ENVIRONMENTAL ISSUES IN REAL ESTATE

TRANSACTIONS

RISKS AND OPPORTUNITIESIN 2010

Welcome

and

Happy St. Patrick’s

Day!

THIS MORNING

• Environmental Liability and Due Diligence• When you need a Phase II…

• Allocating risks in the transaction• Buying or leasing contaminated property

• Foreclosure Sales: managing the environmental risks of buyers

• The secured creditor exemption

Primary Sources of Liability

•Comprehensive Environmental Response Compensation and Liability Act (“CERCLA” or “Superfund”)42 U.S.C. § 9601 et seq.

•New Hampshire Hazardous Waste Cleanup Fund – RSA 147-B

CERCLA and RSA 147-B

• Owners, Operators, Generators and Transporters

• Strict liability – most often it is joint and several

• Costs of investigation, cleanup, monitoring and more

• Incurred by the government and any other person

Potentially Liable “Owners”

• Current owners

• Owners at the time of disposal

• Lessees

• Lenders

• Fiduciaries

• Owners of contiguous property

Original Defenses

• An act of God

• An act of war

• An act or omission of an unrelated third party; defendant exercised due care and took appropriate precautions

Additional Defenses/Exclusions/Exceptions

• Innocent landowner U.S. N.H. (1986) (1989)

• Lender U.S. N.H. (1996) (1993)

• Fiduciary U.S. N.H. (1996) (1993)

Additional Defenses/Exclusions/Exceptions(cont’d.)• De micromis U.S. N.H.

(2002) (None)

• Municipal Solid Waste U.S. N.H. (2002) (None)

• Contiguous property U.S. N.H. owners (2002) (1996)

• Bona fide prospective U.S. N.H. purchaser (2002) (None)

SUPERFUND DEFENSES FOR BUYERS

INNOCENT LANDOWNERS -- take without knowledge of contamination

CONTIGUOUS PROPERTY OWNERS -- take without knowledge of contamination but

BONA FIDE PROSPECTIVE PURCHASERS -- take with knowledge of contamination

SCOPE OF SUPERFUND AND AAI RULE

Purchase of commercial property

Purchase of any property for commercial or public use

Residential property purchase if inspection and title search reveal need for more investigation

AVOID LIABILITY and SAVE MONEY!!• Obtain Superfund defenses – avoid further costs • Identify cleanup costs, impact on project -- so they can be allocated and • Set sales price without discount or negotiate price with seller• Satisfy lenders• Buy environmental insurance

Copyright Sidney Harris

Federal and State Due Diligence/All Appropriate Inquiry -- Why Bother?

All Appropriate Inquiry is required to assert any of the Superfund defenses, at time of acquisition,

AND

May be required by the lender

How Much Diligence is Due? DEPENDS ON YOUR NEEDS!!

“Transaction Screen” is NOT AAI

ASTM Phase I is AAI to assert defenses, AT A MINIMUM! Also, new Forest Land Phase I

Are there “Significant” Data Gaps?

Other types of Due DiligenceNeed to determine migration potential?Need to determine cost of cleanup?Need to determine whether business is in compliance with law?

What’s a “Phase I” anyway?

Doesn’t involve sampling

Does it have to meet ASTM 1527-05?

What is the timing? Before acquiring property!

Who is the “User”? Critical!

ASTM STANDARD

• 97 defined terms, fine print• “Environmental Professional” needed• Records Review• Site Reconnaissance• Interviews with present and past owners, operators, key site manager, governments • User Statements, liens, registry review for recorded activity and use limitations • Report• Q: Recommendation on additional investigation?

Distressed Property: Should you be stressed? More Due Diligence?

• Cautions: Distressed Properties and

Businesses more likely to have

environmental issues? Maybe.

• More Due Diligence Required? Maybe

• Beware dated information!

• Timing of opportunity for assessment

may be compressed

• Brownfields Grant opportunities?

• If in foreclosure, may not be able to do

Phase I, e.g., if no access or interview

of key site manager.

Do I REALLY TRULY HAVE to Do a Phase II (Sampling Investigation)?

