Environmental Indemnity in Real Estate Transactions: Allocating - - PowerPoint PPT Presentation

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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

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, AUGUST 15, 2017

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

• R. Morgan Gilhuly, Partner

, Barg Coffin Lewis & Trapp, San Francisco Cindy J. Karlson, Founder , Law Offices of Cindy J. Karlson, Groton, Conn.

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Cindy J. Karlson Phone: 860.245-4922 Cindy@karlsonlawfirm.com

5

• R. Morgan Gilhuly

Barg Coffin Lewis & Trapp, LLP Phone: 415.228.5400 mgilhuly@bargcoffin.com

• I. General Principles for Contracts and Indemnities for

Real Estate Transactions

• I. General Principles for Contracts and Indemnities for

Real Estate Transactions

• II. The Architecture of an Environmental Indemnity
• III. See You In Court: Case Law
• IV. Practical Tips

6

General Principles #1

 You cannot contract

away your liability vis-à- vis the government

7

General Principles #2

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) 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)

8

General Principles #3

 For the most part,

contracts only bind the parties to the contract and do not bind third parties

Exceptions (sometimes):

Successors and assigns Affiliates Running with the land

 For the most part,

contracts only bind the parties to the contract and do not bind third parties

– Exceptions (sometimes):

• Successors and assigns
• Affiliates
• Running with the land

9

General Principles #4

An environmental indemnity is only as good as the assets of the party giving the indemnity

  Consider parent company guarantee, letter of credit, reserves, escrows,

• ther financial mechanisms

10

Key Questions to Ask and Answer

 Who is giving protection?  Who is receiving protection?  “Indemnify, defend, and hold harmless”?  What is covered?  What is not covered?  Proportional fault, or not?

 “Arising from or related to” vs. “to the extent caused by”

 Who is giving protection?  Who is receiving protection?  “Indemnify, defend, and hold harmless”?  What is covered?  What is not covered?  Proportional fault, or not?

 “Arising from or related to” vs. “to the extent caused by”

11

What Kinds of Liabilities Might Occur?

12

Types of Liability

Cleanup Liabilities 1st Party Economic Losses Third Party Claims Third Party Claims

Voluntary Cleanup Natural Resource Damages Gov’t Ordered Cleanup Business Interrupti

• n&

Delays Added Costs Site Redevelo p-ment Diminish ed Property Value Toxic Tort Property Damage

13

Site Cleanup Liabilities

 Who is responsible – Buyer or Seller?  For what?

 Pre-closing legacy contamination only?



  



 

 Pre-closing legacy contamination only?

 Presumptions and baselines

 Only government ordered cleanup?  Voluntary cleanup?  Cleanup of soil and groundwater only?

 Asbestos, lead paint, mold, drum removal, demolition?

14

Site Cleanup Liabilities

 What is the scope of cleanup covered?

 Industrial/commercial versus residential?  Risked-based cleanup?

 Use of institutional controls permitted? (e.g. site management

plan)?

 

 

 

 Use of institutional controls permitted? (e.g. site management

plan)?

 How implemented and complied with?  Deed restrictions? (e.g. for sensitive uses/site redevelopment)

 Who controls communications with government?

15

Third Party Claims

 Toxic tort claims

 Examples: Site workers, future

• ccupants, offsite neighbors





 



 Property damage claims

 Example: Offsite neighbors

 Natural resource damages

16

First Party Costs and Damages

 First party costs and damages

– Site redevelopment costs – Voluntary cleanup – Diminution in value of property

acquired Business interruption/delay Other direct costs to buyer

 IMPORTANT: Many courts

interpret standard indemnities to cover only third party claims, not first party damages, costs and losses Draft accordingly

 First party costs and damages

Site redevelopment costs Voluntary cleanup Diminution in value of property acquired

– Business interruption/delay – Other direct costs to buyer

 IMPORTANT: Many courts

interpret standard indemnities to cover only third party claims, not first party damages, costs and losses Draft accordingly

17

Site Redevelopment Costs

– Future owners may incur

added costs beyond gov’t

• rdered cleanup

Excavation in connection with redevelopment/construction Disposal of contaminated media

Example - parking garage

Cost of studies and hazmat contractors

Future owners may incur added costs beyond gov’t

• rdered cleanup
• Excavation in connection with

redevelopment/construction

• Disposal of contaminated media

– Example - parking garage

• Cost of studies and hazmat

contractors

18

Vapor Intrusion Liabilities

 Vapor intrusion into

buildings

 Investigation and testing  HVAC control 



 

  HVAC control  Engineered vapor

mitigation systems

 Installation and long

term O&M

 Who pays? Who controls?

