk? (does client understand that compliance and/or agency blessing does not necessarily mean that in the appropriate scenario third party lawsuits or impacts on future bank financing might be an issue?)

8

Quantifying Addressing the Unknown

• r Perception
• Properties with current or historical industrial or commercial uses

that are part of a transaction often pose a dilemma.

• Potential purchasers or lessees must assess the possibility that

certain environmental statutes might impose responsibility on them for contamination that is present at the time of the acquisition or lease.

• They will typically consider the probability that contamination is

present and, if so, the cost to definitively delineate and/or remediate it.

• Related issues could include the likelihood of third-party claims

resulting from site conditions, ability to obtain financing and availability of definitive cleanup standards.

• Note – Much more advanced tools/knowledge today to address

issues but cost can be an issue.

9

Typical Example of Material Environmental Issue

• A scenario might involve a potential purchaser that is reluctant to

acquire an inactive industrial facility for commercial redevelopment because of the perceived risks related to the presence of low levels

• f soil contamination.
• Regardless of the purchaser’s fortitude, potential lenders and/or

investors may be hesitant to participate in a transaction unless two issues are addressed.

• They will seek some quantification of the potential regulatory

responsibilities and/or legal liabilities associated with the property.

• They will need some assurance that only the loan/investment

amount will be forfeited in the event of default failure or a claim.

• Note – Lenders/Buyers often consider as an afterthought more

important issues such as permits because of their focus on contamination issues. (recent example)

10

Categorizing Transactional Environmental Issues

Examples

• Are there human health risks and if so, what type?

– By way of example, contaminated soil and groundwater issues differ from vapor intrusion. – Soil and groundwater will typically only impact human health through direct contact. – In contrast, vapor intrusion health potentially arises from inhalation.

• Are there environmental risks and if so, what type?

– Underground Storage Tank underwent closure prior to 1989?

• Are there non-regulatory environmental issues?

– Key – Focus due diligence and targeted contractual language on relevant issues

• Example - Did Bank’s collateral include water rights?

– See First National Bank of Wynne v. Twin Creeks Special Service District.

11

The Need to Address More Subtle Issues

Example

• Are there Potential Third Party/Common

Liabilities Even if the Property or Facility’s Contamination has been Determined as Requiring No Further Action by an Agency?

– A facility may have contamination at levels an agency has determined warrant no further action. – It is important to recognize that the movement of this contamination off-site could still generate common law bodily injury or property damage claims regardless of this agency approval.

• Example – Arkansas Underground Storage Tank Litigation

12

Environmental Assessment Issues

Risks Associated with Assessing Historical Releases

• A facility may have areas that suffered historical releases resulting

in soil and/or groundwater contamination.

• The current owner may not know if such conditions are present.
• The seller must recognize that a buyer may request authority to

sample for such conditions.

• If such contamination is discovered is the risk associated with this

scenario understood and planned for in the agreement?

• For example, is there a confidentiality agreement in place and/or

does the seller want to know the results?

• Note Knowledge Issue

– Seller undertaking an assessment must recognize all compliance issues must be addressed or criminal enforcement is risked. (or don’t look)

13

Scope of Environmental Assessment Work

• Need to Satisfy Superfund? (may not be necessary in

some instances/unnecessary expense)

– All Appropriate Inquiries (“AAI”) for BFP, etc. Defenses

• Need to Expand AAI or ASTM Scope to Address Non-

Scope Issues Relevant to a Transaction

– Example of non-scope issues might include:

i. Bank financing commercial development on property that will require Corps 404 wetland permit to initiate construction. ii. Buyer of office buildings calculation of reconstruction/remodeling costs may vary materially on the amount of friable asbestos present. iii. Buyer/Lessor of multi-family apartment complex is attempting to budget for repairs that may be driven by water intrusion/mold issues.

14

Environmental Assessment Issues (continued)

• Environmental Assessment Work often Driven by Financial Institution

Requirements (whether client likes it or not):

– If client/buyer is required to pay for an assessment is it important to tailor work to relevant issues instead of using bank’s cookie cutter assessment formula?

