environmental indemnity in real estate transactions...

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Environmental Indemnity in Real EstateTransactions: Allocating Risks ofPotential Cleanup CostsNegotiating Key Provisions, Drafting and Reviewing the Agreement to Ensure Complete Coverage

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TUESDAY, AUGUST 15, 2017

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Today’s faculty features:

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: [email protected]

5

R. Morgan GilhulyBarg Coffin Lewis & Trapp, LLPPhone: [email protected]

I. General Principles for Contracts and Indemnities forReal Estate Transactions

II. The Architecture of an Environmental Indemnity

III. See You In Court: Case Law

IV. Practical Tips

I. General Principles for Contracts and Indemnities forReal 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 contractaway your liability vis-à-vis the government

7


As the Third Circuit said with regardto indemnities and CERCLA liability:

“Agreements to indemnify or holdharmless are enforceable betweenthe parties but not against thegovernment.” Beazer East, Inc. v.Mead Corp., 34 F.3d 206 (3d Cir. 1994)

As the Third Circuit said with regardto indemnities and CERCLA liability:

“Agreements to indemnify or holdharmless are enforceable betweenthe parties but not against thegovernment.” Beazer East, Inc. v.Mead Corp., 34 F.3d 206 (3d Cir. 1994)

8


For the most part,contracts only bind theparties to the contractand do not bind thirdparties

– Exceptions (sometimes):

• Successors and assigns

• Affiliates

• Running with the land

For the most part,contracts only bind theparties to the contractand do not bind thirdparties

– Exceptions (sometimes):

• Successors and assigns

• Affiliates

• Running with the land

9


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

Consider parent company guarantee, letter of credit, reserves, escrows,other financial mechanisms

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

Consider parent company guarantee, letter of credit, reserves, escrows,other 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”

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What Kinds of Liabilities Might Occur?

12

Types of Liability

CleanupLiabilities

1st PartyEconomic

Losses

ThirdParty

Claims

ThirdParty

ClaimsVoluntaryCleanup

NaturalResourceDamages

Gov’tOrderedCleanup

BusinessInterrupti

on&Delays

AddedCosts SiteRedevelop-ment

Diminished

PropertyValueToxic Tort Property

Damage

13

Site Cleanup Liabilities

Who is responsible – Buyer or Seller?

For what? 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?

Who is responsible – Buyer or Seller?

For what? 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?

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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 managementplan)?

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

Who controls communications with government?

What is the scope of cleanup covered? Industrial/commercial versus residential? Risked-based cleanup?

Use of institutional controls permitted? (e.g. site managementplan)?

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, futureoccupants, offsite neighbors

Property damage claims Example: Offsite neighbors

Natural resource damages

Toxic tort claims Examples: Site workers, futureoccupants, offsite neighbors

Property damage claims Example: Offsite neighbors

Natural resource damages

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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 courtsinterpret standard indemnities tocover only third party claims, notfirst 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 courtsinterpret standard indemnities tocover only third party claims, notfirst party damages, costs and losses

Draft accordingly

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Site Redevelopment Costs

– Future owners may incuradded costs beyond gov’tordered cleanup• Excavation in connection with

redevelopment/construction

• Disposal of contaminated media

– Example - parking garage

• Cost of studies and hazmatcontractors

– Future owners may incuradded costs beyond gov’tordered cleanup• Excavation in connection with

redevelopment/construction

• Disposal of contaminated media

– Example - parking garage

• Cost of studies and hazmatcontractors

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Vapor Intrusion Liabilities

Vapor intrusion intobuildings

Investigation and testing

HVAC control

Engineered vapormitigation systems

Installation and longterm O&M

Who pays? Who controls?Who is liable to thegovernment? To occupants?

Vapor intrusion intobuildings

Investigation and testing

HVAC control

Engineered vapormitigation systems

Installation and longterm O&M

Who pays? Who controls?Who is liable to thegovernment? To occupants?