Who is liable to the government? To occupants?

19

Part II: The Architecture of an Environmental Indemnity

20

PART II AGENDA

 Indemnities: Not One Size Fits All  Specific Language Choices  Complex Structures  Synthesizing Indemnity Provisions With The Master

Agreement And Other Deal Documents

 Indemnities: Not One Size Fits All  Specific Language Choices  Complex Structures  Synthesizing Indemnity Provisions With The Master

Agreement And Other Deal Documents

21

Key Contract Terms to Allocate Environmental Liabilities

 Environmental Indemnity

• “We agree to indemnify, defend and hold harmless….”

 Covenants and Affirmative Commitments

“We agree to perform government ordered cleanup and reimburse your added site redevelopment costs…”

 Releases and Waivers

Covenants not to sue

 Representations and Warranties

“We are in compliance with all environmental laws as of the closing…”

 Environmental Indemnity

“We agree to indemnify, defend and hold harmless….”

 Covenants and Affirmative Commitments

• “We agree to perform government ordered cleanup and reimburse your

added site redevelopment costs…”

 Releases and Waivers

• Covenants not to sue

 Representations and Warranties

• “We are in compliance with all environmental laws as of the closing…”

22

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

 Do optics matter?  Sweet and simple

 Allocate based on knowledge of

existing conditions at closing

 Complex indemnity

provisions

 Carve out specific environmental

conditions

23

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

• perations conducted thereon.

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

• perations conducted thereon.

24

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

• r relating to any

environmental conditions on the property or the

• perations 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? 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

• r relating to any

environmental conditions on the property or the

• perations 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?

25

SPECIFIC LANGUAGE CHOICES

Decision Point: Crafting general or specific language for scope of the indemnity

 Pros

 Avoid potential costly litigation  Manage parties’ expectations

 Cons

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

Decision Point: Crafting general or specific language for scope of the indemnity

 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

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

• Exclude substances ordinarily used for purposes of cleaning

 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

• Exclude substances ordinarily used for purposes of cleaning

27

“Environmental Laws” are…



“Environmental Laws” means any and all applicable federal, state, or local law or regulation, whether now in force or as amended or enacted in the future, pertaining to public health or the environment, including, without limitation, ……”*** ***NOTE – These are excerpts are for example purpose only and should not be relied upon as legal advice.

 “Environmental Laws” means any federal, state or local

statute, law, ordinance, code, common law, rule, regulation, order or decree, regulating, relating to, or imposing liability or other obligations concerning the protection of the environment, natural resources, and/or activities concerning air, water, solid waste, resource protection, inland wetlands, watercourses, or environmental conditions or involving any asbestos- containing materials, materials presumed by law to contain asbestos, PCBs, petroleum, petroleum byproduct, and/or hazardous or toxic substances, chemicals or materials, or any other waste, materials, pollutant or contaminant that is regulated to protect the environment, as may now or at any time hereafter be in effect, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, as amended (42 U.S.C. Sections 9601, et seq.) (“CERCLA”), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), the Clean Air Act, as amended (42 U.S.C. Sections 7401, et seq., the Toxic Substances Control Act, as amended (15 U.S.C. Sections 2601, et seq.), the Clean Water Act, as amended (33 U.S.C. Sections 1251, et seq.), and/or any other applicable environmental law or any regulations promulgated under any of the foregoing.



“Environmental Laws” means any and all applicable federal, state, or local law or regulation, whether now in force or as amended or enacted in the future, pertaining to public health or the environment, including, without limitation, ……”*** ***NOTE – These are excerpts are for example purpose only and should not be relied upon as legal advice.

 “Environmental Laws” means any federal, state or local

statute, law, ordinance, code, common law, rule, regulation, order or decree, regulating, relating to, or imposing liability or other obligations concerning the protection of the environment, natural resources, and/or activities concerning air, water, solid waste, resource protection, inland wetlands, watercourses, or environmental conditions or involving any asbestos- containing materials, materials presumed by law to contain asbestos, PCBs, petroleum, petroleum byproduct, and/or hazardous or toxic substances, chemicals or materials, or any other waste, materials, pollutant or contaminant that is regulated to protect the environment, as may now or at any time hereafter be in effect, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, as amended (42 U.S.C. Sections 9601, et seq.) (“CERCLA”), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), the Clean Air Act, as amended (42 U.S.C. Sections 7401, et seq., the Toxic Substances Control Act, as amended (15 U.S.C. Sections 2601, et seq.), the Clean Water Act, as amended (33 U.S.C. Sections 1251, et seq.), and/or any other applicable environmental law or any regulations promulgated under any of the foregoing.

