advanced environmental law real estate lawyers€¦ · statutory defenses to cercla liability...

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Presented to Miller Canfield Real Estate Group

Lawrence W. Falbe

October 20, 2016

Advanced Environmental Law for Real Estate Lawyers

Getting the deal done after a “bad” Phase I

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Today’s Fun Fact Pattern

In 2016, Client owns industrial property that was once contaminated from former plating operations. A cleanup in the 1990s was believed to have addressed contamination (based on the standards at that time) related to the plating operations but no official closure was obtained.

Client decides to sell the property and orders a new Phase I to insure no environmental issues before it lets the property out of its control. Consultant recommends a new soil vapor survey since new regulations have been passed since the initial cleanup; soil vapor testing reveals likely vapor intrusion problems in the building.

Client is anxious that favorable current market conditions will diminish by the time a full investigation and possible cleanup is performed, but Client is concerned about possible liability down the road if it does not perform a cleanup.

What are Client’s options to get the deal done?

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Environmental Liability

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What can affect a property from an environmental perspective?

Leaking Underground Storage Tanks

(LUSTs)

Landfills Midnight DumpingIndustry (solvents, paints, hydraulic fluid, petroleum)

Dry Cleaners

Asbestos‐containing materials; radon; lead in paint and

water

Wetlands, ecological resources,

endangered species

Industrial hygiene, health and safety

EMF/high voltage power lines

Off‐site treatment, storage, recycling or disposal of wastes or recyclables

Vapor Intrusion

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What can affect a property from an environmental perspective?

Types of contaminants:

• Metals (plating operations, foundries, other industry)

• Chlorinated solvents (dry cleaners, degreasers)

• Petroleum (leaking underground storage tanks, spills)

Affected media:

• Soil

• Groundwater

• Air

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Costs Associated with Environmental Issues

First‐Party

Cost Overruns Associated with Cleaning Up Known Contamination

Clean Up Costs upon the Discovery of Unknown Contamination

Regulatory and Legal

Mandate from Agency to Clean Up Contamination

Fines and Penalties and Government Oversight Costs

Governmental Re‐Opening of Previously “Closed” Environmental Issues

Associated Legal Defense Costs

Third‐Party

Obligation to Clean Up Other Properties

Bodily Injury Claims as a Result of Contamination

Loss of Value of Property


Business Risks

Interruption to Business Operations

Loss of Rents

Increased Development Costs


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Generally: Environmental Liability is strict, joint and several, and runs with the land.

Many people don’t realize that….... a purchaser/lessee/operator (and sometimes a lender) of contaminated property can be held liable, even though they are not responsible for contaminating the property at issue.

Environmental Liability Framework

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CERCLA (a/k/a “Superfund”)The Comprehensive Environmental Response, Compensation and Liability Act – Federal statute that applies to any release of hazardous substances at a facility.

– Enacted in 1980, amended in 1986 and 2002

– Passed in response to Love Canal in New York

– Poorly written statute

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CERCLA (a/k/a Superfund)(cont.)

Joint and several liability for environmental cleanup (response) costs:

– the current owner and operator of a contaminated property

– any owner or operator at the time of disposal of any hazardous substances

– transporter

– generator

– Liability is strict, regardless of fault

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CERCLA (Superfund) Cont. Damages – recovery of costs of response

Typically allocated between PRPs

Injunctive Relief not available for private parties Available to USEPA under Section 106 Order

Attorneys’ Fees – generally not recoverable

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Types of Environmental Liabilities

Statutory Defenses to CERCLA Liability Innocent Landowner– Must prove that contamination was caused

by 3rd party with whom purchaser has no contractual relationship and “all appropriate inquiry” was performed. (cannot have prior knowledge).

Bona Fide Prospective Purchaser –IF all appropriate inquiry performed, disposal on site took place before date of purchase and appropriate care exercised with respect to any discovered contaminants. (prior knowledge OK).

Contiguous Property Owner – Neighbors whose property is contaminated by the offending property.

Municipal Immunity – Governments who involuntarily acquire property through tax delinquency or demolition foreclosure, abandonment, eminent domain. 11

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All disposal of hazardous substances at property occurred before purchase

Conduct All Appropriate Inquiry (AAI) prior to purchase

Comply with “continuing obligations” after purchase

Not otherwise be a responsible party

Requirements to Establish BFPP



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Comply with land use restrictions Comply with CERCLA information requests and subpoenas Provide legally required notices Exercise “appropriate care” with respect to hazardous

substances at the facility– Stop any continuing releases– Prevent any threatened future release– Prevent/limit exposure of people/environment

to past releases

Required Elements of BFPP Defense after property acquisition:


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Michigan’s Baseline Environmental Assessment (BEA)Much like CERCLA’s Bona Fide Prospective Purchaser Defense –Avoids State environmental liability IF buyer performs a Baseline Environmental Assessment (BEA) prior to or within 45 days of purchase of the property. • Buyer must perform All Appropriate Inquiry (AAI) and perform field work

that identifies contamination; • Contamination must exist on the property in excess of most stringent

(residential) state action levels (making it a “facility”);• Buyer must submit BEA (including results of AAI and sampling and

analysis) to MDEQ within six months of title transfer;• Buyer must draft (and periodically update or revise as conditions or use

changes) a “Due Care Plan” that protects human health and the environment from harm due to the contamination (which can be submitted to DEQ for approval but need not be). 14


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Michigan’s Baseline Environmental Assessment (BEA)If the BEA is properly submitted, State Law then provides:• Buyer who performs the BEA and complies with the Due Care Plan has

liability protection under state environmental law for general remedial responsibilities related to the contamination.

