Anticipating Post-Closing Environmental Issues in Real...

Presenting a live 90-minute webinar with interactive Q&A

Anticipating Post-Closing EnvironmentalIssues in Real Estate DealsManaging and Avoiding Post-Closing Consequences; Setting the Rules of Play

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, FEBRUARY 28, 2017

The audio portion of the conference may be accessed via the telephone or by using your computer'sspeakers. Please refer to the instructions emailed to registrants for additional information. If youhave any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Daniel A. Cantor, Partner, Arnold & Porter Kaye Scholer, Washington, D.C.

Cindy J. Karlson, Founder, Law Offices of Cindy J. Karlson, Groton, Conn.

Daniella D. Landers, Partner, Reed Smith, Houston

Tips for Optimal Quality

Sound QualityIf you are listening via your computer speakers, please note that the qualityof your sound will vary depending on the speed and quality of your internetconnection.

If the sound quality is not satisfactory, you may listen via the phone: dial1-866-755-4350 and enter your PIN when prompted. Otherwise, pleasesend us a chat or e-mail [email protected] immediately so we canaddress the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen,press the F11 key again.

FOR LIVE EVENT ONLY

Sound QualityIf you are listening via your computer speakers, please note that the qualityof your sound will vary depending on the speed and quality of your internetconnection.

If the sound quality is not satisfactory, you may listen via the phone: dial1-866-755-4350 and enter your PIN when prompted. Otherwise, pleasesend us a chat or e-mail [email protected] immediately so we canaddress the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen,press the F11 key again.

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm yourparticipation in this webinar by completing and submitting the AttendanceAffirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you emailthat you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926ext. 35.

FOR LIVE EVENT ONLY

In order for us to process your continuing education credit, you must confirm yourparticipation in this webinar by completing and submitting the AttendanceAffirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you emailthat you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926ext. 35.

Program Materials

If you have not printed the conference materials for this program, pleasecomplete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see aPDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

If you have not printed the conference materials for this program, pleasecomplete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see aPDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

Cindy J. KarlsonLaw Offices of Cindy J. Karlson

Direct Office: 860.245.4922Cell: 860.614.0184

[email protected]

PROGRAM AGENDAI. Anticipating and identifying potential

environmental issues which may occur post-closing

II. Negotiation strategy and contractual tools toaddress post-closing issues

III. Implications of court decisions and otherconsiderations

I. Anticipating and identifying potentialenvironmental issues which may occur post-closing

II. Negotiation strategy and contractual tools toaddress post-closing issues

III. Implications of court decisions and otherconsiderations

6

Rules of the Game1. Joint and several liability.

2. You cannot contract liability vis-à-vis the government

3. Environmental conditions are frequently latent andunknown at the time of closing

4. Most environmental issues run with the land

1. Joint and several liability.

2. You cannot contract liability vis-à-vis the government

3. Environmental conditions are frequently latent andunknown at the time of closing

4. Most environmental issues run with the land

7

Rules of the Game Real estate contracts often do not bind third parties

Some environmental agreements are not recorded onthe land records(access agreement, technical risk management plans)

Real estate contracts often do not bind third parties

Some environmental agreements are not recorded onthe land records(access agreement, technical risk management plans)

8

The Art of the Commercial Real Estate Deal- There is no boilerplate or default deal format

- Need to identify the environmental risks

- Allocate the risks- Pre-closing- Post-closing

- There is no boilerplate or default deal format

- Need to identify the environmental risks

- Allocate the risks- Pre-closing- Post-closing

9

The Spectrum of Liability

10

Types of Post-Closing Liabilities

Cleanup Liabilities Monetary Claims

11

Government1st

Party

Voluntary ContractConditions

3rd

PartyGovernment

Potential Cleanup Obligations

InvestigationRemediation

Post-remediation monitoringLand use restrictions

Ongoing operation & maintenanceFinancial assurance

InvestigationRemediation

Post-remediation monitoringLand use restrictions

Ongoing operation & maintenanceFinancial assurance

12

Investigation Considerations

Soil sampling Location Timing

Groundwater sampling Location of wells Repair and replacement of wells Removing or abandoning wells

Indoor air sampling Where and when

Soil sampling Location Timing

Groundwater sampling Location of wells Repair and replacement of wells Removing or abandoning wells

Indoor air sampling Where and when

13

Remediation Considerations- Specific level of cleanup- Who is responsible for government submittals- Who choices remediation option- Who pays for what costs and unknowns- Will land use restrictions be allowed as remediation- How will remediation impact post-closing existing or

future use of the property- Are financial assurances required?

- Specific level of cleanup- Who is responsible for government submittals- Who choices remediation option- Who pays for what costs and unknowns- Will land use restrictions be allowed as remediation- How will remediation impact post-closing existing or

future use of the property- Are financial assurances required?

14

Post-Remediation Monitoring Define length of monitoring program

Site access issues

Sharing data and information

Cooperation

Post-closing use of property potential impacts onremediation outcomes

Communications with government

Impacts on financial agreements

Define length of monitoring program

Site access issues

Sharing data and information

Cooperation

Post-closing use of property potential impacts onremediation outcomes

Communications with government

Impacts on financial agreements

15

Land Use Restrictions Agree on which restrictions may

be allowed by the parties

Who will pay for costs?