28

SPECIFIC LANGUAGE CHOICES

 Environmental Claims –third party demand or can

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

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

the scope of the indemnity

 “spilling, leaking, pumping, pouring, emitting, injecting,

escaping or dumping”

 (what about “migration”? Potential or threatened

releases included?)

 Environmental Claims –third party demand or can

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

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

the scope of the indemnity

 “spilling, leaking, pumping, pouring, emitting, injecting,

escaping or dumping”

 (what about “migration”? Potential or threatened

releases included?)

29

SPECIFIC LANGUAGE CHOICES

 Key concepts:

 How is “known environmental liability” defined?

 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 concepts:

 How is “known environmental liability” defined?

 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

30

SPECIFIC LANGUAGE CHOICES

 Important definitions:

 Environmental, health and safety?  Environmental Conditions

 What does this include?

 Remediation

 Response activities? Land use restrictions? Financial

assurance?

 Important definitions:

 Environmental, health and safety?  Environmental Conditions

 What does this include?

 Remediation

 Response activities? Land use restrictions? Financial

assurance?

31

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

 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

32

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, buyer may make an indemnity claim against seller Cap: Dollar amount limit on a party’s liability (or can act as trigger for shared liability after the cap amount is reached) 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, buyer may make an indemnity claim against seller Cap: Dollar amount limit on a party’s liability (or can act as trigger for shared liability after the cap amount is reached)

33

COMPLEX STRUCTURES

 When does the indemnity terminate?

 Are termination provisions linked to achieving some

kind of cleanup 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

 When does the indemnity terminate?

 Are termination provisions linked to achieving some

kind of cleanup 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

34

Synthesizing Indemnity Provisions

Within the Purchase Agreement Itself:

 Representations and Warranties  Disclosure Schedules  Covenants  Third-Party Beneficiaries  Assignment  Survival  Choice of Law

Within the Purchase Agreement Itself:

 Representations and Warranties  Disclosure Schedules  Covenants  Third-Party Beneficiaries  Assignment  Survival  Choice of Law

35

Synthesizing Indemnity Provisions

Representations and Warranties

 What if party reps to “the absence of hazardous

substances on Property” and the party stores typical cleaning supplies which are considered hazardous substances on-site – you will automatically be subject to indemnity because of breach of representation

 Knowledge qualifier – “to the best of seller’s knowledge”

Representations and Warranties

 What if party reps to “the absence of hazardous

substances on Property” and the party stores typical cleaning supplies which are considered hazardous substances on-site – you will automatically be subject to indemnity because of breach of representation

 Knowledge qualifier – “to the best of seller’s knowledge”

36

Synthesizing Indemnity Provisions

 Some generic reps & warranties that may tie in with

indemnity triggers:

 Use of hazardous materials and/or substances is in

compliance with all applicable laws

 All necessary environmental permits and authorizations.  No release of hazardous substances  No pending enforcement, administrative actions or

environmental claims against the Company

 Some generic reps & warranties that may tie in with

indemnity triggers:

 Use of hazardous materials and/or substances is in

compliance with all applicable laws

 All necessary environmental permits and authorizations.  No release of hazardous substances  No pending enforcement, administrative actions or

environmental claims against the Company

37

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

indemnity claims?

 Choice of law  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

indemnity claims?

 Choice of law

38

Synthesizing Indemnity Provisions

 Disclosure schedules

 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

• perations or a process constitute a disclosure?

 Limit to acknowledge without additional inquiry or investigation?

 Disclosure schedules

 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

• perations or a process constitute a disclosure?

 Limit to acknowledge without additional inquiry or investigation? 39

Synthesizing Indemnity Provisions

With other deal documents:

 Master purchase and sale agreement  Personal and Corporate Guarantees  Loan and financing agreements  Leases  Risk Liability Transfer Contracts

With other deal documents:

 Master purchase and sale agreement  Personal and Corporate Guarantees  Loan and financing agreements  Leases  Risk Liability Transfer Contracts

40

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

• r 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:….

 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

• r 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:….

41

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. 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.