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Part II: The Architecture of anEnvironmental Indemnity

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PART II AGENDA Indemnities: Not One Size Fits All

Specific Language Choices

Complex Structures

Synthesizing Indemnity Provisions With The MasterAgreement And Other Deal Documents

Indemnities: Not One Size Fits All

Specific Language Choices

Complex Structures

Synthesizing Indemnity Provisions With The MasterAgreement And Other Deal Documents

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Key Contract Terms to AllocateEnvironmental Liabilities

Environmental Indemnity

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

Covenants and Affirmative Commitments

• “We agree to perform government ordered cleanup and reimburse youradded 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 youradded site redevelopment costs…”

Releases and Waivers

• Covenants not to sue


• “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 indemnityprovisions Carve out specific environmental

conditions

Do optics matter?

Sweet and simple Allocate based on knowledge of

existing conditions at closing

Complex indemnityprovisions Carve out specific environmental

conditions

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NOT ONE SIZE FITS ALLExample:

Tenant will indemnify and hold Landlord harmless fromand against any and all liabilities, losses, damages, suits,penalties, claims and demands of every kind, includingreasonable attorneys’ fees, arising out of or relating toany environmental conditions on the property or the

operations conducted thereon.

Example:

Tenant will indemnify and hold Landlord harmless fromand against any and all liabilities, losses, damages, suits,penalties, claims and demands of every kind, includingreasonable attorneys’ fees, arising out of or relating toany environmental conditions on the property or the

operations conducted thereon.

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NOT ONE SIZE FITS ALLTenant will indemnify and

hold Landlord harmless fromand against any and all

liabilities, losses, damages,suits, penalties, claims and

demands of every kind,including reasonable

attorneys’ fees, arising out ofor relating to any

environmental conditions onthe property or the

operations conductedthereon.

Issue Spotting

1. Who can recovermonies (successors andassigns)?

2. Define any terms?3. Length of indemnity

period?4. Which costs covered?5. Which costs are NOT

covered?

Tenant will indemnify andhold Landlord harmless from

and against any and allliabilities, losses, damages,suits, penalties, claims and

demands of every kind,including reasonable

attorneys’ fees, arising out ofor relating to any

environmental conditions onthe property or the

operations conductedthereon.

Issue Spotting

1. Who can recovermonies (successors andassigns)?

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

Decision Point: Crafting general or specific language forscope 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 forscope 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

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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, ureaformaldehyde (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, ureaformaldehyde (building materials), mold, microbial matter- Also consider including solid waste, explosives, radioactive

materials- Exclude substances ordinarily used for purposes of cleaning

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“Environmental Laws” are… “Environmental Laws” means any and all applicable

federal, state, or local law or regulation, whether now inforce or as amended or enacted in the future, pertaining topublic health or the environment, including, withoutlimitation, ……”***

***NOTE – These are excerpts are for example purpose onlyand should not be relied upon as legal advice.

“Environmental Laws” means any federal, state or localstatute, law, ordinance, code, common law, rule,regulation, order or decree, regulating, relating to, orimposing liability or other obligations concerning theprotection of the environment, natural resources, and/oractivities concerning air, water, solid waste, resourceprotection, inland wetlands, watercourses, orenvironmental conditions or involving any asbestos-containing materials, materials presumed by law tocontain asbestos, PCBs, petroleum, petroleum byproduct,and/or hazardous or toxic substances, chemicals ormaterials, or any other waste, materials, pollutant orcontaminant that is regulated to protect the environment,as may now or at any time hereafter be in effect, includingwithout limitation, the Comprehensive EnvironmentalResponse, Compensation and Liability Act, as amended (42U.S.C. Sections 9601, et seq.) (“CERCLA”), the ResourceConservation and Recovery Act, as amended (42 U.S.C.Sections 6901, et seq.), the Hazardous MaterialsTransportation Act, as amended (49 U.S.C. Sections 1801,et seq.), the Clean Air Act, as amended (42 U.S.C. Sections7401, et seq., the Toxic Substances Control Act, asamended (15 U.S.C. Sections 2601, et seq.), the Clean WaterAct, as amended (33 U.S.C. Sections 1251, et seq.), and/orany other applicable environmental law or any regulationspromulgated under any of the foregoing.