• Is there a logical system in place that tailors the scope of the assessment to

relevant collateral issues?

a. Should storage tank trust fund eligibility for tanks be an add-on to Phase I for transaction in which convenience store will be collateral? b. Should some type mold/water intrusion survey be included for collateral consisting of nursing homes that have many occupants with respiratory issues?

• ASTM Recognized Environmental Conditions (“REC”)

a. Note variability/discretion

• Example – Underground storage tanks closed a month ago with closure accepted by

agency.

• USTs removed in early 80s with limited documentation
• Example – Does a drain in an office building that formerly housed a chiropractic office

constitute a REC? Film development in area of drain, etc.

15

Environmental Assessment Issues (continued)

• Can you rely (legally) on the environmental

consultant’s work in a particular transaction?

– Sometimes both the buyer and seller will use a consultant’s work. However, can each party rely

• n it if there is a mistake?
• Did a General Release Bar Claims Related to

Alleged Wetland Delineation Errors?

– See Riverbend Community, LLC et al. v. Green Stone Engineering, LLC.

16

Environmental Assessment Issues (continued)

• Delineating the Roles of the Attorney and Technical Professional/Environmental

Consultant

– The responsibility (i.e. among client, attorney, consultant, etc.) for supervising the environmental due diligence and determining the appropriate assessment activities can become a source of contention. – An example is found in Coves of the Highland Community Development District v. McGlinchey Stafford, P.L.L.C. – A law firm was engaged as counsel to a district in connection with organizational, bond issuance, and compliance activities for real estate development. – Plaintiff filed a Complaint alleging the law firm verbally promised “to guide and oversee the entire process: and ensure necessary work was performed for the project.” – The U.S. Corps of Engineers issued public notice after some work was done stating the area had been used as a bombing range. – The agency prohibited issuance of permits until risks of unexploded ordinance and contamination had been addressed. – Note – If your client looks to you for guidance on scope of assessment, are you prepared to tailor it to relevant issues (is an ASTM Phase I relevant for a greenfield property, slated to be developed as a multi-family apartment facility , or should limited funds be used for a wetland delineation?)

17

Assessment of Mold in the Transactional Context Recognizing Need to Tailor The Assessment

• Assessment Issues

– Living Organisms – Absence of regulatory/action standards (numerous and complex issues involved in establishing causal relationship between exposure and health reference) – Establishment of a baseline – Detection difficulties – Interpreting/understanding assessment results – Common-law damage actions – Allocation of responsibility on agreements

• Assessment Tasks

– Visual inspection – Sampling

• Air

– Bulk/Surface

– ASTM Standard

18

Negotiating and Structuring the Agreement

• The use of contractual verbiage to address

environmental liabilities/requirements is governed by some key principles.

• The value of the warranty, indemnity or related

provisions is obviously dependent upon the future financial viability of the party providing it.

• Contractual provisions will not protect a party from an

environmental governmental enforcement action.

• Drafting provisions that clearly allocate responsibility

for various environmental concerns can require some specificity.

19

Language Issues Warranties/Covenants – Key Issues

• The failure to tailor language
• When does a “compliance” warranty fall short

– Ex-residual contamination (N.E. Arkansas) – Ex-asbestos – Ex-off-site waste

• Resolve cost-recovery statutory liability

– Ex-mold

• As Is provision

– Does not affect governmental actions – Need language to address non-contractual claims

• Are they asking the Seller to warrant for prior owner

activities/conditions?

• What is “reasonable” wear and tear in the commercial/industrial

environmental context?

20

Language Issues

• Are All Relevant Risks/Liabilities Encompassed?

– Vapor Intrusion

• Should a warranty include indoor air pollutants or tenant/occupant complaints?
• Disclosure Provisions/Issues

– Sale of a recycling facility

• The Delaware Federal Court in Greenston, LLC, et al v. Todd A. Heller, et al addressed a

contractual dispute related to sale of a recycling facility.