• Buyer is protected from enforcement actions by USEPA through a Memorandum of Understanding with MDEQ.

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Michigan’s Baseline Environmental Assessment (BEA)However:• BEA protections do not protect from third-party CERCLA (Superfund)

Liability. • Property can be subject to use restrictions and other limitations on the

property that may devalue it.• Out-of-state lenders and prospective downstream purchasers may be

uncomfortable with BEA concept.• BEA does not protect against ‘indirect’ risks such as loss of rent,

interruption to business operations, personal injury claims, etc.• Vapor intrusion can cause heath and safety concern that may still

require remediation or controls, irrespective of BEA protections.

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Statutory defenses are great…• But consider…

• What happens if you buy some contaminated property and can establish a defense… but the original “polluter” is long since gone or is judgment-proof…


YOU STILL OWN CONTAMINATED PROPERTY!

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Discussion:

How do parties negotiate the latent cost of contamination if BFPP and/or BEA protections can be established?

Do they need to / should they?

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Structuring the Deal

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In a typical deal situation:

• Seller’s Concern: Neither indemnities nor any other contractual provisions can completely exculpate a seller from future liability.

• Buyer’s Concern: A purchaser of contaminated property can be held liable, even though it is not responsible for contaminating the property at issue. Inadequate due diligence can lead to unwanted surprises.

• Lender’s Concern: Latent discovery of environmental impairments can devalue the collateral and lower LTV, impede cash flow from rents, and raise foreclosure/property management concerns.


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How to Protect the Seller

• Contractual Protections (indemnity, as-is/where-is, releases, express assumptions, covenant not to sue) geared towards shifting as much liability as possible to Buyer.

• Limit Representations and Warranties• Clean up the property / obtain NFR Letter.

• Can be done by seller, or by buyer (if sufficient protections are in place).

• Insurance ???

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How to Protect the Buyer

• Investigate!!! / Due Diligence to Establish Statutory Defenses and avoid surprises!

• Obtain Reps and Warranties from Seller.• Contractual Protections (Indemnities, escrows).• Provide for clean up of the property in the

context of the deal.• Insurance ???


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Essential Contract Components

• Define Terms• Provide for Due Diligence / “All Appropriate Inquiry”

opportunity (and timing)• Allocate environmental liabilities• Reps and Warranties – or – “as-is, where-is”• Address remediation or “NFR Letter” responsibilities

if necessary• Termination parameters

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Drafting Basics

Definitions

– “Hazardous Materials” - should refer to and include “hazardous substances” under CERCLA, “hazardous” and “solid” “wastes” under RCRA, petroleum (since excluded under CERCLA), “pollutants” under the IL Act, etc., etc.

– “Environmental Laws” - should include CERCLA, RCRA, Clean Air Act, Clean Water Act, IL Act, regulations, ordinances, etc., etc.

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Due Diligence - how much and when?– Provide a Due Diligence period – Phase I,

ECAs– Scope - invasive testing? (ensure appropriate

protections to landowner)– “Tiering” (generally for Phase IIs)– Use of prior environmental reports– What if you already know of environmental

problems?– Who pays?– Termination 25

Drafting Basics

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Liability Allocation

• “As-is, where-is” - standing alone, it provides little or no protection from most environmental claims

• Representations and Warranties (seller’s goals vs. buyer’s goals)

• “Shotgun Approach”: Obtain an express indemnity, a release/covenant not to sue and an assumption of environmental liabilities from buyer, and couple with an as-is, where-is clause.

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• “As-is, where-is” really only disclaims warranties as to condition of the property.

• In other words, an as-is, where-is clause simply means that seller is not making any promises about the environmental condition of the property.

• While a buyer can’t sue for breach of warranty, buyer may well be able to sue under CERCLA, common law or other causes of action.

• See Nat’l Law Journal Article

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Warranties/Representations should cover:• Condition of current (and former?) properties: (Releases,

contamination, tanks (USTs), asbestos, lead paint, radon).

• No known impacts from former operations or from nearby properties or facilities.

• No releases / generation / storage / disposal / etc. of Hazardous Materials.

• No restrictions on use or other environmental requirements.

• Compliance with all existing environmental laws.

• No threat of enforcement actions or civil lawsuits.

• No off-site Hazardous Materials management.

• All permits needed for lawful operation.

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Warranties/Representations cont:• Insist on (or watch out for) limitations/qualifiers as to

knowledge (and whose knowledge is it?)

• Scheduled exceptions/disclosures

• Certify disclosure of all relevant reports, data, etc.

• Seller certifies due inquiry

• Recertify at closing

• Penalties for non-compliance

• Insurance???

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Indemnities

– What does the indemnity cover?