Usually not! BUT…..• Under AAI Rule, mandatory if data

gap and Environmental Professional cannot render an opinion

• Vapor Intrusion investigation may be required to render an opinion

• If BFPP, may be required as “Appropriate Care by Taking Reasonable Steps to Prevent, Control or Limit Release”

• EPA Brownfields Programs require

PHASE II DESIRABLE, EVEN IF NOT REQUIRED:

1. Determine extent of contamination, potential impact on neighbors, workers

2. Satisfy your lender

3. Determine cleanup costs

4. Address site with government agencies

PHASE II ISSUES

• Cost and Timing, and who does it

• Permissions

• Is reporting of the data required to the regulators? To the other parties involved? To the occupants/tenants?

“CONTINUING OBLIGATIONS” TO MAINTAIN DEFENSES

1. Full cooperation with environmental agencies, which may include government cleanup

2. Comply with information requests3. Comply with land use restrictions and

institutional controls4. Take reasonable steps to prevent, limit

releases and exposures, and exercise appropriate care

5. Comply with spill reporting obligations

MISTAKE: Look Only at ASTM and Superfund Liabilities

• ASTM only looks at likelihood of contaminated property• Doesn’t consider environmental liabilities of business activities

+ Ongoing operation compliance+ Off-site disposal liabilities+ OSHA liabilities+ Potential claims for nuisance, trespass, negligence by neighbors, trespassers, guests

Allocating Environmental Risk in a Commercial Real Estate Transaction

4 Opportunities to assess, investigate and allocate environmental risk

• Prior to contract• Purchase and sale provisions• Due diligence• Closing documents

Pre-Agreement Assessment – Seller

• Review any environmental reports generated at the time of your purchase, or in connection with any financing

• Consider a Phase I to provide “comfort” and enhance property value

Pre-Agreement Assessment – Seller (cont’d.)

• Deal affirmatively with known issues either through disclosure or clean up in advance of listing. In New Hampshire, a seller has an obligation to disclose concealed defects that are:

√ Known to the seller√ Unknown to the buyer√ Incapable of detection upon a reasonable

inspection√ Dangerous to property or life

Pre-Agreement Assessment – Seller (cont’d.)

• Review conditions contained in any existing permits or approvals to determine compliance, and consider any necessary action

Pre-Agreement Assessment – Buyer

• Review the seller disclosures

• Do your homework on the area – talk to local municipal officials about the property, the neighborhood, and prior uses

• Walk the site and look at use of surrounding properties

• Consider title work to determine any environmental liens or institutional controls recorded against the property

Purchase and Sale Agreement – Representations and Warranties

• No knowledge (actual or constructive) of current or former violations or claims• No knowledge (actual or constructive) of facts which would give rise to violations or claims• Compliance:

√ At closing√ During seller’s period of ownership√ Prior to seller’s period of ownership

Purchase and Sale Agreement – Additional Considerations

• Access to seller’s environmental reports and permits• Restrictions on level of investigations during due diligence

√ Invasive vs. non-invasive√ Specific reference to Phase I ESA (be

sure to reference ASTM standards)

• Indemnity for damage to property and other claims as a result of inspections (but not for environmental results or required reporting)

Purchase and Sale – Due Diligence

If there is a known environmental problem, or one is discovered during due diligence, consider an agreement or provisions in the purchase and sale relative to:

• Split sampling

• Review and editing of reports prior to final draft and reporting to government

√ Beware of independent duty to report (See RSA 146-A:5 regarding oil discharge, e.g.)

• Reasonable control over scope of additional investigation

• Enhanced indemnity clauses ( see Closing section)

Closing – Indemnity, Defense and Hold Harmless Agreements

An indemnity is an agreement to compensate another party to a contract for certain losses that such other party may suffer during the performance of a contract.

A defense clause is an agreement to provide a legal defense in the event that such losses occur.

A hold harmless clause is an agreement under which one or both parties agree not to hold the other party responsible for certain loss, damage, or legal liability.