• The agreement included the following language:

Section 3.21 Environmental Matters. K. The Seller has provided the Buyer with copies of all reports, correspondence (internal and external), analytical data, and other documents and records related to the environmental condition of the Seller or the Business facilities, their compliance with Environmental Laws, and/or Environmental Claims.

• A dispute arose over stockpiles of glass at recycling facility.
• Agency correspondence was in the files regarding an investigation of piles.
• Testimony from agency personnel indicated that the facility was not out of compliance.
• The agency apparently assumed the glass would be removed in the applicable time period.
• 3.21(k) was not deemed to be breached because applicable regulation was not within the

scope of 3.21 and stockpiles were not determined to be an environmental issue.

21

Language Issues Advising the Client of Risk

• The clients wanted a commercial property to

manufacture barbecue sauce.

• The clients alleged that the attorneys were aware that

the property was designated a hazardous waste site but neglected to discuss it with the clients and the attorneys encouraged the clients to sign an “as is” lease.

• Court found that the clients needed to prove only that

the defendant-attorney’s negligence was a proximate cause of damages.

• See Ted Barnett, et al, Respondents-Appellants v.

Jeffrey L. Schwartz, et al, Appellants-Respondents.

22

Ensuring Necessary Permits Are in Place for Historical/Current Activities Wood Waste Landfill/Breach of Warranty?

• Example:

– The Louisiana Court of Appeals recently decided a case involving the purchase of property that had been used as a landfill—without a permit—for forty years. – Purchaser Attempts to Rescind Acquisition of Property to be Used for Unpermitted Wood Waste Landfill – In Smith v. Sonnier, the court held that in order to rescind the contract for sale, the purchasing party must show that the property was not fit for the intended use at the time the property was purchased. – In August of 2009, David Smith purchased two acres of property in Jennings, Louisiana from Joseph Sonnier for $12,000 to use as a disposal site for wood waste from his tree cutting business.

23

• Sonnier had been using the property for a similar purpose for forty

years prior to the sale.

• He disposed of his own wood waste on the property and also

charged others, including the City of Jennings, to dispose of waste

• n the property.
• Sonnier never sought a permit for the property and explained that

he was unaware that it was necessary to do so.

• Other than one visit from the Department of Environmental Quality

about hydraulic fluid leaking from a bulldozer, Sonnier had never received any other visits from the DEQ about the landfill.

• He also claimed that the DEQ had never informed him that his use
• f the property was improper.
• In January 2010, five months after Sonnier sold the property, Smith

received a visit from the DEQ and was informed that he must cease using the property as a landfill.

24

Permits (continued)

Court Addresses Parties Dispute Over the Phrase “Feedlot Permit” in a Real Property Sale Contract

A prudent purchaser of a facility will determine whether the facility has obtained and is operating in compliance with all local, state and federal permits or other required authorizations.

• If the purchaser will operate the facility in a different manner and/or expand it, the permits or

authorizations to do so must be determined.

• Equally important, the governmental agencies that grant such permits almost always have specific

procedures for their transfer in the event of the sale (or sometimes leasing/foreclosure) of the facility.

• It is, therefore, necessary to address these issues with some specificity.
• In Stitch Ranch, LLC v. Double B. J. Farms, Inc. the Court of Appeals of Nebraska addressed a dispute

between parties that entered into a contract for the transfer of real property in Dawson County,

• Nebraska. Stitch Ranch, LLC and Double B.J. Farms, Inc. entered into a contract which included a

provision requiring Stitch to obtain a “feedlot permit” on the property and to assign the permit to DBJ.

• The property included farm ground and land that had previously been operated as a feedlot. The

real estate sale contract included a provision that:

…Seller agrees to obtain a feedlot permit on Dawson County property and to assign permit to Purchaser by January 1, 2011.

• A dispute arose between the parties concerning what was required to satisfy the “feedlot”

provision and the parties never completed closing.

• The district court concluded that each party had attached reasonable but materially different

meanings to the term “feedlot permit,” characterizing the issue as one of “mistake” and ordered that the contract be cancelled.