A2 surveys

Legal title work

Subordination agreements

What if remediation or land userestrictions not completed andproperty is sold again?

Agree on which restrictions maybe allowed by the parties

Who will pay for costs?

A2 surveys

Legal title work

Subordination agreements

What if remediation or land userestrictions not completed andproperty is sold again?

16

Odds and Ends

Operation and Maintenance Remediation systems Who pays for electric Equipment and structures

Engineering controls Cap repair and maintenance Trees and green cover

Operation and Maintenance Remediation systems Who pays for electric Equipment and structures

Engineering controls Cap repair and maintenance Trees and green cover

17

Complicating Factors

Tenants/Leases Lender conditions Third party claims Government

Tenants/Leases Lender conditions Third party claims Government

18

Issues to Parse Out Site access Obligation triggers Cleanup end points Notice requirements Information dissemination Agency communication parameters Cooperation requirements

Site access Obligation triggers Cleanup end points Notice requirements Information dissemination Agency communication parameters Cooperation requirements

19

Anticipating PostAnticipating Post--Closing Environmental Issues inClosing Environmental Issues inReal Estate Deals:Real Estate Deals:

Negotiation Strategies andNegotiation Strategies andContractual ToolsContractual Tools

February 28, 2017February 28, 2017

Anticipating PostAnticipating Post--Closing Environmental Issues inClosing Environmental Issues inReal Estate Deals:Real Estate Deals:

Negotiation Strategies andNegotiation Strategies andContractual ToolsContractual Tools

February 28, 2017February 28, 2017

Daniella D. LandersREED SMITH LLPPhone: 713.469.3654

[email protected]

Agenda Allocation and Management of Risks

Contractual Considerations And Tools

Techniques to Address Post-Closing EnvironmentalRisks

Allocation and Management of Risks

Contractual Considerations And Tools

Techniques to Address Post-Closing EnvironmentalRisks

21

Preliminary Considerations for Negotiation Do necessary due diligence

Identify as many issues as youcan to avoid surprises

Understand the keyplayers and theirobjectives Allocate risks

appropriately Allocate based on knowledge of

existing conditions at closing

Outline Key Concerns Carve out specific environmental

conditions

Do necessary due diligence Identify as many issues as you

can to avoid surprises

Understand the keyplayers and theirobjectives Allocate risks

appropriately Allocate based on knowledge of

existing conditions at closing

Outline Key Concerns Carve out specific environmental

conditions22

Preliminary Considerations for Negotiation What are the parties

relative rights pre- andpost- closing? Who can recover monies

(successors and assigns)? Define any terms? Length of indemnity

period? Which costs covered? Which costs are NOT

covered?

What are the partiesrelative rights pre- andpost- closing? Who can recover monies

(successors and assigns)? Define any terms? Length of indemnity

period? Which costs covered? Which costs are NOT

covered?

23

Preliminary Considerations for Negotiation Understanding the terms Term sheets Definitions – Avoid ambiguous terms

Representations and Warranties Limiting the scope of coverage Indemnities Conditions to closing/ conditions precedent Other unique considerations

Understanding the terms Term sheets Definitions – Avoid ambiguous terms

Representations and Warranties Limiting the scope of coverage Indemnities Conditions to closing/ conditions precedent Other unique considerations

24

Preliminary Considerations for NegotiationOn Site or Off-site Contamination Concerns Who is responsible – Buyer or Seller?

For what?

Pre-closing legacy contamination only?

Presumptions and baselines

Only government ordered cleanup?

Or anything required by laws?

Voluntary cleanup?

Cleanup of soil and groundwater only? Asbestos, lead paint, mold, drum removal, demolition

On Site or Off-site Contamination Concerns Who is responsible – Buyer or Seller?

For what?

Pre-closing legacy contamination only?

Presumptions and baselines

Only government ordered cleanup?

Or anything required by laws?

Voluntary cleanup?

Cleanup of soil and groundwater only? Asbestos, lead paint, mold, drum removal, demolition

25

Preliminary Considerations for NegotiationDrafting: Use general or specific language to addresspost-closing concerns?

Pros Avoid potential costly litigation Manage parties’ expectations

Cons Could incur additional transactional costs in negotiation Could unknowingly exclude costs if provisions too specific

Drafting: Use general or specific language to addresspost-closing concerns?

Pros Avoid potential costly litigation Manage parties’ expectations

Cons Could incur additional transactional costs in negotiation Could unknowingly exclude costs if provisions too specific

26

Contractual Considerations

Definitions are critical!!!

“Environmental Laws”- Understand what is and is not included (agency guidance,directives, orders?)

“Hazardous Substances”- Be careful if you only limit it to substances under CERCLA- Petroleum and its by-products, PCBs, asbestos, lead paint,urea formaldehyde (building materials), mold, microbialmatter- Also consider including solid waste, explosives, radioactivematerials

Definitions are critical!!!

“Environmental Laws”- Understand what is and is not included (agency guidance,directives, orders?)

“Hazardous Substances”- Be careful if you only limit it to substances under CERCLA- Petroleum and its by-products, PCBs, asbestos, lead paint,urea formaldehyde (building materials), mold, microbialmatter- Also consider including solid waste, explosives, radioactivematerials

27

Contractual ConsiderationsKey Terms

What is included in “material adverse condition” ?

What is “known environmental liability” ?