“Environmental Laws” means any and all applicablefederal, state, or local law or regulation, whether now inforce or as amended or enacted in the future, pertaining topublic health or the environment, including, withoutlimitation, ……”***

***NOTE – These are excerpts are for example purpose onlyand should not be relied upon as legal advice.

“Environmental Laws” means any federal, state or localstatute, law, ordinance, code, common law, rule,regulation, order or decree, regulating, relating to, orimposing liability or other obligations concerning theprotection of the environment, natural resources, and/oractivities concerning air, water, solid waste, resourceprotection, inland wetlands, watercourses, orenvironmental conditions or involving any asbestos-containing materials, materials presumed by law tocontain asbestos, PCBs, petroleum, petroleum byproduct,and/or hazardous or toxic substances, chemicals ormaterials, or any other waste, materials, pollutant orcontaminant that is regulated to protect the environment,as may now or at any time hereafter be in effect, includingwithout limitation, the Comprehensive EnvironmentalResponse, Compensation and Liability Act, as amended (42U.S.C. Sections 9601, et seq.) (“CERCLA”), the ResourceConservation and Recovery Act, as amended (42 U.S.C.Sections 6901, et seq.), the Hazardous MaterialsTransportation Act, as amended (49 U.S.C. Sections 1801,et seq.), the Clean Air Act, as amended (42 U.S.C. Sections7401, et seq., the Toxic Substances Control Act, asamended (15 U.S.C. Sections 2601, et seq.), the Clean WaterAct, as amended (33 U.S.C. Sections 1251, et seq.), and/orany other applicable environmental law or any regulationspromulgated under any of the foregoing.

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SPECIFIC LANGUAGE CHOICES Environmental Claims –third party demand or can

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

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

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

releases included?)

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

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

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

releases included?)

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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?

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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 forpurposes 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 forpurposes of triggering indemnity claims

32

COMPLEX STRUCTURESCaps and Baskets

Basket: Buyer maintains a running total of the post-closing environmental liabilities it has incurred; whenthe 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 canact as trigger for shared liability after the cap amount isreached)

Caps and Baskets

Basket: Buyer maintains a running total of the post-closing environmental liabilities it has incurred; whenthe 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 canact as trigger for shared liability after the cap amount isreached)

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COMPLEX STRUCTURESWhen does the indemnity terminate?

Are termination provisions linked to achieving somekind 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 somekind 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 ProvisionsWithin 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 ProvisionsRepresentations and Warranties

What if party reps to “the absence of hazardoussubstances on Property” and the party stores typicalcleaning supplies which are considered hazardoussubstances on-site – you will automatically be subject toindemnity because of breach of representation

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


What if party reps to “the absence of hazardoussubstances on Property” and the party stores typicalcleaning supplies which are considered hazardoussubstances on-site – you will automatically be subject toindemnity 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 incompliance 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 withindemnity triggers:

Use of hazardous materials and/or substances is incompliance 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

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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 orpotentially 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 orpotentially 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 disclosureschedules? Covered by indemnity? Issue – a disclosure schedule can be list of

environmental reports (which often reference otherprior 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? Limit to acknowledge without additional inquiry or investigation?

Disclosure schedules

What and how is information included in the disclosureschedules? Covered by indemnity? Issue – a disclosure schedule can be list of

environmental reports (which often reference otherprior 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? Limit to acknowledge without additional inquiry or investigation?

39

Synthesizing Indemnity ProvisionsWith 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’ feesand court costs) incurred or sustained by Buyer arising directlyor indirectly, from : (a) any failure of Seller to comply with anyEnvironmental Laws; (b) Existing Contamination (whetherknown or unknown); (c) any breach of this agreement; or (d)contamination, if attributable to the actions or omissions ofSeller, including without limitation any of the following:….