• Pre-closing conditions / post-closing activities

• Breach of Representations and Warranties

– Is the Indemnity enforceable?

• Most are strictly construed

• Should be as specific as possible as to environmental issues (but beware toxic torts suits later on)

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CAUTION: What entity is providing the indemnity? (financial assurance)

Caveats:• Indemnity and assumption are only as good as the parties

that stand behind it.• Generally, no protection from suits by 3rd party or

government.

Excess of Indemnity Insurance

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How to Limit Indemnities

– Materiality floor (reduces risk for giving reps/warranties)

– Cap overall liability (can be separate from non-environmental liability cap)

– Deductible “floor” for engaging indemnity coverage (discourages gratuitous cleanups)

– “Sunset” provision to limit temporal scope

– Governmental or Third-party trigger (i.e., no “voluntary” cleanups)

– Indemnify only for breach of reps/warranties

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Express assumptions

– The more specific, the more enforceable

– But, beware of creating a record

Covenants not to sue

Releases

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Other Significant Provisions

Agreements to Remediate• There is no absolute guarantee against future liability.

• The best way to guard against future lawsuits is to actually clean up the property - this can be done in many different ways.

• Clean up prior to sale.

• Seller agrees to conduct cleanup obligation post-sale.

• Escrow money and allow buyer to conduct cleanup.

• Discount purchase price and buyer agrees to cleanup.

• Goal- actually get the property clean so that there is no reason to sue later – NFR/NFA Letter is a good idea.

• Potential Toxic Tort suits down the road (!)34


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Issues for Cleanups in the Contract– Who performs the work?

– Remediate pre- or post-closing?

– What are the cleanup criteria (e.g., TACO standards, NFR Letter, etc.?)

– Tied into discount for purchase price (obligate buyer to perform cleanup)

– Provide escrow or holdback to fund cleanup?

– Insurance (cost cap or as a funding source)

– Self-help for non-performance

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Right to terminate

– Unconditional v. conditional (sole discretion of Buyer, for any reason, etc.?)

– Earnest money at risk or not?

– When does money “go hard” (if at all?)

– Often drafted in conjunction with Due Diligence provisions

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All environmental reps, warranties, indemnities and other provisions must survive the closing (but one party or another may wish to give some provisions limited life, i.e., one-year limit on reps/warranties and/or indemnity)

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Environmental Due Diligence

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Evaluating Risk

The goal of due diligence is not to eliminate 100% of the environmental risks...The goal really is to reduce those risks to an acceptable level, dependent on THE CLIENT’sinternal risk management comfort level

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Objectives of Due Diligence

Evaluate known

potential risks

Identify previously unknown risks

Quantify all risks

identified

Consider options for managing

risks

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Conducting robust environmental due diligence allows a party to:

• Avoid entering a transaction with unacceptable environmental risks

• Negotiate to allocate liability of a known environmental risk

• Establish eligibility for certain statutory defenses to environmental liability

• Mitigate risk through insurance or other strategies

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Types of Environmental Assessments

ASTM Phase I Environmental Site Assessment (ESA) (ASTM Practice E1527-13)

Customized Mini Phase Is

Customized Environmental Questionnaire

ASTM Transaction Screen E1528-14

Phase I + (customized add-ons/non-scope considerations, e.g., asbestos, wetlands, mold)

Compliance Audits

Phase II Invasive Testing Investigations

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Use of Phase Is in the Purchase of Real Property: Why Do One?• Educate the prospective buyer about the property

• A Phase I which reveals no recognized environmental conditions can be used to obtain a “safe harbor” from future environmental liability. Prove “all appropriate inquiry” (AAI)

• Is it required? – Viewpoint of Lenders.

• Is there any advantage to NOT Doing a Phase I?

• Whose responsibility is it to obtain the Phase I?

• Value of Phase Is performed by others?

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Due Diligence for Property

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Phase I Environmental Site Assessments

What’s the procedure for a standard Phase I? An environmental professional performs historical research using a

variety of sources: old aerial photographs, city directories, fire insurance (Sanborn) maps.

Environmental databases (usually EDR) are used to identify any issues with the property or adjacent land (e.g., LUST databases, NPL sites, RCRA waste generators)

Freedom of Information Act (FOIA) requests are made to U.S. EPA, IEPA, local government agencies

Interviews with current/former site owners, government officials, etc.

A visual “site reconnaissance” is performed

The Phase I report identifies “recognized environmental conditions” (“RECs”) or indicates they are absent

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What’s the procedure for a standard Phase I? (cont.)REC = “.... The presence or likely presence of any hazardous substances or petroleum products in, on, or at a property (1) due to any release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment. De minimis conditions are not recognized environmental conditions.”

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Phase I “Non-Scope” Considerations– Asbestos-containing materials; radon; lead in paint and water

– Wetlands, ecological resources, endangered species

– Industrial hygiene, health and safety; indoor air

– EMF/high voltage power lines

– REGULATORY COMPLIANCE

– Former or adjacent sites

– Off-site treatment, storage, recycling or disposal of wastes or recyclables

– Third-Party Liabilities

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What a Phase I is NOT A “clean” Phase I is NOT a guarantee that a site is clean.