What is included as an “Environmental Matter” ? Definition could include – generation, storage, handling, treatment and disposal of hazardous

materials/substances (not just release of same) Compliance with permits Financial assurance requirements Deed restrictions Covenants Site access costs

Key Terms

What is included in “material adverse condition” ?

What is “known environmental liability” ?

What is included as an “Environmental Matter” ? Definition could include – generation, storage, handling, treatment and disposal of hazardous

materials/substances (not just release of same) Compliance with permits Financial assurance requirements Deed restrictions Covenants Site access costs

28

Contractual Considerations “Environmental Claims” –third party demand or can

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

“Release” – how broad you define a “release” willimpact the scope of the indemnity “spilling, leaking, pumping, pouring, emitting,

injecting, escaping or dumping” (what about “migration”? Potential or threatened

releases included?)

“Environmental Claims” –third party demand or canbuyer or seller make direct claims to reimburse coststhey incurred not at the request of thirdparty/government requirement? (what about a bank?)

“Release” – how broad you define a “release” willimpact the scope of the indemnity “spilling, leaking, pumping, pouring, emitting,

injecting, escaping or dumping” (what about “migration”? Potential or threatened

releases included?)

29

Seller’s General Position Wants specific and narrow definitions Will attempt to limit any representation and warranty by

adding certain qualifier language Add “to the best of [seller’s or borrower’s] knowledge” Want to require any adverse or issues of concern be

referred to in a “material adverse effect/condition”provision Attempt to add a disclaimer of warranty that the property

is being sold “AS IS” Will want specific limitations on the scope and locations

outlined in the agreement Limitation on survivability

Wants specific and narrow definitions Will attempt to limit any representation and warranty by

adding certain qualifier language Add “to the best of [seller’s or borrower’s] knowledge” Want to require any adverse or issues of concern be

referred to in a “material adverse effect/condition”provision Attempt to add a disclaimer of warranty that the property

is being sold “AS IS” Will want specific limitations on the scope and locations

outlined in the agreement Limitation on survivability

30

Buyer’s General Position Typically wants broad definitions and reps/warranties No limitations or qualifiers is preferred Want more general catchall environmental language in a

“material adverse effect/condition” provision Will want any representation or warranty to be supported

by an indemnity for the Seller No specific limitations on the scope and locations outlined

in the agreement Longer terms on survivability

Typically wants broad definitions and reps/warranties No limitations or qualifiers is preferred Want more general catchall environmental language in a

“material adverse effect/condition” provision Will want any representation or warranty to be supported

by an indemnity for the Seller No specific limitations on the scope and locations outlined

in the agreement Longer terms on survivability

31

Techniques to Limit Liability Disclosure Schedule Knowledge Qualifier Materiality Qualifier Specific Time

Limitations Limitations on scope

and locations Limitation on

survivability

Disclosure Schedule Knowledge Qualifier Materiality Qualifier Specific Time

Limitations Limitations on scope

and locations Limitation on

survivability

32

Addressing Post-Closing EnvironmentalRisks

Disclosure Schedules Detailed or broad language?

Knowledge Qualifier Whose knowledge? What is “knowledge” – actual or imputed? Specify a particular individual or impute knowledge to the company as

a whole?

Specific time, scope or location Is the scope limited by time period (i.e., “my watch, your watch”) Do you carve out certain types of liability or contamination? Do you carve out certain locations? Limitation on Survivability (e.g., 2 or 3 years after closing)

Disclosure Schedules Detailed or broad language?

Knowledge Qualifier Whose knowledge? What is “knowledge” – actual or imputed? Specify a particular individual or impute knowledge to the company as

a whole?

Specific time, scope or location Is the scope limited by time period (i.e., “my watch, your watch”) Do you carve out certain types of liability or contamination? Do you carve out certain locations? Limitation on Survivability (e.g., 2 or 3 years after closing)

33


Materiality Triggers Single event or in the aggregate

What costs will be considered as part of materiality total

What if the parties do not agree on what conditions arematerial for purposes of triggering indemnity claims

Materiality Triggers Single event or in the aggregate

What costs will be considered as part of materiality total

What if the parties do not agree on what conditions arematerial for purposes of triggering indemnity claims

34


Environmental Remediation Obligations• Who controls communications with government for past

contamination?

• What kind of cleanup?• Industrial/commercial versus residential?• Risked-based cleanup?

Use of institutional controls permitted? (e.g. site management plan)? How implemented and complied with? Deed restrictions? (e.g. for sensitive uses/site redevelopment)

Environmental Remediation Obligations• Who controls communications with government for past

contamination?

• What kind of cleanup?• Industrial/commercial versus residential?• Risked-based cleanup?

Use of institutional controls permitted? (e.g. site management plan)? How implemented and complied with? Deed restrictions? (e.g. for sensitive uses/site redevelopment)

35


On-Site or Offsite Disposal of EnvironmentalContaminants

Both parties are liable under CERCLA. Parties can contractually allocate responsibility, but joint and several

liability remains as to the government.

Buyer generally prefers broad representations that there has been noon-site disposal of hazardous materials or other pollutants

Seller typically prefers narrow representations that extend only tothose substances or materials which pose a threat to human health ofthe environment in order to exclude de minimis deposits ofenvironmental contaminants

On-Site or Offsite Disposal of EnvironmentalContaminants

Both parties are liable under CERCLA. Parties can contractually allocate responsibility, but joint and several

liability remains as to the government.

