Environmental Indemnity in Real Estate Transactions: Allocating Risks of Potential Cleanup Costs Negotiating Key Provisions, Drafting and Reviewing the Agreement to Ensure Complete Coverage Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. WEDNESDAY, APRIL 23, 2014 Presenting a live 90-minute webinar with interactive Q&A R. Morgan Gilhuly, Partner, Barg Coffin Lewis & Trapp, San Francisco Cindy Karlson, Founder, Law Offices of Cindy J. Karlson, East Hampton, Conn. Karen J. Nardi, Partner, Arnold & Porter, San Francisco
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Environmental Indemnity in Real Estate
Transactions: Allocating Risks of
Potential Cleanup Costs Negotiating Key Provisions, Drafting and Reviewing the Agreement to Ensure Complete Coverage
As the Third Circuit said with regard to indemnities and CERCLA liability: “Agreements to indemnify or hold harmless are enforceable between the parties but not against the government.” Beazer East, Inc. v. Mead Corp., 34 F.3d 206 (3d Cir. 1994)
Synthesizing Indemnity Provisions With The Agreement And Other Deal Documents
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NOT ONE SIZE FITS ALL Do optics matter?
Sweet and simple Allocate based on knowledge of
existing conditions at closing
Complex indemnity provisions Carve out specific environmental
conditions
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NOT ONE SIZE FITS ALL Example:
Tenant will indemnify and hold Landlord harmless from and against any and all liabilities, losses, damages, suits, penalties, claims and demands of every kind, including reasonable attorneys’ fees, arising out of or relating to any environmental conditions on the property or the
operations conducted thereon.
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NOT ONE SIZE FITS ALL Tenant will indemnify and
hold Landlord harmless from and against any and all
liabilities, losses, damages, suits, penalties, claims and
demands of every kind, including reasonable
attorneys’ fees, arising out of or relating to any
environmental conditions on the property or the
operations conducted thereon.
Issue Spotting
1. Who can recover monies (successors and assigns)?
2. Define any terms?
3. Length of indemnity period?
4. Which costs covered?
5. Which costs are NOT covered?
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SPECIFIC LANGUAGE CHOICES Deciding whether to set forth the indemnity scope in a general or specific fashion
Pros
Avoid potential costly litigation
Manage parties’ expectations
Cons
Could incur additional transactional costs in negotiation
Could unknowingly exclude costs if provisions are too specific
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SPECIFIC LANGUAGE CHOICES Definitions are critical!!!
“Environmental Laws” - Understand what is and is not included (agency guidance, directives, orders?)
“Hazardous Substances”
- Be careful if you only limit it to substances under CERCLA - Petroleum and its by-products, PCBs, asbestos, lead paint, urea formaldehyde (building materials), mold, microbial matter - Also consider including solid waste, explosives, radioactive materials
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SPECIFIC LANGUAGE CHOICES Environmental Claims – does it have to be third party
demand or can buyer or seller make direct claims to reimburse costs they incurred not at the request of third party/government requirement? (what about a bank?)
Release – how broad you define a “release” will impact the scope of the indemnity “spilling, leaking, pumping, pouring, emitting, injecting,
escaping or dumping”
(what about “migration”?)
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SPECIFIC LANGUAGE CHOICES Key concepts:
How is “known environmental liability” defined?
What is included as an “Environmental Matters?
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
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COMPLEX STRUCTURES
Using a Materiality Trigger
Single event or in the aggregate
What costs will be considered as part of materiality total
What if the parties do not agree on what conditions are material for purposes of triggering indemnity claims
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COMPLEX STRUCTURES Caps and Baskets
Basket: Buyer maintains a running total of the post-closing environmental liabilities it has incurred; when the total exceeds the agreed threshold dollar amount, buy make an indemnity claim against Seller
Cap: Dollar amount limit on a party’s liability (or can act as trigger for shared liability after the cap amount is reached)
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COMPLEX STRUCTURES When does the indemnity terminate?
Are termination provisions linked to achieving some
kind of end point?
Obtaining a No Further Action letter from the agency
(not all states provide this)
Obtaining sign off from environmental consultant
Completion of specific tasks
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Synthesizing Indemnity Provisions Within the Agreement Itself:
Representations and Warranties
Disclosure Schedules
Covenants
Third-Party Beneficiaries
Assignment
Survival
Choice of Law
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Synthesizing Indemnity Provisions Representations and Warranties
What if party reps to “the absence of hazardous substances on Property” and the party stores hazardous substances on-site – you will automatically be subject to indemnity because of breach of representation
What about background levels of some naturally occurring materials?
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Synthesizing Indemnity Provisions Covenants
Is certain work a required obligation? If default and another party steps in to do the work, is it covered by indemnity or potentially escrow or other funds?
Assignment Is the agreement assignable? With or without prior written
consent?
Third party beneficiaries Who is a beneficiary to the agreement? Can they make
What and how is information included in the disclosure
schedules?
Covered by indemnity?
Issue – a disclosure schedule can be list of environmental reports (which often reference other prior reports and documents) Does mere reference constitute disclosure of a specific issue
Does the simple mention of a description of the business operations or a process constitute a disclosure?