A Phase I may NOT reveal every possible environmental problem on the property, nor does it define the extent of the problem, if any.

A Phase I is NOT a compliance audit.

A Phase I does NOT necessarily guarantee that a property purchaser will be able to claim a defense against future environmental liability.

A Phase I does NOT have eternal life.

A Phase I may not be usable by others.

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Timing of Environmental Due Diligence Typically a Phase I ESA takes 30 days.

DO NOT time the environmental investigation so that you have the Phase I only the day before closing.

OTHERWISE – there is no opportunity to review the Phase I for errors, but also no time to follow up on possible issues.

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Phase I Viability A Phase I completed less than 180 days prior to

the date of acquisition of the property is presumed to be valid. (ASTM E1527-13 sec 4.6)

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Phase I Viability A Phase I for which the information was collected

or updated within one year prior to the date of acquisition of the property may be used providedthat the following components are conducted or updated within 180 days of property acquisition:– Interviews with site owners, operators and/or occupants– Searches for recorded environmental cleanup liens– Reviews of federal, state and local government records– Visual inspection of the property

And – an updated declaration by the EP

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What happens after the Phase I?

That depends…

• If the Phase I reveals no recognized environmental conditions, full speed ahead!

• Enables one to fairly value the deal

• Affords psychological comfort

• Lenders will lend money

• First step in establishing statutory protections later if needed

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Post Phase I Considerations

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If the Phase I reveals one or more RECs, more work is (probably) needed

• Generally a Phase II is the next step

• Remediation may need to be performed

• Possibly pursue an NFR/NFA Letter

• Due Care (Continuing Obligations) may need to be taken later

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• Phase II ESA – environmental due diligence which includes physical sampling (generally of a limited nature) of the site. For example, a Phase II ESA may include laboratory analysis of soil, groundwater and/or surface water, for certain contaminants.– A Phase II ESA may also include testing for the presence of lead-based

paint, asbestos-containing materials (“ACMs”), and volatile organic compounds that may pose a risk of harm due to vapor intrusion.

Phase IIs

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The Primary Goal is usually to investigate concerns identified in Phase I

–Testing can be performed for soil, groundwater, soil-gas, and interior air (vapor intrusion)

–Soil testing using Geoprobe, hand augers, etc.

–Groundwater testing using temporary or permanent wells

–Soil gas and/or interior air using probes or vacuum canisters

Phase IIs


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• Secondary Goal is to delineate extent of any problems

– Even a no-action remedy needs to determine the extent of the problem

– Most states insistent on full delineation before issuing closure letter

– Estimate of remediation costs is almost always desired

Phase IIs

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Typical Phase II Data Table


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Typical Phase II Plume Diagram

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Definition: Vapor intrusion is the migration of volatile chemicals from the subsurface into overlying buildings. Volatile chemicals in buried wastes and /or contaminated groundwater can emit vapors that may migrate through subsurface soil and into air spaces of overlying buildings. (USEPA 2002)

For purposes of the ASTM standard, not from naturally occurring substances

In addition to being part of the ASTM E1527‐13 Phase I Standard, government agencies – Federal and State – are focusing more on this, for investigation and mitigation

Hot Topic: Vapor Intrusion


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Figure 1. Migration of Soil Vapors to Indoor Air

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Vapors can accumulate in dwellings or occupied buildings to levels that may pose short‐term or long‐term safety hazards, and/or health effects.

Average person drinks 2 liters of water per day

BUT – the Average person inhales 20,000 liters of air a day

Because of this health concern, VI can pose an economic risk to retail development

Why Worry about VI?


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Pressure‐driven flow

– Building underpressurization

• Stack Effect

• Wind loading

• Ventilation systems

• Barometric pressure

– Diffusion through cracks

How does it work?

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Sealing openings involves filling in cracks in the floor slab and gaps around pipes and utility lines found in basement walls. Concrete can be poured over unfinished dirt floors.

Installing vapor barriers involves placing sheets of “geomembrane” or strong plastic beneath a building to prevent vapor entry. Vapor barriers are best installed during building construction, but can be installed in existing buildings that have crawl spaces.

Passive venting involves installing a venting layer beneath a building. Wind or the build‐up of vapors causes vapors to move through the venting layer toward the sides of the building where it is vented outdoors. A venting layer can be installed prior to building construction as well as within existing buildings. It is usually used with a vapor barrier.

Passive Vapor Intrusion Mitigation Methods:

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Mitigation Solutions


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•Sub‐slab depressurization (SSD) involves connecting a blower (an electric fan) to a small suction pit(s) dug into the slab in order to vent vapors outdoors. (Most common method.)

• Building over‐pressurization involves adjusting the building’s heating, ventilation, and air‐conditioning system to increase the pressure indoors relative to the sub‐slab area. This method is typically used for office buildings and other large structures.

*Note that active systems require ongoing operation and maintenance (O&M) costs.

Active Vapor Intrusion Mitigation Methods:


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Typical fan and vent pipe

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What happens after the Phase I? That depends…(cont.)• How to work a cleanup into the deal

• Cleanup before closing or after?• Who will have the responsibility?• How can you insure cleanup will be done?• Escrows/holdbacks/baskets/caps• Indemnities• Insurance?