Buyer generally prefers broad representations that there has been noon-site disposal of hazardous materials or other pollutants

Seller typically prefers narrow representations that extend only tothose substances or materials which pose a threat to human health ofthe environment in order to exclude de minimis deposits ofenvironmental contaminants

36


“As Is” Clauses Purpose: Used as a tool for Seller/Owner to shift liability to

Buyer/Tenant Must be conspicuous in the agreements Limitations Does not preclude Buyer’s statutory contribution claims under

CERCLA Some courts may apportion CERCLA liability or allow claims of

breach of implied representations/warranties

“As Is” Clauses Purpose: Used as a tool for Seller/Owner to shift liability to

Buyer/Tenant Must be conspicuous in the agreements Limitations Does not preclude Buyer’s statutory contribution claims under

CERCLA Some courts may apportion CERCLA liability or allow claims of

breach of implied representations/warranties

37


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

“as is” deals. Also, serves as a waiver and potentially preventscomeback claims

Must be conspicuous in the agreements Limitations Cannot alter or change underlying CERCLA or cost recovery

liability to the government (e.g., EPA or state) Can only be used to change who ultimately pays the response costs Mardan v. C.G.C Music, 804 F.2nd 1454 (9th Cir. 1986)

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

“as is” deals. Also, serves as a waiver and potentially preventscomeback claims

Must be conspicuous in the agreements Limitations Cannot alter or change underlying CERCLA or cost recovery

liability to the government (e.g., EPA or state) Can only be used to change who ultimately pays the response costs Mardan v. C.G.C Music, 804 F.2nd 1454 (9th Cir. 1986)

38


Cost Allocation andLimitations

Basket Buyer maintains a running total of

the post-closing environmentalliabilities it has incurred; when thetotal exceeds the agreed thresholddollar amount, buyer may make anindemnity claim against seller

Cap Dollar amount limit on a party’s

liability (or can act as trigger forshared liability after the capamount is reached)

Cost Allocation andLimitations

Basket Buyer maintains a running total of

the post-closing environmentalliabilities it has incurred; when thetotal exceeds the agreed thresholddollar amount, buyer may make anindemnity claim against seller

Cap Dollar amount limit on a party’s

liability (or can act as trigger forshared liability after the capamount is reached)

39


Indemnities Purpose: Serves as a promise to safeguard against existing or future

liabilities It is only as good as the party providing the indemnity (indemnitor) Has no effect on an environmental agency’s rights to sue or seek ting

recovery Express Negligence Rule:

Indemnity for a party’s own negligence must be expressly spelled out inthe agreement. See e.g., Fina v. Arco, 200 F.3d 266 (5th Cir. 2000)

Drafting Considerations: One size does not fit all – Tailor specifically for the deal Indicate the effective period and the trigger for the applicability Use conspicuous language (bold, all caps)

Indemnities Purpose: Serves as a promise to safeguard against existing or future

liabilities It is only as good as the party providing the indemnity (indemnitor) Has no effect on an environmental agency’s rights to sue or seek ting

recovery Express Negligence Rule:

Indemnity for a party’s own negligence must be expressly spelled out inthe agreement. See e.g., Fina v. Arco, 200 F.3d 266 (5th Cir. 2000)

Drafting Considerations: One size does not fit all – Tailor specifically for the deal Indicate the effective period and the trigger for the applicability Use conspicuous language (bold, all caps)

40


Indemnities Default arrangement: Seller indemnifies buyer for all pre-closing liabilities Buyer indemnifies seller for all post-closing liabilities

Because buyers become liable for environmental costs upon purchase,the seller is usually asked to indemnify the buyer for liabilities thatarise post-closing but are related to pre-closing events

Buyers may be willing in some cases to assume environmentalliabilities in return for a reduced purchase price or othercompensation

Indemnities Default arrangement: Seller indemnifies buyer for all pre-closing liabilities Buyer indemnifies seller for all post-closing liabilities

Because buyers become liable for environmental costs upon purchase,the seller is usually asked to indemnify the buyer for liabilities thatarise post-closing but are related to pre-closing events

Buyers may be willing in some cases to assume environmentalliabilities in return for a reduced purchase price or othercompensation

41


Environmental Insurance There are a variety of products available to protect against certain

environmental liabilities. Should be scrutinized before the deal closes

Pollution Legal Liability Policy Covers liabilities that are unknown and unexpected Not always available, depending on market conditions,

size of potential claims Costly & Time consuming

Cleanup Cost Cap policy Covers specific plan to clean up

known contamination Not available when site poorly

characterized Expensive, risky

Environmental Insurance There are a variety of products available to protect against certain

environmental liabilities. Should be scrutinized before the deal closes

Pollution Legal Liability Policy Covers liabilities that are unknown and unexpected Not always available, depending on market conditions,

size of potential claims Costly & Time consuming

Cleanup Cost Cap policy Covers specific plan to clean up

known contamination Not available when site poorly

characterized Expensive, risky

42


Escrow These provisions are useful when there are ongoing remediation expenses that

are expected post-closing. Purchasers of property that is contaminated, suspected to be contaminated, or

have regulatory compliance issues may require sellers to establish escrowaccounts that could pay the cost of cleanup, address third party claims, and/oraddress regulatory compliance deficiencies.