25

Another Permit/Authorization Example

Was a Developed Wind Project Purchase and Sale Agreement Breached if the Whooping Cranes and Piping Plovers Potential Take Issues Were Not Resolved by the Closing Date?

• enXco developed certain property located in North Dakota for the

purpose of constructing a wind energy generation project that would be capable of supporting the installation and operation of 100 1.5 megawatt wind turbine generators.

• enXco and Xcel entered into a Developed Wind Project Purchase

and Sale Agreement for the project wherein enXco agreed to sell its wind energy development assets to NPS (i.e. Xcel). See enXco Development Corporation vs. Northern States Power Company.

• The USFWS had stated in a February 2010 letter that the risk of

lethal take to whooping cranes as a result of the Merricourt Project was unknown.

• However, the USFWS asserted that it believed an adverse effect to

whopping cranes was likely.

26

• The USFWS then recommended that the Project not

commence until enXco has applied for and received an Incidental Take Permit.

• enXco alleges that although the potential for adverse

impacts from development projects is not unique, NSP used the USFWS’s February 2010 letter concerning the whooping cranes to be a breach of representations and warranties contained in the agreement.

• At that time, NSP also provided notice of a “Material

Adverse Effect” under the agreement.

• enXco argued that the Incidental Take Permit was not a

seller permit and that NSP’s contentions of alleged breaches of the agreement were premature.

27

Language Issues (continued)

Dispute Regarding Post-Closure Cleanup Obligations of Seller of Convenience Store

• The purchase or sale of a commercial or industrial property sometimes

involves the discovery or disclosure of a preexisting environmental condition.

• A common example is the presence of soil or groundwater contamination

that may require delineation and/or remediation.

• Even if such issues are significant or material, the parties may choose to

address them through purchase price adjustments, post-closing cleanup

• bligations, etc.
• One scenario may involve the seller agreeing to investigate and/or

remediate contamination subsequent to closing.

• Documenting this post-closing obligation will require the parties to

address such issues as:

– At what point is the seller’s obligation to remediate completed? – Is there a timing requirement as to how quickly the seller must accomplish investigation and/or remediation? – May the seller at its own discretion choose the investigative and/or remediation methods?

28

Language Issues (continued) Lease

• Building materials and designs that limit

energy use and use materials with lesser environmental impact.

– Should Lease be written to allocate savings to entity that bears the cost.

29

Language Issues (continued) Lease

• Should an Environmental Baseline be set by

Lessor Prior to Occupancy By Lessee Who Will Undertake Similar Activities?

• Care should be undertaken to ensure Lease

prohibition of “hazardous materials,” etc. are reasonably defined or drawn.

• Should Lessees be provided incentives for

notification/compliance? (tank/trust fund example)

30

Language Issues (continued)

Did Failure to Remove Tanks/Soil Contamination Result in a Lease Holdover?

• Carroll Independent Fuel Company v. Washington Real Estate Investment

Trust addresses lease agreements between Washington Real Estate Investment Trust and Carroll Independent Fuel Company.

– WRIT leased two service stations located in Maryland from CIF. – After the leases ended, a dispute arose between the two parties regarding: 1) the responsibility for cleaning up contamination found in the soil and groundwater surrounding the service station buildings; and 2) whether CIF failed to surrender possession of the premises, requiring it to pay a holdover fee that was three times the annual rent. – The trial court found that CIF was not liable for the environmental contamination, but CIF was a holdover tenant and required to pay $624,621.09, plus attorney’s fees for $25,000.

• The questions presented to the appellate court included:

– Did the trial court err in finding that CIF was a holdover tenant because it failed to (a) remove gas tanks, (b) deliver an environmental inspection certificate, and (c) remove a third party from its property? – Was the imposition of holdover fees an unenforceable penalty?

31

Language Issues (continued)

• CIF contended that the circuit court erred in its finding that it was a “holdover tenant” by

arguing that a tenant must be physically present on the premises to be a holdover tenant.

