Transcript Slide 1

ENVIRONMENTAL ISSUES IN
REAL ESTATE
TRANSACTIONS
RISKS AND OPPORTUNITIES
IN 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.
(1986)
N.H.
(1989)
• Lender
U.S.
(1996)
N.H.
(1993)
• Fiduciary
U.S.
(1996)
N.H.
(1993)
Additional
Defenses/Exclusions/Exceptions
(cont’d.)
• De micromis
• Municipal
Solid Waste
• Contiguous
owners
• Bona
property
fide prospective
purchaser
U.S.
(2002)
N.H.
(None)
U.S.
(2002)
N.H.
(None)
U.S.
(2002)
N.H.
(1996)
U.S.
(2002)
N.H.
(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 Diligence
Need 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 requests
3. Comply with land use restrictions and
institutional controls
4. 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 lease
2) Lessor/owner has no say how
property used
3) Lessee absolute right to sublet
4) Lessee responsible for all
payments
5) Lessee responsible for all repairs
6) 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??