These accounts are often limited to specified dollar amounts and a limitedperiod of time following the completion of the transaction.

Escrow These provisions are useful when there are ongoing remediation expenses that

are expected post-closing. Purchasers of property that is contaminated, suspected to be contaminated, or

have regulatory compliance issues may require sellers to establish escrowaccounts that could pay the cost of cleanup, address third party claims, and/oraddress regulatory compliance deficiencies.

These accounts are often limited to specified dollar amounts and a limitedperiod of time following the completion of the transaction.

43


Escrow – Devil is in the details: WHAT (SCOPE)?

The question of how clean is clean and what condition triggers the obligations ofthe Sellers or Buyers is often left to post-closing discussion or negotiation.

Is the goal of remediation getting to zero detection (restoration) or is it to receive aregulatory determination such as a No Further Action determination (risk basedclosure), or something in between? Even under Risk Based Closure, whatinstitutional controls are acceptable for the property and what closure document isrequired to meet the party’s obligations.

Regarding environmental compliance, consider listing each item of deficiency alongwith a scope of work, costs, schedule and the party responsible for the definedactions.

Escrow – Devil is in the details: WHAT (SCOPE)?

The question of how clean is clean and what condition triggers the obligations ofthe Sellers or Buyers is often left to post-closing discussion or negotiation.

Is the goal of remediation getting to zero detection (restoration) or is it to receive aregulatory determination such as a No Further Action determination (risk basedclosure), or something in between? Even under Risk Based Closure, whatinstitutional controls are acceptable for the property and what closure document isrequired to meet the party’s obligations.

Regarding environmental compliance, consider listing each item of deficiency alongwith a scope of work, costs, schedule and the party responsible for the definedactions.

44


Escrow – Devil is in the details: WHO?

Define who is responsible for what tasks and be specific! Who will take the lead onthe project and be responsible for achieving the final outcome? Who will overseethe work on the project? Who will be responsible for coordination with agencies?Who will confirm conclusions and strategy for achieving the final outcome? Whoare the parties who decide fund disbursement and what are the hurdles to accessthe escrow account? If the escrow includes addressing compliance deficiencies, whodefines the scope, schedule, and cost? Who will be responsible for any regulatorypenalties that might result from the situation to be remedied?

WHEN? Laying out and agreeing to a critical path to complete all items specified in the

escrow agreement is crucial. Financial incentives for success and forfeitures fordelays can be and often are established.

Escrow – Devil is in the details: WHO?

Define who is responsible for what tasks and be specific! Who will take the lead onthe project and be responsible for achieving the final outcome? Who will overseethe work on the project? Who will be responsible for coordination with agencies?Who will confirm conclusions and strategy for achieving the final outcome? Whoare the parties who decide fund disbursement and what are the hurdles to accessthe escrow account? If the escrow includes addressing compliance deficiencies, whodefines the scope, schedule, and cost? Who will be responsible for any regulatorypenalties that might result from the situation to be remedied?

WHEN? Laying out and agreeing to a critical path to complete all items specified in the

escrow agreement is crucial. Financial incentives for success and forfeitures fordelays can be and often are established.

45


Other Considerations Dispute Resolution?

How will disputes be resolved post-closing – court or ADR? Specialized knowledge in real estate as well as environmental law or

remediation technologies Predecessor operations covered? First-party claims covered? Time limit for payment? Copies of reports, communications with regulators? Access/recorded easement? Deed restrictions?

Other Considerations Dispute Resolution?

How will disputes be resolved post-closing – court or ADR? Specialized knowledge in real estate as well as environmental law or

remediation technologies Predecessor operations covered? First-party claims covered? Time limit for payment? Copies of reports, communications with regulators? Access/recorded easement? Deed restrictions?

46

Final Take-Aways Early due diligence

before the deal closes isimportant tounderstanding post-closure obligations Understand and

memorialize the exactrisk allocation

Consider eternity – therewill be changes

Early due diligencebefore the deal closes isimportant tounderstanding post-closure obligations Understand and

memorialize the exactrisk allocation

Consider eternity – therewill be changes

47

Anticipating PostAnticipating Post--Closing EnvironmentalClosing Environmental

Issues in Real Estate DealsIssues in Real Estate Deals::

PostPost--Closing DisputesClosing DisputesFebruary 28, 2017

Anticipating PostAnticipating Post--Closing EnvironmentalClosing Environmental

Issues in Real Estate DealsIssues in Real Estate Deals::

PostPost--Closing DisputesClosing DisputesFebruary 28, 2017

Daniel A. CantorArnold & Porter Kaye Scholer LLP

Phone: [email protected]

48

Background

• Post-closing environmental issues cannot always bepredicted.

• Sometimes the issue is clearly addressed by theunderlying property conveyance agreement. In othercases, issue is a surprise or does not fit neatly intocontract terms.

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

• Post-closing environmental issues cannot always bepredicted.

• Sometimes the issue is clearly addressed by theunderlying property conveyance agreement. In othercases, issue is a surprise or does not fit neatly intocontract terms.