• The question was whether tenant’s physical presence includes the company’s failure to

remove gas tanks, deliver an environmental inspection certificate, or remove a third-party form its property.

• The trial court asserted CIF was in physical possession of the property through conduct other

than continued physical presence.

• The appellate court reasoned that the typical way that a tenant retains possession of leased

premises is to physically remain on the premises at the expiration of the lease term.

• CIF vacated the premises when the lease ended.
• CIF actions were held not to constitute a holdover.
• Lessee activities will sometimes trigger regulatory requirements such as investigation and

remediation of releases that cannot be completed prior to expiration of the lease term.

• Addressing this scenario in the lease term is important.
• Will this failure to complete these tasks (if required by the lease) be treated as a holdover?

32

Language (continued) Closure/NFA Issues

• Potential environmental issues in a property transaction are often

addressed using contingency language requiring the Seller to provide some sort of closure or no further action letter authored by a governmental environmental agency.

• The Minnesota Court of Appeals addressed contingency language in the

sale of a fuel-oil business in the case of Hager’s of Cohasset, Inc. v. Charles

• F. Nelson, et al.
• The Seller agreed, in the purchase document, that the sale was contingent
• n:

Hager giving Nelson a letter from the Minnesota Pollution Control Agency (“MPCA”) stating the land is free from any future cleanup.

• A disagreement arose subsequent as to the adequacy of the document

from MPCA relied on by the Seller.

• The Seller argued that the language in the purchase document concerning

the Buyer’s requirements were ambiguous because “neither respondents nor appellants knew what type of letter would satisfy such a condition”.

33

Addressing Post Closing Releases/Remediation

• Transactional sale documents sometimes contain language allocating how pre and post-closing

environmental contamination or releases are addressed.

• This is particularly important when pre-closing soil or subsurface contamination is identified.
• Often, the Seller agrees to remediate it.
• However, the contractual language may include an exception to the Seller’s liability if there is “new

contamination” discovered after closing attributable to Buyer’s activities.

• It may be particularly problematic when a particular facility will continue the same type of activities

that caused the prior environmental releases.

• A typical example is the transfer of a retail motor fuel outlet that utilizes petroleum underground

storage tanks.

• A federal district judge in New York recently addressed the interpretation of a contract containing

language attempting to set up a process to allocate responsibility for pre and post-closing releases from a retail motor fuel outlet’s UST, in Sunoco, Inc. v. 175-33 Horace Harding Realty Corp.

• The Plaintiff Sunoco, Inc. (“Seller”) commenced an action against Defendant, 175-33 Horace

Harding Realty Corp. (“Buyer”).

• Buyer purchased Seller’s facility in New York. The Seller and Buyer entered into an “Agreement of

Sale” (“Agreement”). It was apparently an operating retail motor fuel outlet.

34

• Both parties were aware that the facility was contaminated with petroleum.
• The Seller agreed to be responsible, at its cost and expense, for remediation of the

pre-closing release to the satisfaction of the New York State Department of Environmental Conservation.

• However, the Agreement also provided that if there was a “New Release” of

contamination while the Seller was conducting environmental activity after the closing date, Buyer would be responsible for additional costs of remediation attributable to the New Release.

• Further, if there was a dispute regarding a New Release, the agreement provided

in 12 (g) that:

BUYER AND SELLER will mutually agree on an environmental consultant to make a determination as to the quantity of contamination resulting from the New Release and (i) whether there is a New Release, and if a New Release, (ii) the increase in the cost of remediation due to the New Release…. The method of selection of the environmental consultant will be as follows: Initial consideration will be given to the consultant hired by the SELLER to conduct a remediation [sic] or monitoring. If BUYER and SELLER do not agree to use this consultant, SELLER will submit to BUYER a list of four consultants from which BUYER will select one within ten days after receiving the list.

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Foreclosure/Post Foreclosure Issues

• EPA/Arkansas Secured Creditor Exemptions

Apply (Remember Federal Requirements)

• Practical Issues

– Statutory Secured Creditor Exemption (ASWMA Debris Example) – Other Statutes (applicable to RCRA tank provisions)/Third Party – Tank Trust Funds/Assume Liability?