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Post - Phase II


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Achieving Site Closure

Post Phase II / Remediation – Site Closure Options

– Obtain a No Further Remediation (“NFR”) Letter (or equiv.)– NFRAP (No Further Remedial Action Planned, or equiv.)– Comfort Letter– Prospective Purchaser Agreement

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Evaluating Site Closure NFA/NFR Letters

Do not assume that just because there is a closure letter in the chain of title that it signifies a “clean bill of health” for the property.

– Limitations for industrial/commercial use or other AULs– Restrictions on use of groundwater– Duty to maintain engineered barriers– Beware of pre-vapor intrusion closure letters!

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Fact Pattern Revisited

In 2016, Client owns industrial property that was once contaminated from former plating operations. A cleanup in the 1990s was believed to have addressed contamination (based on the standards at that time) related to the plating operations but no official closure was obtained.

Client decides to sell the property and orders a new Phase I to insure no environmental issues before it lets the property out of its control. Consultant recommends a new soil vapor survey since new regulations have been passed since the initial cleanup; soil vapor testing reveals likely vapor intrusion problems in the building.

Client is anxious that favorable current market conditions will diminish by the time a full investigation and possible cleanup is performed, but Client is concerned about possible liability down the road if it does not perform a cleanup.

What are Client’s options to get the deal done?

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Options

Most Conservative (baseline) – Client takes property off market (or at least postpones active negotiations) and performs a comprehensive Phase II analysis on the property. Client pursues an NFA Letter from State EPA (which may or may not require remedial activities) or, at minimum, investigates and remediates the property as necessary to get a clean opinion from our environmental consultant. Client then markets the property as non-impacted by environmental issues (i.e., “clean”). Indemnities to shift pre-closing environmental liabilities are up to negotiations between the parties. Environmental PLL insurance may be of (limited) use to cover future issues (that are currently unknown issues), but the known contaminants must first have been identified and addressed. [This option gives Client the maximum amount of control over the process and stringency of the cleanup, and minimizes future legacy environmental risk, but it takes the longest].

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Options

Alternative #1 (Client obtains closure, no escrow) – Client continues to market property and discloses environmental conditions to prospective buyer. Siemens negotiates purchase price as if property was clean, and contractually commits to investigate (Phase II) and remediate property as necessary, post-closing, to obtain an NFA Letter or consultant opinion, as above. Closure to be obtained within a year (or as negotiated) with a right of self-help for Buyer if Client does not comply. Client indemnifies Buyer until remediation/closure is complete, at which point indemnity shifts to obligate Buyer in favor of Client for future environmental issues (if so negotiated). “Excess of Indemnity” insurance can be obtained, if desired by Buyer, to backstop Client’s obligation to Buyer – and/or also possibly Buyer’s future indemnity to Client, if applicable.

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Options

Alternative #2 (Buyer obtains closure, no escrow) – Client negotiates purchase price at a discount (based on estimated cost of cleanup plus a premium to cover the risk) and contractually commits the Buyer to investigate and remediate property as necessary, post-closing, to obtain an NFR Letter or consultant opinion, as above. Closure to be obtained within a year (or as negotiated) with a right of self-help for Client if Buyer does not comply. Buyer indemnifies Client to shift all environmental risk to Buyer and “Excess of Indemnity” insurance can be obtained to backstop the Buyer’s obligation.

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Options

Alternative #3 (Client obtains closure, escrow) - Client negotiates purchase price as if property was clean, and contractually commits to investigate and remediate property as necessary, post-closing, to obtain an NFA Letter or consultant opinion, as above. Closure to be obtained within a year (or as negotiated) with a right of self-help for Buyer if Client does not comply. Buyer reserves an agreed-upon portion of the purchase price in escrow (or Client obtains LOC or similar third-party guarantee) to guarantee Client’s performance of the remediation. If the cost of remediation/closure is less than the escrow, CLIENT gets the remainder. If the cost is more, Client eats the additional cost. “Excess of Indemnity” insurance can be obtained to backstop the Client’s obligation to Buyer (if Buyer demands additional risk protection beyond the escrow).

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Options

Alternative #4 (Buyer obtains closure, escrow) - Client negotiates purchase price as if property was clean, but a sum of money equal to the estimated cleanup costs plus a healthy premium (to compensate Buyer for taking risk of cost overruns) is held in escrow. Buyer contractually commits to investigate and remediate property as necessary, post-closing, to obtain an NFA Letter or consultant opinion, as above. If the cost of remediation/closure is less than the escrow, the BUYER gets the remainder (which is the upside for the Buyer). If the cost is more, the Buyer eats the additional cost and is contractually obligated to complete the remediation. “Excess of indemnity” insurance is obtained to backstop the Buyer’s obligation.

