Environmental Contamination in Real Estate Transactions

1. Environmental Contamination in Real Estate Transactions

2. 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

3. 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

4. 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

5. 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

6. Preparing a Property for SaleTypical 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.

7. 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

8. Allocating the Cost/Risk • 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

9. 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

10. 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

11. 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 • Copies of all reports • Right to investigate • Pre-closing and post-closing remedial work (holdback) • No material changes prior to closing

12. Addressing Concerns in the Agreement • Indemnities • 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

13. Addressing Concerns in the Agreement • Security • 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

14. Closing the Transaction • 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