Closing – Contents of a Buyer-Seller Indemnity

A good environmental indemnity provides for

• defense and consultant costs• remediation costs• fines and penalties• perpetual or reasonable time limits on

coverage• bifurcation of responsibility according to

period of ownership

Closing – Contents of a Lender Indemnity

• Typical for commercial financing transactions

• Sometimes a separate agreement, sometimes a mortgage or loan covenant

• Generally very broad in scope and unlimited in duration

Closing – Post Closing Agreements

In order to address issues which will survive the closing, additional agreements may be necessary to address

• monitoring and testing• reporting • access• escrows for actual or potential

remediation• environmental insurance

Leasing

A combination of the above clauses, to include

• Representations and warranties• Indemnities and hold harmless (account for

joint use of property, as applicable)• On-going monitoring, testing and reporting

issues, if any• Consider environmental due diligence for

base line

Buying or Leasing Contaminated Property

• BFPP liability protection

• NH Brownfields liability protection

When is a Lessee an Owner?

- “indicia of ownership” –

1) Long term lease2) Lessor/owner has no say how

property used3) Lessee absolute right to sublet4) Lessee responsible for all

payments5) Lessee responsible for all repairs6) Lessor/owner has no right to

terminate early

2009 EPA Guidance on BFPP and Lessees

• Owners of contaminated property may prefer to lease v. sell

• Lessees with “indicia of ownership” can be a BFPP

• Lessees with “derivative” BFPP status can maintain such status if Owner loses BFPP status

N.H. Brownfields Program

• The covenant program

• Voluntary cleanup program

• Due diligence and liability risks when purchasing covenant or voluntary cleanup properties

• Violations of use restrictions or program requirements may void covenant resulting in strict liability

Recent Trends – Foreclosure Trends in New Hampshire from the Registry Review

Recent Trends – Who Is Buying at Foreclosure? Lenders seem to be taking properties back at foreclosure at a greater pace than the recession of the late 80s and early 90s, and also frequently postponing and cancelling sales

Anatomy of a Foreclosure Sale in NH

• No disclosures by the lender• No representations or warranties by the lender• Substantial cash deposit•Limited, if any, access to property prior to purchase• Fast closing from date of sale (30 to 45 days)• No financing contingency• Deferred maintenance issues

The Optional Considerations of a Traditional Buyer Become “Less Optional”

• Investigating the prior use of the property through inquiry of local officials

• Reviewing planning, zoning and enforcement files

• Having a title search done to reveal environmental (and other!) issues

In addition, you should consider

• Purchasing a transaction screen report/data base search by a professional

• Talking to parties in possession (maybe not the owner…)

• Investigating the possibility of access prior to closing

Without access and discussions with owners or occupiers, a Phase I providing “innocent purchaser” defense may not be available, so you might consider

• Allowing the lender to take the property back

Real Estate Owned, or REO Sales

Same risks as foreclosure, except:

• More time for due diligence

• More time for closing

• Potential for access is greater

Lenders – Maintaining the Secured Creditor Exemption

Lenders take risks with capital – but not unlimited risk!

What is lender’s Environmental Risk Program?”

Critical to avoid unlimited liability:Don’t participate in management of facility or make waste management decisions before foreclosure

BEFORE FORECLOSURE

OK – requiring environmental compliance and cleanup, extending credit for that purpose, monitoring and inspecting.

NOT OK – Decision-making control over operations or environmental compliance

Q: Should lender do a Phase I or Phase II before foreclosure (a) as a hedge against losing liability after foreclosure, or (b) to help market the property?

AFTER FORECLOSURE

OK – “maintain business activities”, windup operations, undertake a cleanup action, take actions to preserve, protect or prepare the property for sale

MUST – attempt to sell or release or otherwise divest at the earliest practicable, commercially reasonable time

Additional requirements – listing within 5 months, sale within 3 years or burden shifts to lender

BUT LENDERS STILL HAVE LIABILITY AFTER FORECLOSURE WHEN

They run the enterprise

They arrange for disposal

They obtain permits, or otherwise assume liability directly

QUESTIONS??