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

4949

Legal Principles Parties may contractually allocate liabilities, but may not

shed liability to government by contract. Beazer East,Inc. v. Mead Corp., 34 F.3d 206 (3d Cir. 1994).(“agreements to indemnify or hold harmless areenforceable between the parties but not against thegovernment”). “A plaintiff suing to recover on an indemnity contract must

prove, inter alia, that it has suffered a loss within themeaning of the parties’ indemnification agreement, aswell as the amount of the loss sustained.” Carson HarborVillage, Ltd. v. Unocal Corp., 287 F. Supp. 2d 1118 (C.D.Cal. 2003).

Parties may contractually allocate liabilities, but may notshed liability to government by contract. Beazer East,Inc. v. Mead Corp., 34 F.3d 206 (3d Cir. 1994).(“agreements to indemnify or hold harmless areenforceable between the parties but not against thegovernment”). “A plaintiff suing to recover on an indemnity contract must

prove, inter alia, that it has suffered a loss within themeaning of the parties’ indemnification agreement, aswell as the amount of the loss sustained.” Carson HarborVillage, Ltd. v. Unocal Corp., 287 F. Supp. 2d 1118 (C.D.Cal. 2003).

50

Legal Principles (cont’d)

Indemnities are contracts subject to the laws ofcontract.

But, court hesitate to construe indemnities broadlyunless they are express and unambiguous.

Indemnities are contracts subject to the laws ofcontract.

But, court hesitate to construe indemnities broadlyunless they are express and unambiguous.

51


See, e.g., Tara Corp. v. NL Indus., Inc., 73 F.3d 738(7th Cir. 1996): “Illinois interprets indemnityagreements according to its general principles ofcontract law. Yet Illinois law also provides thatindemnity agreements must be set forth in clear andexplicit language, so that the indemnitor’s obligationsare manifest. Moreover, since indemnityagreements are not favored in Illinois, they must bestrictly construed against the indemnitee.” See alsoKiewit Eastern Co., Inc. v. L&R Construction Co., 44F.3d 1194 (3d Cir. 1995).

See, e.g., Tara Corp. v. NL Indus., Inc., 73 F.3d 738(7th Cir. 1996): “Illinois interprets indemnityagreements according to its general principles ofcontract law. Yet Illinois law also provides thatindemnity agreements must be set forth in clear andexplicit language, so that the indemnitor’s obligationsare manifest. Moreover, since indemnityagreements are not favored in Illinois, they must bestrictly construed against the indemnitee.” See alsoKiewit Eastern Co., Inc. v. L&R Construction Co., 44F.3d 1194 (3d Cir. 1995).

52


Where indemnification shifts liability for indemnitee’snegligence to indemnitor, indemnity must be clear onthis point. See, e.g., Fina Inc. v. ARCO, 200 F.3d 266(5th Cir. 2000).

State law limitations on indemnities include punitivedamages, fines, and certain construction contracts.

Where indemnification shifts liability for indemnitee’snegligence to indemnitor, indemnity must be clear onthis point. See, e.g., Fina Inc. v. ARCO, 200 F.3d 266(5th Cir. 2000).

State law limitations on indemnities include punitivedamages, fines, and certain construction contracts.

53

Hypothetical 1 Fact Pattern Seller has indemnified buyer for pre-existing

contamination. Two years after closing, buyer decides to redevelop

property. In connection with redevelopment, buyer willexcavate large volumes of contaminated soil at depth.Environmental law does not require removal of soilunless it is disturbed. Buyer submits indemnity claim for incremental costs of

handling and disposing of contaminated soil as well asdewatering.

Fact Pattern Seller has indemnified buyer for pre-existing

contamination. Two years after closing, buyer decides to redevelop

property. In connection with redevelopment, buyer willexcavate large volumes of contaminated soil at depth.Environmental law does not require removal of soilunless it is disturbed. Buyer submits indemnity claim for incremental costs of

handling and disposing of contaminated soil as well asdewatering.

54

Hypothetical 1 (cont’d) Does the contract cover first-party costs? How does the voluntary nature of the redevelopment

impact the indemnity obligation? Will turn on specificlanguage of indemnity. G.J. Leasing Co., Inc. v. Union Elec. Co., 54 F.3d 379 (7th

Cir. 1995) (stating that CERCLA’s limitation of recoveryto those response costs that are “necessary” acts as a“check on the temptation to improve one’s property andcharge the expense of improvement to someone else”) 24 Leggett Street LTD v. Beacon Indus., Inc., 239 Conn.

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

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

impact the indemnity obligation? Will turn on specificlanguage of indemnity. G.J. Leasing Co., Inc. v. Union Elec. Co., 54 F.3d 379 (7th

Cir. 1995) (stating that CERCLA’s limitation of recoveryto those response costs that are “necessary” acts as a“check on the temptation to improve one’s property andcharge the expense of improvement to someone else”) 24 Leggett Street LTD v. Beacon Indus., Inc., 239 Conn.

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

55

Hypothetical 1 (cont’d)

Must the buyer incur the costs before indemnity is ripe?

See, e.g., Carson Harbor Village, Ltd. v. Unocal Corp., 287F. Supp. 2d 1118 (C.D. Cal. 2003): “Where an indemnity contractprotects against loss, as opposed to liability, the indemnitee maynot recover without payment of the amount of the loss. Wherethe contract protects against liability, however, the indemnitor’sobligation arises when the liability of the indemnitee isestablished.”

Must the buyer incur the costs before indemnity is ripe?

