Transcript Tricks and Traps of Environmental Contamination in Real

Environmental Contamination
in Real Estate Transactions
Environmental Law Meets
Real Estate Law
• Identifying and addressing environmental concerns in
the transaction
• Preparing a property for sale
• Allocating the cost/risk
• Addressing concerns in the agreement
• Closing the transaction
Identify the Issues
• Avoid discovery of unexpected environmental issues
• Assuming contamination may unjustifiably impact
price
• Environmental liability can be applied to a wide range
of actors- not just the polluter
• There are methods to investigate and if required
remediate the contamination
Preparing a Property for Sale
• The level of due diligence required will vary with the
nature and use of the property both past and future
• Primary tool is an ESA either Phase I or Phase II
• A Phase I is mainly a paper search to determine actual
and potential site contamination both on and off-site
• Usually takes 2-3 weeks and cost approximately
$2000-3500
Preparing a Property for Sale
• A Phase II is considered an intrusive investigation to
assess potential or known impacts to the soil and
groundwater
• Includes installing boreholes/monitoring wells
• Samples are taken and analyzed at a laboratory
• The costs vary with each project
Preparing a Property for Sale
Typical High Risk Activities
• Chemical plants, battery manufacturing, recycling
facilities
• Asphalt manufacturing, electroplating, metal
fabrication, circuit board manufacturing, steel works
• Leather tanneries, ship building, repair yards
• Textiles mills, drycleaners, scrap yards
• Service Stations, properties with underground
storage tanks.
Preparing a Property for Sale
• Large companies with known environmental liabilities
often spend as much time/money on environmental
investigations prior to a sale as they do for a purchase
• If the Vendor obtains the ESA prior to offering the
property for sale, delays are avoided and control
maintained
• The Vendor can dictate in the agreement restrictions on
future use to limit future liability
• Environmental diligence may provide the Vender with
option to remediate prior to sale to maximize sale price
and increase interest
Allocating the Cost/Risk
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Involve professionals early
Complete Phase I and, if required, Phase II
Full disclosure and indemnities key
If contamination, Record of Site Condition (RSC)
should be considered
Allocating the Cost/Risk
WHY RSC?
• Provides immunity to current and future owners from
most MOE orders for contamination prior to RSC
filing
• Mandatory when changing from less sensitive use to
more sensitive use (industrial to residential)
• EPA allows the Vendor to obtain same protection as
the Purchaser if RSC required in agreement
Allocating the Cost/Risk
• Every deal is different
• Best addressed in agreement, could include separate
indemnity or even insurance policy
• Former owners may face risk even when selling on an
“as is” basis
• Purchasers may be liable for existing contamination,
ongoing mitigation or off-site discharge
• Lenders will require diligence and reliance on ESAs
Addressing Concerns in the
Agreement
• Representations and Warranties
• Qualified by knowledge and time period
• Full disclosure if known issues
• Survival beyond closing
• Covenants and Conditions to Closing
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Copies of all reports
Right to investigate
Pre-closing and post-closing remedial work (holdback)
No material changes prior to closing
Addressing Concerns in the
Agreement
• Indemnities
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Covering disclosed information/unknown information
Threshold or cap to liability
Time limit on claims
Assignment to future purchaser or lenders
Carve out for known accepted issues
Addressing Concerns in the
Agreement
• Security
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How strong is the covenant of the other party
Will they have resources to meet obligations
Holdback on covenants or to fund remediation
Environmental insurance may be appropriate
Closing the Transaction
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Address environmental issues early
Knowledge of risk/issues can lead to solutions
ESAs only as good as the consultant and work scope
Reports must be properly reviewed to ensure all
issues properly addressed and no inappropriate
assumptions