Seller agrees, at its sole cost and expense, to indemnify, defendand 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’ feesand court costs) incurred or sustained by Buyer arising directlyor indirectly, from : (a) any failure of Seller to comply with anyEnvironmental Laws; (b) Existing Contamination (whetherknown or unknown); (c) any breach of this agreement; or (d)contamination, if attributable to the actions or omissions ofSeller, including without limitation any of the following:….

41

Example 2

Buyer shall indemnify, defend and hold Seller harmless fromany 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 theproperty by Buyer, its agents, tenants, employees or

contractors.

Buyer shall indemnify, defend and hold Seller harmless fromany 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 theproperty by Buyer, its agents, tenants, employees or

contractors.

42

Final Take-Aways

Boiler plate is only agood starting point

Understand andmemorialize the exactrisk allocation

Pick your battles

Boiler plate is only agood starting point

Understand andmemorialize the exactrisk 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 costsupon purchase, the seller is usually asked to indemnifythe buyer for liabilities that arise post-closing but arerelated to pre-closing events Buyers may be willing in some cases to

assume environmental liabilities in returnfor a reduced purchase price or othercompensation

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

Because buyers become liable for environmental costsupon purchase, the seller is usually asked to indemnifythe buyer for liabilities that arise post-closing but arerelated to pre-closing events Buyers may be willing in some cases to

assume environmental liabilities in returnfor a reduced purchase price or othercompensation

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)

49

The Environmental IndemnityToolkit 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

50

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 environmentalindemnities: 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

51

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 orconveyance shall be effective to transfer from the owner oroperator of any vessel or facility or from any person who may beliable for a release or threat of release under this section, to anyother person the liability imposed under this section. Nothingin this subsection shall bar any agreement to insure, holdharmless, or indemnify a party to such agreement for anyliability under this section.”

Early litigation: Do pre-CERCLA indemnityagreements cover CERCLA liability? Section 9607(e)(1) of CERCLA provides:

“No indemnification, hold harmless, or similar agreement orconveyance shall be effective to transfer from the owner oroperator of any vessel or facility or from any person who may beliable for a release or threat of release under this section, to anyother person the liability imposed under this section. Nothingin this subsection shall bar any agreement to insure, holdharmless, or indemnify a party to such agreement for anyliability under this section.”

52

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. Hardage985 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 government100% 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 government100% liable

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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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VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC735 F.3d 25 (1st Cir. 2013)

Borrower defaulted on loan secured by daycare centerwith 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

VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC735 F.3d 25 (1st Cir. 2013)

Borrower defaulted on loan secured by daycare centerwith 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 connectionwith, in whole or in part, directly or indirectly,. . . the presence, suspected presence,release, suspected release, or threat ofrelease of any Hazardous Material”on or around the Property

VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC735 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 connectionwith, in whole or in part, directly or indirectly,. . . the presence, suspected presence,release, suspected release, or threat ofrelease 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 bya third party Court held indemnity was so broad that it must have

been limited by the next sentence providing “Suchliabilities shall include . . . .” To hold otherwise would make borrower

liable for costs that were neitherreasonable nor necessary

VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC735 F.3d 25 (1st Cir. 2013) (cont’d)

Court held recoverable costs limited to costs sought bya third party Court held indemnity was so broad that it must have

been limited by the next sentence providing “Suchliabilities shall include . . . .” To hold otherwise would make borrower

liable for costs that were neitherreasonable nor necessary

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Lesson of VFC Partners is that courts will parse thespecific language of the indemnity and will applycommon 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 tounlimited liability may backfireon the indemnitee


Lesson of VFC Partners is that courts will parse thespecific language of the indemnity and will applycommon 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 tounlimited liability may backfireon the indemnitee

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Practice Tips A good contract has:

– A separate environmentalsection

– All of the above terms(indemnity, covenants,release of liability, repsand warranties)

– Consider a deedrestriction (no sensitiveuses)

– Consider an accessagreement

– Consider a technical riskmanagement plan

A good contract has:– A separate environmental

section– All of the above terms

(indemnity, covenants,release of liability, repsand warranties)

– Consider a deedrestriction (no sensitiveuses)

– Consider an accessagreement

– Consider a technical riskmanagement 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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