See, e.g., Carson Harbor Village, Ltd. v. Unocal Corp., 287F. Supp. 2d 1118 (C.D. Cal. 2003): “Where an indemnity contractprotects against loss, as opposed to liability, the indemnitee maynot recover without payment of the amount of the loss. Wherethe contract protects against liability, however, the indemnitor’sobligation arises when the liability of the indemnitee isestablished.”

56

Hypothetical 2 Fact pattern Property contains soil contamination from Seller’s

operations. Purchase contract contains a “my watch, your watch”

allocation of environmental liability. Post-closing, Buyer re-grades property, redistributing

contamination. Post-closing, EPA issues PRP letter to both Seller and

Buyer. Buyer asserts bonafide purchaser defense and makes

indemnity demand against Seller. Seller asserts indemnity demand against Buyer.

Fact pattern Property contains soil contamination from Seller’s

operations. Purchase contract contains a “my watch, your watch”

allocation of environmental liability. Post-closing, Buyer re-grades property, redistributing

contamination. Post-closing, EPA issues PRP letter to both Seller and

Buyer. Buyer asserts bonafide purchaser defense and makes

indemnity demand against Seller. Seller asserts indemnity demand against Buyer.

57


Does Buyer’s re-grading of contaminated soilconstitute a release by Buyer and thus defeat bonafidepurchaser protection? Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 791 F.

Supp. 2d 431 (D.S.C., 2011): “Disposals are not limited toone-time occurrences, but instead include times whenhazardous materials are moved or dispersed. A‘disposal’ “may occur when a party dispersescontaminated soil....”

Indemnity is not a defense against EPA action. Factual issue of what contamination occurred under

each party’s watch.

Does Buyer’s re-grading of contaminated soilconstitute a release by Buyer and thus defeat bonafidepurchaser protection? Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 791 F.

Supp. 2d 431 (D.S.C., 2011): “Disposals are not limited toone-time occurrences, but instead include times whenhazardous materials are moved or dispersed. A‘disposal’ “may occur when a party dispersescontaminated soil....”

Indemnity is not a defense against EPA action. Factual issue of what contamination occurred under

each party’s watch.58

Hypothetical 3 Fact pattern Seller agrees to indemnify Buyer for contamination

arising from pre-existing contamination for a period of 5years. Agreement does not contain a release of liability. On day before expiration of indemnity period, Buyer

sends Seller a report, performed voluntarily,documenting presence of certain soil and groundwatercontamination. Subsequent testing discovers additionalpresence of same types of contamination.

Fact pattern Seller agrees to indemnify Buyer for contamination

arising from pre-existing contamination for a period of 5years. Agreement does not contain a release of liability. On day before expiration of indemnity period, Buyer

sends Seller a report, performed voluntarily,documenting presence of certain soil and groundwatercontamination. Subsequent testing discovers additionalpresence of same types of contamination.

59


Fact pattern

Buyer makes indemnity claim against seller.

Seller asserts that indemnity claim is time barred.

Buyer argues that claim is timely, and in any event it canclaimant in the alternative under CERCLA.

Fact pattern

Buyer makes indemnity claim against seller.

Seller asserts that indemnity claim is time barred.

Buyer argues that claim is timely, and in any event it canclaimant in the alternative under CERCLA.

60


Issues to consider Must all costs be “incurred” by sunset or is

identification of issue sufficient?

24 Leggett Street LTD, 239 Conn. at 310: “Although aplaintiff has the evidentiary burden of proving its damages atthe time of trial, there is no additional requirement that theplaintiff must satisfy this evidentiary burden prior to theexpiration of the applicable limitations period.”

Issues to consider Must all costs be “incurred” by sunset or is

identification of issue sufficient?

24 Leggett Street LTD, 239 Conn. at 310: “Although aplaintiff has the evidentiary burden of proving its damages atthe time of trial, there is no additional requirement that theplaintiff must satisfy this evidentiary burden prior to theexpiration of the applicable limitations period.”

61


Issues to consider Given the absence of a release, may Buyer bring a

statutory or common law claim after the indemnitysunsets? C.P. Chemicals, Inc. v. Exide Corp., Inc., 14 F.3d 594 (4th Cir.

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

Hulbert v. Port of Everett, 159 Wn. App. 389 (2011): Holdingthat indemnity unaccompanied by release did not state lawclaims.

Issues to consider Given the absence of a release, may Buyer bring a

statutory or common law claim after the indemnitysunsets? C.P. Chemicals, Inc. v. Exide Corp., Inc., 14 F.3d 594 (4th Cir.

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

Hulbert v. Port of Everett, 159 Wn. App. 389 (2011): Holdingthat indemnity unaccompanied by release did not state lawclaims.

62

Hypothetical 4 Fact Pattern Seller indemnified Buyer for pre-existing hazardous

substances. Post-closing, Buyer makes indemnity claim to Seller

seeking cost of removing asbestos and lead paint inconnection with remodeling of old buildings.

Fact Pattern Seller indemnified Buyer for pre-existing hazardous

substances. Post-closing, Buyer makes indemnity claim to Seller

seeking cost of removing asbestos and lead paint inconnection with remodeling of old buildings.

63


Issues What is the scope of the indemnity? Limited to soil and

groundwater? Releases to the environment? Sycamore Indus. Park Assocs. v. Ericsson, Inc., 546 F.3d 847

(7th Cir. 2008): “We reaffirm that when there is no emissioninto the outside environment, but rather any hazard resultingfrom emission of asbestos fibers would be confined inside abuilding, there is no release or threatened release, and thusthere can be no liability under CERCLA.”