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Options

Alternative #5 (third party takes the risk, various scenarios) – Client negotiates purchase price as if clean, then contracts with an environmental consultant to provide a guaranteed fixed-price cleanup, plus indemnity. Risk of potential cost overruns is with the consultant. Client takes part of purchase price to pay consultant for estimated cleanup cost plus a premium for transferring the risk. “Excess of indemnity” insurance can be obtained to backstop the consultant’sobligation. – OR – Client sells property to a Brownfield Redevelopment company at

a (deep?) discount. Redevelopment company generally would perform some level of cleanup and then flip (or rent) the property to a user. Redevelopment Company takes the risk that future environmental issues arise by indemnifying Client. “Excess of indemnity” insurance could be obtained to backstop the Redevelopment company’s indemnity to Siemens (although the insurance would have a limited time duration, which limits its long-term effectiveness).

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QUESTIONS?

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millercanfield.comUNITED STATES CANADA MEXICO POLAND CHINA

Lawrence W. [email protected]+1.312.460.4266


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Economic Revitalization Through BrownfieldsConference, Springfield, IL

August 31, 2016

Lawrence W. Falbe, Esq.

Miller Canfield Paddock Stone PLC

Overview of BrownfieldLegal Issues


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It’s a great time (legally) to redevelopbrownfields:

Risk-based remediation standards are fairly clear andcommonplace; new technologies make cleanups lessexpensive

Almost all states have voluntary cleanup programs andwill provide closure

The law is well developed with fewer uncertainties

Environmental risks are more commonly understoodand perceived to be manageable

The Good News

22017 Annual Real Estate Seminar

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There are still plenty of legal / liabilityhurdles:

Seller fears opening up “can of worms” by trying to sellor redevelop brownfield property

Buyer underestimates cleanup costs or becomes liablefor unknown environmental issues

Lender risks losing loan funds due to failure of projector worried about acquiring legal liability

New issues such as “vapor intrusion” not understood

Bad technical and/or legal advice can cause problems,cost overruns, delays

The Bad News


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Costs Associated with Environmental Issues

First-Party

Cost Overruns Associated withCleaning Up Known Contamination

Clean Up Costs upon the Discoveryof Unknown Contamination

Regulatory and Legal

Mandate from Agency to Clean UpContamination

Fines and Penalties and GovernmentOversight Costs

Governmental Re-Opening of Previously“Closed” Environmental Issues


Third-Party

Obligation to Clean Up OtherProperties

Bodily Injury Claims as a Result ofContamination

Claims as a Result of Loss of Valueof Property


Business Risks

Interruption to Business Operations

Loss of Rents

Increased Development Costs


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Generally: Environmental Liability is strict, joint andseveral, and runs with the land.

Many people don’t realize that….

... a purchaser/lessee/operator (and sometimes a lender) ofcontaminated property can be held liable, even though they arenot responsible for contaminating the property at issue.



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CERCLA (a/k/a “Superfund”)

The Comprehensive Environmental Response,

Compensation and Liability Act – Federal statute that

applies to any release of hazardous substances at a

facility.– Enacted in 1980, amended in 1986 and 2002

– Passed in response to Love Canal in New York

– Poorly written statute

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CERCLA (a/k/a Superfund)(cont.)

Joint and several liability for environmental cleanup(response) costs:

– the current owner and operator of a contaminatedproperty

– any owner or operator at the time of disposal of anyhazardous substances

– transporter

– generator

– Liability is strict, regardless of fault

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CERCLA (Superfund) Cont. Damages – recovery of costs of response

Typically allocated between PRPs

Injunctive Relief not available for private parties

Available to USEPA under Section 106 Order

Attorneys’ Fees – generally not recoverable

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Statutory Defenses to CERCLA Liability

Innocent Landowner– Must prove that contamination was causedby 3rd party with whom purchaser has no contractual relationshipand “all appropriate inquiry” was performed. (cannot have priorknowledge).

Bona Fide Prospective Purchaser –IF all appropriate inquiryperformed, disposal on site took place before date of purchase andappropriate care exercised with respect to any discoveredcontaminants. (prior knowledge OK).

Contiguous Property Owner – Neighbors whose property iscontaminated by the offending property.

Municipal Immunity – Governments who involuntarily acquireproperty through tax delinquency or demolition foreclosure,abandonment, eminent domain. 9


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CERCLA Amended: Small Business LiabilityRelief and Brownfields Revitalization Act (2002)– one purpose was to promote the revitalization ofbrownfields



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2002 Brownfields Amendments

to CERCLA (cont’d)Created bona fide prospective purchaser(BFPP) defense to CERCLA liability



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All disposal of hazardous substances at propertyoccurred before purchase

Conduct All Appropriate Inquiry (AAI) prior to purchase

Comply with “continuing obligations” after purchase

Not otherwise be a responsible party

Requirements to Establish BFPP



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Comply with land use restrictions

Comply with CERCLA information requests and subpoenas

Provide legally required notices

Exercise “appropriate care” with respect to hazardoussubstances at the facility

– Stop any continuing releases

– Prevent any threatened future release

– Prevent/limit exposure of people/environment

to past releases

Required Elements of BFPP Defenseafter property acquisition:



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Statutory defenses are great…

• But consider…

• What happens if you buy some contaminatedproperty and can establish a defense… but theoriginal “polluter” is long since gone or isjudgment-proof…


YOU STILL OWNCONTAMINATEDPROPERTY!


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The Resource Conservation and Recovery Act(RCRA)

“Cradle-to-Grave” statute designed to govern thegeneration, identification, storage and disposal ofhazardous waste.