42

Final Take-Aways

 Boiler plate is only a

good starting point

 Understand and

memorialize the exact risk allocation

 Pick your battles  Boiler plate is only a

good starting point

 Understand and

memorialize the exact risk allocation

 Pick your battles

43

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

 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

44

The Environmental Indemnity Tool Kit

 Some commonly used tools:

 Insurance  Deductibles and thresholds  Cost Caps  Cost sharing  Time limits  Corporate guarantee  Letters of credit  Reserves  Escrow

 Some commonly used tools:

 Insurance  Deductibles and thresholds  Cost Caps  Cost sharing  Time limits  Corporate guarantee  Letters of credit  Reserves  Escrow

45

The Toolkit: Insurance

 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

 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

46

The Toolkit: Insurance

 Indemnity only for non-insured claims

 Watch out for policies that provide only excess coverage  The indemnity may be considered primary coverage

47

The Environmental Indemnity Toolkit

 Deductibles and thresholds:

 Many environmental statutes impose liability for trivial

releases

 Transaction costs may make indemnity for small claims

inefficient

 Limit indemnity to claims exceeding a $ threshold  Or limit indemnity to amounts

exceeding a “basket” amount

 Deductibles and thresholds:

 Many environmental statutes impose liability for trivial

releases

 Transaction costs may make indemnity for small claims

inefficient

 Limit indemnity to claims exceeding a $ threshold  Or limit indemnity to amounts

exceeding a “basket” amount

48

The Environmental Indemnity Toolkit

 Cost Caps and Cost Sharing

 Cost caps may be coordinated with insurance  Cost sharing may be linked to parties’ roles

with respect to site operations

 Time Limits

 Time limits may be linked to loan terms,

if property is financed

 May be extended if environmental issues

discovered

 Restrictions on use of property

 Indemnity limited to commercial/

industrial use

 Limits on types of businesses (e.g., daycare or

school)

 Cost Caps and Cost Sharing

 Cost caps may be coordinated with insurance  Cost sharing may be linked to parties’ roles

with respect to site operations

 Time Limits

 Time limits may be linked to loan terms,

if property is financed

 May be extended if environmental issues

discovered

 Restrictions on use of property

 Indemnity limited to commercial/

industrial use

 Limits on types of businesses (e.g., daycare or

school)

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The Environmental Indemnity Toolkit

 Other provisions:

 Predecessor operations covered?  First-party claims covered?  Notice and opportunity to defend  Time limit for payment  Copies of reports, communications with regulators  Access/recorded easement  Arbitration or mediation clause

 Other provisions:

 Predecessor operations covered?  First-party claims covered?  Notice and opportunity to defend  Time limit for payment  Copies of reports, communications with regulators  Access/recorded easement  Arbitration or mediation clause

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Part III: See You In Court

 Examples of contested issues involving environmental

indemnities:

 Expenses outside the scope of the indemnity

 Attorneys’ fees?  Expert costs?

 Work resulting from new construction  Work resulting from change in use (commercial to residential)  Work not necessary to comply with applicable laws  Lenders’ costs associated with environmental due

diligence/mitigation/remediation

 First-party losses

 Examples of contested issues involving environmental

indemnities:

 Expenses outside the scope of the indemnity

 Attorneys’ fees?  Expert costs?

 Work resulting from new construction  Work resulting from change in use (commercial to residential)  Work not necessary to comply with applicable laws  Lenders’ costs associated with environmental due

diligence/mitigation/remediation

 First-party losses

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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

• perator 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

• ther 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.”

 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

• perator 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

• ther 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)

 Pre-CERCLA indemnity agreement covered CERCLA liabilities  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

 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)

 Pre-CERCLA indemnity agreement covered CERCLA liabilities  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

 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

 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

• f receiver rather than taking possession of property

 Lenders conducted Phase I assessments and indoor

air testing and sought costs from receiver  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

• f 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”

• n or around the Property

 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”

• n or around the Property

57

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  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

58

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

• n the indemnitee

 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

• n the indemnitee

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Practice Tips

 A good contract has:

– A separate environmental

section

– All of the above terms

(indemnity, covenants, release of liability, reps and warranties) Consider a deed restriction (no sensitive uses) Consider an access agreement Consider a technical risk management plan

 A good contract has:

A separate environmental section All of the above terms (indemnity, covenants, release of liability, reps and warranties)

– Consider a deed

restriction (no sensitive uses)

– Consider an access

agreement

– Consider a technical risk

management plan

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Lessons Learned

 Consider all media  Look past the current transaction  Plan for stricter standards  Consider eternity  Consider all media  Look past the current transaction  Plan for stricter standards  Consider eternity

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