Issues What is the scope of the indemnity? Limited to soil and

groundwater? Releases to the environment? Sycamore Indus. Park Assocs. v. Ericsson, Inc., 546 F.3d 847

(7th Cir. 2008): “We reaffirm that when there is no emissioninto the outside environment, but rather any hazard resultingfrom emission of asbestos fibers would be confined inside abuilding, there is no release or threatened release, and thusthere can be no liability under CERCLA.”

64

Hypothetical 5 Fact pattern Seller indemnifies Buyer for known pre-existing

contamination. Post-closing, Seller completes government required

remediation. Regulators will allow deep subsurfacecontamination to remain in place but require a deedrestriction prohibiting residential use and prohibitingsubsurface excavation without a soil management plan. Buyer resists deed restrictions, taking the position that

they will diminish value of property and shiftremediation obligations back to Buyer.

Fact pattern Seller indemnifies Buyer for known pre-existing

contamination. Post-closing, Seller completes government required

remediation. Regulators will allow deep subsurfacecontamination to remain in place but require a deedrestriction prohibiting residential use and prohibitingsubsurface excavation without a soil management plan. Buyer resists deed restrictions, taking the position that

they will diminish value of property and shiftremediation obligations back to Buyer.

65


Issues Does contract affirmatively obligate Buyer to record a

deed restriction? If so, what are the terms? Does contract require Buyer to cooperate with Seller in

performance of remediation? Does contract give Seller the right to select remedy? Is cooperation by Buyer an implied condition of

indemnity?

Issues Does contract affirmatively obligate Buyer to record a

deed restriction? If so, what are the terms? Does contract require Buyer to cooperate with Seller in

performance of remediation? Does contract give Seller the right to select remedy? Is cooperation by Buyer an implied condition of

indemnity?

66

Hypothetical 6 Fact pattern Buyer agrees to release and indemnify Seller from

liability for all contamination pre-dating the sale. Buyer and Seller agree that the indemnity and release

will run with the land and record notice of theindemnity and release in land record. Buyer then sells property. New owner discovers contamination on property and

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

Fact pattern Buyer agrees to release and indemnify Seller from

liability for all contamination pre-dating the sale. Buyer and Seller agree that the indemnity and release

will run with the land and record notice of theindemnity and release in land record. Buyer then sells property. New owner discovers contamination on property and

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

67


Issues Are indemnity and release enforceable against

subsequent purchaser even though subsequentpurchaser is not party to the indemnity and releaseagreement? Calabrese v. McHugh, 170 F. Supp. 2d 243 (D. Conn. 2001):

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

Issues Are indemnity and release enforceable against

subsequent purchaser even though subsequentpurchaser is not party to the indemnity and releaseagreement? Calabrese v. McHugh, 170 F. Supp. 2d 243 (D. Conn. 2001):

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

68

Financing Terms andConditions

When loan is secured by “impaired real property” lenders will often includespecific terms and conditions in the financing documents for extraprotection for them

Breach = default

Evaluate and understand the implications of the post-closing conditions

Lenders may have more strict requirements and internal policies forenvironmental compliance than governmental agencies

Cleanup endpoint for a bank may be different than the regulatorystandard

Could the bank’s conditions mean extra costs for you? FDIC guidance & SBA

When loan is secured by “impaired real property” lenders will often includespecific terms and conditions in the financing documents for extraprotection for them

Breach = default

Evaluate and understand the implications of the post-closing conditions

Lenders may have more strict requirements and internal policies forenvironmental compliance than governmental agencies

Cleanup endpoint for a bank may be different than the regulatorystandard

Could the bank’s conditions mean extra costs for you? FDIC guidance & SBA

69

Financing T&Cs (Cont.)• Withholding an escrow sum from the loan proceeds

• Limitations on property use

• Representations and warranties regarding environmental compliance

• Additional costs to purchase secured creditor insurance policies

• Consultant reliance letters

• Personal guarantee

• Indemnity

• Withholding an escrow sum from the loan proceeds

• Limitations on property use

• Representations and warranties regarding environmental compliance

• Additional costs to purchase secured creditor insurance policies

• Consultant reliance letters

• Personal guarantee

• Indemnity

70

Financing T&Cs Tips1. Consult with lender early to get an idea of their requirements

2. If lender requires a holdback/escrow to cover the costs for post-closingenvironmental work, two things to negotiate: The cost estimate for the work (the bank will use this number as

basis for escrow amount) The amount of the buffer the bank adds to the cost estimate

3. Have clear release points for escrow monies Banks will drag their feet on allowing milestone payments and

prefer lump sum payout at the completion of all the work

1. Consult with lender early to get an idea of their requirements

2. If lender requires a holdback/escrow to cover the costs for post-closingenvironmental work, two things to negotiate: The cost estimate for the work (the bank will use this number as

basis for escrow amount) The amount of the buffer the bank adds to the cost estimate

3. Have clear release points for escrow monies Banks will drag their feet on allowing milestone payments and

prefer lump sum payout at the completion of all the work

71

Anticipating Post-Closing Environmental Issues in Real...

Documents

Transcript of Anticipating Post-Closing Environmental Issues in Real...