No private cause of action for a cost recovery claim underthe statute, but citizen suits may be asserted against anyparty for any release of hazardous wastes that currentlypose endangerment to health and environment.

Attorney’s fees can be recovered.

Injunctive relief available to private parties


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State Environmental Statutes and Common Law

Claims

Illinois Environmental Protection Act / state “baby Superfund” laws.

Common law causes of action such as public and private nuisance,

trespass, strict liability, ultra hazardous activity.

Criteria for proving claims are same or less burdensome than

criteria for proving CERCLA or a RCRA claim and remedies can

be more expansive. Often, these are added to CERCLA/RCRA

claims in the same complaint.

Common law causes of action can sometimes be pre-empted by

state or federal law.


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In a typical deal situation:

• Seller’s Concern: Neither indemnities nor any other contractual

provisions can completely exculpate a seller from future liability.

• Buyer’s Concern: A purchaser of contaminated property can be held

liable, even though it is not responsible for contaminating the property

at issue. Inadequate due diligence can lead to unwanted surprises.

• Lender’s Concern: Latent discovery of environmental impairments

can devalue the collateral and lower LTV, impede cash flow from rents,

and raise foreclosure/property management concerns.



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Seller’s Side- how do I protect myself from future liability?

What the Seller Wants

To leave all environmental liabilities with company or shift them to buyer

Not to have any surprises!

Buyer’s Side- how do I investigate a property and defineenvironmental problems?

What the Buyer Wants

To have liability only for post-closing matters


Lender’s Side-

What the Lender Wants

To avoid environmental liabilities interfering with debt repayment or valueof collateral




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How to Protect the Seller

• Contractual Protections (indemnity, as-is/where-is, releases, express assumptions, covenant notto sue) geared towards shifting as much liabilityas possible to Buyer.

• Limit Representations and Warranties

• Clean up the property / obtain NFR Letter.

• Can be done by seller, or by buyer (ifsufficient protections are in place).

• Insurance ???


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How to Protect the Buyer

• Investigate!!! / Due Diligence to EstablishStatutory Defenses and avoid surprises!

• Obtain Reps and Warranties from Seller.

• Contractual Protections (Indemnities, escrows).

• Provide for clean up of the property in thecontext of the deal.

• Insurance ???


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Essential Contract Components

• Define Terms

• Provide for Due Diligence / “All Appropriate Inquiry”opportunity (and timing)

• Allocate environmental liabilities

• Address remediation or “NFR Letter” responsibilitiesif necessary

• Termination parameters


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Evaluating Risk

The goal of due diligence is not to eliminate 100% ofthe environmental risks...

The goal really is to reduce those risks to anacceptable level, dependent on your organization’sinternal risk management comfort level


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Evaluateknown

potential risks

Identifypreviouslyunknown

risks

Quantify allrisks

identified

Consideroptions formanaging

risks


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Conducting robust environmental due diligenceallows a party to:

• Avoid entering a transaction withunacceptable environmental risks

• Negotiate to allocate liability of a knownenvironmental risk

• Establish eligibility for certain statutorydefenses to environmental liability

• Mitigate risk through insurance or otherstrategies


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Types of Environmental Assessments

ASTM Phase I Environmental Site Assessment (ESA)(ASTM Practice E1527-13)

Customized Mini Phase Is

Customized Environmental Questionnaire

ASTM Transaction Screen E1528-14

Phase I + (customized add-ons/non-scopeconsiderations, e.g., asbestos, wetlands, mold)

Compliance Audits

Phase II Invasive Testing Investigations


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Phase I Environmental SiteAssessments

What’s the procedure for a standard Phase I? An environmental professional performs historical research using a

variety of sources: old aerial photographs, city directories, fireinsurance (Sanborn) maps.

Environmental databases (usually EDR) are used to identify any issueswith the property or adjacent land (e.g., LUST databases, NPL sites,RCRA waste generators)

Freedom of Information Act (FOIA) requests are made to U.S. EPA,IEPA, local government agencies

Interviews with current/former site owners, government officials, etc.

A visual “site reconnaissance” is performed

The Phase I report identifies “recognized environmental conditions”(“RECs”) or indicates they are absent

VAPOR INTRUSION NOW INCLUDED!26


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What’s the procedure for a standard Phase I? (cont.)

REC = “.... The presence or likely presence of any hazardoussubstances or petroleum products in, on, or at a property (1)due to any release to the environment; (2) under conditionsindicative of a release to the environment; or (3) underconditions that pose a material threat of a future release to theenvironment. De minimis conditions are not recognizedenvironmental conditions.”

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Phase I “Non-Scope” Considerations– Asbestos-containing materials; radon; lead in paint and water

– Wetlands, ecological resources, endangered species

– Industrial hygiene, health and safety; indoor air

– EMF/high voltage power lines

– REGULATORY COMPLIANCE

– Former or adjacent sites

– Off-site treatment, storage, recycling or disposal of wastes orrecyclables

– Third-Party Liabilities

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What a Phase I is NOT

A “clean” Phase I is NOT a guarantee that a site is clean.