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Synthesizing Indemnity Provisions With other deal documents:
Master purchase and sale agreement
(if indemnity is contained in separate environmental side agreement)
Personal and Corporate Guarantees
Loan and financing agreements
Leases
Risk Liability Transfer Contracts
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Example 1 Seller agrees, at its sole cost and expense, to indemnify, defend
and hold harmless Buyer, its directors, officers, stockholders, employees, assigns and successors, from any loss, cost, damage (whether direct or consequential), obligation, liability, judgment, action, penalties, claims, proceeding, injunction suit, fines, or expense (including consultants’, experts’, attorneys’ fees and court costs) incurred or sustained by Buyer arising directly or indirectly, from : (a) any failure of Seller to comply with any Environmental Laws; (b) Existing Contamination (whether known or unknown); (c) any breach of this agreement; or (d) contamination, if attributable to the actions or omissions of Seller, including without limitation any of the following:….
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Example 2
Buyer shall indemnify, defend and hold Seller harmless from any loss, cost, damage or expense (including attorneys’ fees) actually incurred or sustained by Seller in connection with
the Release or disposal of Hazardous Substances on the property by Buyer, its agents, tenants, employees or
contractors.
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Final Take-Aways
Boiler plate is only a good starting point
Understand and memorialize the exact risk allocation
The Environmental Indemnity Tool Kit Default arrangement:
Seller indemnifies buyer for all pre-closing liabilities
Buyer indemnifies seller for all post-closing liabilities
Because buyers become liable for environmental costs upon purchase, the seller is usually asked to indemnify the buyer for liabilities that arise post-closing but are related to pre-closing events
Buyers may be willing in some cases to assume environmental liabilities in return for a reduced purchase price or other compensation
Environmental Indemnity Case Law Early litigation: Do pre-CERCLA indemnity
agreements cover CERCLA liability?
Section 9607(e)(1) of CERCLA provides:
“No indemnification, hold harmless, or similar agreement or conveyance shall be effective to transfer from the owner or operator of any vessel or facility or from any person who may be liable for a release or threat of release under this section, to any other person the liability imposed under this section. Nothing in this subsection shall bar any agreement to insure, hold harmless, or indemnify a party to such agreement for any liability under this section.”
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Environmental Indemnity Case Law U.S. v. Hardage
985 F.2d 1427 (10th Cir. 1993)
Under Section 9607, parties may allocate liability through indemnity agreements
Kerr–McGee Chem. Corp. v. Lefton Iron & Metal Co. 14 F.3d 321, 327 (7th Cir. 1994)
Indemnity agreement and “as is” clause considered as factors in allocating liability in contribution action
Beazer East, Inc. v. Mead Corp. 34 F.3d 206 (3d Cir. 1994)
State law governs interpretation of agreements allocating liability among private responsible parties
Pre-CERCLA indemnity may be effective to transfer CERCLA liability
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Environmental Indemnity Case Law Cadillac Fairview/California, Inc. v. Dow Chem. Co.
299 F.3d 1099 (9th Cir. 2002)
Indemnity agreement properly considered as allocation factor in case finding government 100% liable
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Environmental Indemnity Case Law The specific language of the indemnity matters
Taracorp, Inc. v. NL Industries, Inc. 73 F.3d 738 (7th Cir. 1996)
Two indemnities:
One for environmental contamination “located at, on, or near” Facility #1
One for liabilities “related to environmental hazards associated with” Facility #2
NL argued that both indemnities were limited to contamination on or near the facility
But Seventh Circuit held that NL was liable as an arranger for wastes transported off-site from Facility #2
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Environmental Indemnity Case Law VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC
735 F.3d 25 (1st Cir. 2013)
Borrower defaulted on loan secured by daycare center with suspected PCE contamination
Lenders’ assignees foreclosed and sought appointment of receiver rather than taking possession of property
Lenders conducted Phase I assessments and indoor air testing and sought costs from receiver
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Environmental Indemnity Case Law VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC
735 F.3d 25 (1st Cir. 2013) (cont’d)
The Indemnity Agreement provided that borrowers would indemnify the lenders:
“from and against all. . . costs, . . . demands, . . . expenses” and other liabilities “of any kind or nature whatsoever . . . sought from or asserted against Indemnitees in connection with, in whole or in part, directly or indirectly, . . . the presence, suspected presence, release, suspected release, or threat of release of any Hazardous Material” on or around the Property
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Environmental Indemnity Case Law VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC
735 F.3d 25 (1st Cir. 2013) (cont’d)
Court held recoverable costs limited to costs sought by a third party
Court held indemnity was so broad that it must have been limited by the next sentence providing “Such liabilities shall include . . . .”
To hold otherwise would make borrower liable for costs that were neither reasonable nor necessary
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Environmental Indemnity Case Law VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC
735 F.3d 25 (1st Cir. 2013) (cont’d)
Lesson of VFC Partners is that courts will parse the specific language of the indemnity and will apply common sense limits
Lenders will want provisions to allow recovery of costs necessary to investigate contaminated property
But an indemnity that is so broad that it would subject the indemnitor to unlimited liability may backfire on the indemnitee