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Risk Management Provisions Environmental Insurance

• Environmental Insurance

– Use of Environmental Insurance in the Commercial Loan Context

• Specialized insurance products are sometimes used to cover exposure to certain environmental liabilities.
• Such insurance products were developed to cover risks that are not typically addressed by the routine products

such as a Comprehensive General Liability policy.

• The policies usually contain language broadly excluding both governmental and common law related

environmental liabilities.

• The need for environmental insurance continues to evolve as new exposures arise.
• For example, a key insurance issue for contractors and architects over the past several years has been the need to

address the gap in their liability policies excluding mold related risks.

• Environmental insurance can sometimes play a role in addressing potential environmental exposures associated

with commercial transactions.

• The relevant policies are known by names such as Pollution Legal Liability and Secured Creditor.
• The utility of a policy depends, of course, on the policy terms (which are often the subject of negotiation), the

cost, and risk tolerance.

• In the transactional context, environmental insurance may be of interest to a party such as a borrower or seller

that is reluctant to provide (or incapable of doing so) environmental warranties and/or indemnities.

• This may be particularly important because the costs to quantify or eliminate the possibility of an environmental

issue may jeopardize a transaction.

• Such insurance be utilized to address the perceived exposure potentially associated with an industrial facility.
• Note that the insurance company underwriting process will often include some type of record review and/or

assessment work.

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Environmental Insurance Example

• A recent example involved a transaction in which a financial institution was considering a loan for

the development of a large multi-family complex on a former industrial site.

• The financial institution would not provide the loan unless the borrower personally guaranteed the

environmental warranties and indemnities.

• The borrower was not willing to provide such a guaranty.
• The companies involved agreed to the substitution of a Pollution Legal Liability policy in lieu of

providing a personal guaranty.

• The negotiation of the policy involved the resolution of several provisions.
• The financial institution questioned whether the proposed policy covered diminution of the

property’s (collateral) value.

• One question was whether coverage included change in law/government re-openers.
• The term “Environmental Law” in the policy simply incorporated laws, regulations, etc. pursuant to

which an insured has or may have an obligation to incur cleanup costs.

• In other words, assume a cleanup has already been undertaken and the work was blessed or
• therwise given a “no further action” letter by an agency.
• Assume the agency subsequently decides additional work needs to be done.
• The agency would logically utilize such “environmental laws” to mandate additional work.
• If so, such work would clearly be covered by this policy.
• There was not an exclusion for an exemption for previously blessed work at a property that is

deemed deficient or in need of additional attention by the government in the future.

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Risk Management State Storage Tank Trust Funds

• Eligibility Issues
• A number of states have petroleum storage tank trust funds which provide reimbursement for the remediation

and/or third party damage claims related to releases from petroleum underground storage tanks.

• Arkansas has a trust fund that covers both corrective action and third part claims for certain underground and

aboveground tanks.

• Almost every trust fund preconditions reimbursement on meeting certain eligibility requirements.
• These state trust funds have often play a role in addressing real or perceived liability tank issues in transactions

involving facilities utilizing tanks.

• It is important to note that the federal and state underground storage tank regulations have certain minimum

requirements for required response (reporting, investigation, corrective action) in the event of a leak or a spill that

• perate independently of the trust fund reimbursement process.
• A critical issues in commercial transactions in which underground storage tanks are involved may be whether or

not the tanks are trust fund eligible.

• If a given tank is trust fund eligible, a particular purchaser or lender may discount and/or be more comfortable

with the risk posed by the property.

• The situation occasionally arises in which a release from an underground storage tank is discovered during due

diligence.

• The parties to a transaction need to recognize that in the event from an underground storage tank is discovered

that the investigative and/or corrective action requirements (and the related timelines) must be met regardless of whether the trust fund eligibility determination has been rendered by ADEQ.

• Under the current trust fund statute and regulations, there is not a set time period for the agency to issue

determination regarding trust fund eligibility.

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