A Phase I may NOT reveal every possible environmentalproblem on the property, nor does it define the extent of theproblem, if any.

A Phase I is NOT a compliance audit.

A Phase I does NOT necessarily guarantee that a propertypurchaser will be able to claim a defense against futureenvironmental liability.

A Phase I does NOT have eternal life.

A Phase I may not be usable by others.

All Phase Is are NOT created equally. 29



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Timing of Environmental Due Diligence

Typically a Phase I ESA takes 30 days.

DO NOT time the environmental investigation sothat you have the Phase I only the day beforeclosing.

OTHERWISE – there is no opportunity to reviewthe Phase I for errors, but also no time to follow upon possible issues.

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Phase I Viability

A Phase I completed less than 180 days prior tothe date of acquisition of the property is presumedto be valid. (ASTM E1527-13 sec 4.6)

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Phase I Viability

A Phase I for which the information was collectedor updated within one year prior to the date ofacquisition of the property may be used providedthat the following components are conducted orupdated within 180 days of property acquisition:– Interviews with site owners, operators and/or occupants

– Searches for recorded environmental cleanup liens

– Reviews of federal, state and local government records

– Visual inspection of the property

And – an updated declaration by the EP

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What happens after the Phase I?

That depends…

• If the Phase I reveals no recognized environmental

conditions, full speed ahead!

• Enables one to fairly value the deal

• Affords psychological comfort

• Lenders will lend money

• First step in establishing statutory protections later if needed

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If the Phase I reveals one or more RECs, more workis (probably) needed

• Generally a Phase II is the next step

• Remediation may need to be performed

• Possibly pursue an NFR/NFA Letter

• Due Care (Continuing Obligations) may need to be taken later


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• Phase II ESA – environmental due diligence whichincludes physical sampling (generally of a limited nature) ofthe site. For example, a Phase II ESA may includelaboratory analysis of soil, groundwater and/or surfacewater, for certain contaminants.

– A Phase II ESA may also include testing for the presence of lead-basedpaint, asbestos-containing materials (“ACMs”), and volatile organiccompounds that may pose a risk of harm due to vapor intrusion.

Phase IIs


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The Primary Goal is usually to investigateconcerns identified in Phase I

–Testing can be performed for soil, groundwater, soil-gas, andinterior air (vapor intrusion)

–Soil testing using Geoprobe, hand augers, etc.

–Groundwater testing using temporary or permanent wells

–Soil gas and/or interior air using probes or vacuum canisters

Phase IIs


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• Secondary Goal is to delineate extent of anyproblems

– Even a no-action remedy needs to determine the extent ofthe problem

– Most states insistent on full delineation before issuingclosure letter

– Estimate of remediation costs is almost always desired

Phase IIs


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Typical Phase II Data Table


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Typical Phase II Plume Diagram


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Post Phase II / Remediation – Site ClosureOptions

– Obtain a No Further Remediation (“NFR”) Letter (or equiv.)

– NFRAP (No Further Remedial Action Planned, or equiv.)

– Comfort Letter

– Prospective Purchaser Agreement


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No Further Remediation Letters– Provides protection from liability under the Environmental Protection

Act, but not under federal statutes. Sec. 58.10(a): “Issuance of theNFR Letter signifies a release from further responsibilities under theAct…and shall be considered prima facie evidence that the site doesnot constitute a threat to human health and the environment….”

– Benefits are intended to run with the land to subsequent owners ofthe property.

– NFR letter can be limited in several ways:

• A focused NFR letter (area or constituents);

• NFR letter may limit future use of property (“AUL”);

• “Engineered Barriers.”

– Federal MOU offers comfort against federal enforcement but not lawsuitsunder CERCLA or other laws


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Evaluating Site Closure NFA/NFRLetters

Do not assume that just because there is a closure letter inthe chain of title that it signifies a “clean bill of health” forthe property.

– Limitations for industrial/commercial use or other AULs

– Restrictions on use of groundwater

– Duty to maintain engineered barriers

– Beware of Pre-2013 Illinois NFR Letters!


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Top 10 Tips for Hiring Consultants

1. Build up your stable of trustworthy consultants (at variousprice points and capabilities).

2. Pre-negotiate standard terms and conditions (T&C).

3. Check contracts/T&C when "inheriting" consultants orobtaining a reliance letter; seek to renegotiate if necessary

4. Confirm the scope of the engagement and fee structure(estimates, lump sum/not-to-exceed, fund reimbursements,etc.).

5. Indemnities, and negotiating the limits of the consultant'sliability (beware limits to the value of the contract!).


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Top 10 Tips for Hiring Consultants

6. Check the insurance coverage and limits;additional insureds (subs?).

7. Miscellaneous provisions: confidentiality, fee-shifting, fee mark-ups, permits.

8. Know when to give in: exclusion of consequentialdamages.

9. Who pays? Know who the client is, make sure theconsultant does too, and document it.

10.Who cleans up the mess? (IDW)


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QUESTIONS?

45Lawrence W. Falbe [email protected] 2017 Annual Real Estate Seminar

June 2-3, 2017 CH. 6

advanced environmental law real estate lawyers€¦ · statutory defenses to cercla liability...

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