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Www.americanbar.org | www.abacle.org What a Real Estate Lawyer Needs to Know About Environmental Issues American Bar Association’s Sections of Environment,

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Presentation on theme: "Www.americanbar.org | www.abacle.org What a Real Estate Lawyer Needs to Know About Environmental Issues American Bar Association’s Sections of Environment,"— Presentation transcript:

1 | What a Real Estate Lawyer Needs to Know About Environmental Issues American Bar Association’s Sections of Environment, Energy, and Resources & Real Property, Trust and Estate Law

2 | Panelists Eugene P. Schmittgens Jr. Member, Evans & Dixon, St. Louis Matthew E. Cohn Partner, Arnstein & Lehr, Chicago Jill B. Richardson Associate, Cole Schotz, New York City Moderator: Lauran M. Sturm Partner, Waller Lansden Dortch & Davis, Nashville

3 | Overview of Presentation Sources of Environmental Liability in real estate transactions Environmental Due Diligence State Voluntary Cleanup Programs Negotiating Environmental Clauses

4 | Sources of Environmental Liability Federal, State, Local, and Common Law Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §§ 9601 et seq. –CERCLA Defenses Evolution Common Elements

5 | Environmental Due Diligence Phase I Environmental Site Assessments –All Appropriate Inquiries Authority (beyond CERCLA) Criteria Other considerations Phase II Environmental Site Assessments

6 | State Voluntary Cleanup Programs Common Elements of State Programs No Further Remediation Letters

7 | Negotiating Environmental Clauses Document requests/duration of due diligence period Scope of Work Non-disclosure of Buyer’s findings Indemnity/Insurance Site Access

8 | Why Do We Do What We Do?: The Statutory Basis for Conducting Environmental Due Diligence in a Real Estate Transaction Gene Schmittgens, Evans & Dixon, St. Louis, Missouri

9 | Sources of Environmental Liabilities Federal Law State Law Local Law Common Law

10 | Sources of Environmental Liability Statutes of concern –CWA, CAA, RCRA, CERCLA, SARA,NEPA, SMCRA, TSCA, OSHA Regulations and guidance Primary enforcement agency Delegated authority

11 | CERCLA Remedies abandoned sites Addresses current releases Strict joint and several liability BP is easy Four classes of persons are liable Limited defenses

12 | Evolution of CERCLA Defenses CERCLA is not fair The Innocent Landowner defense –Changed definition of “contractual relationship” –Applicable if the property was acquired after disposal and, current owner did not know –Must show “all appropriate inquiry” which is not defined

13 | Evolution of CERCLA Defenses Brownfields Revitalization Act –Clarifies Liability issues –Temporarily defined “Due Diligence” –Codifies ASTM 1527 –Requires USEPA to Promulgate Rules –Defines Post-purchase care

14 | Evolution of CERCLA Defenses Brownfields Revitalization Act –Added new defenses Contiguous Property Owner Bona Fide Prospective Purchaser, and, Clarified requirements for Innocent Landowner Defense

15 | Evolution of CERCLA Defenses Brownfields Revitalization Act –Defenses have statutory threshold criteria require continuing obligations –Defenses share “Common Elements” –But also have key differences

16 | Common Elements Threshold Criteria –Made All Appropriate Inquiry, AND –Is not a potentially responsible party –Has no affiliation with a potentially liable party

17 | Common Elements Continuing Obligations –Comply with land use restrictions/institutional controls –Take reasonable steps with respect to hazardous substances on property –Provide cooperation, assistance and access –Comply with informational requests and administrative subpoenas –Provide all legally required notices

18 | Key Points CERCLA issues won’t address: –Ongoing operational compliance –State Laws –Common Law/Third Party

19 | Phase I & II Environmental Site Assessments (ESAs) Matthew E. Cohn Arnstein & Lehr LLP 120 South Riverside Plaza Chicago, Illinois (312)

20 | All Appropriate Inquires Pointers Self-executing. –The EPA will never tell you that your Phase I and Phase II Environmental Site Assessments are good enough. –Your environmental consultant will always tell you that they are. –You won’t really “know” until the buyer gets sued as a Section 107 liable party (i.e., owner) and has to defend the environmental consultant’s work. Hire your own consultant. –Buyer should be skeptical of Phase I and Phase II Environmental Site Assessment reports provided by the seller.

21 | What authority should I look to besides the CERCLA statute? EPA regulations at 40 CFR 312 ASTM E standard Federal Register publication of All Appropriate Inquiries rule, 70 FR

22 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 1.Environmental Professional PE or PG and 3 years relevant experience Licensed by state to perform AAIs Bachelors degree or higher and 5 years experience 10 years experience

23 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 2.Interviews Owners, operators, and occupants Current and past facility managers Past owners, operators and occupants Employees of past and current occupants For abandoned properties, owners and operators of neighboring properties

24 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 3.Historical Records Look back to as far back as property contained structures or to time first time the property was used. Types of records: aerial photographs, fire insurance maps, building department records, chain of title documents, and land use records.

25 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 4.Environmental Cleanup Liens Search for existence liens filed or recorded under federal, state, local or tribal law Records obtained by the person for whom report is being prepared may be provided to the environmental professional

26 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 5.Review Government Records Databases of government records Government records Federal, state, local or tribal Subject property and adjoining properties Records of reported releases and investigation reports Records of activities that may cause contamination – landfill, storage tanks, waste handling CERCLIS records Public health records

27 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 5.Review Government Records (cont.) Registries of engineering controls, land use controls, institutional controls Records of releases or threatened releases on nearby properties Records of nearby NPL sites Records of nearby leaking storage tanks sites Records of RCRA generator sites Distance of nearby release sites relevant and considers: nature of release, geology, land development density, property type, past use, migration pathways

28 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 6.Site Inspection Visual inspection of facility and locations where hazardous substances may have been used, stored, treated, handled, and disposed Visual inspection of adjoining facilities from the subject property line Visual inspection must be performed and cannot accept seller denial of access

29 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 7.Specialized Knowledge or Experience Buyer’s knowledge of the subject property Buyer’s knowledge of area surrounding subject property Buyer’s knowledge of conditions of adjoining properties Any other experience American Nat’l Bank v. Harcros, 1997 WL (N.D. Ill.)

30 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 8.Purchase Price Property being sold for less than the market value, because the seller knows the property is contaminated Deal is too good to be true

31 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 9.Commonly Known or Reasonably Attainable Information Information generally known about the property in the local community Current owners or occupants Local and state governmental officials Other persons in the community Local newspapers, websites, organizations, libraries, historical societies Hemingway Transport v. Kahn, 74 FR 148 (Bankr. D. Mass. 1994) – “had [defendants] exerted a modicum of effort, … would … inspect further”

32 | Ten Criteria for All Appropriate Inquiries (Must Be in the Phase I ESA Report) 10.Degree of Obviousness Consideration of the totality of information collected Foster v. US, 922 F.Supp. 642 (D.D.C. 1996) – cursory visual inspection, soil stained, in run-down industrial area, and did no testing – not an “innocent landowner” The All Appropriate Inquiries process does not require sampling, but in some cases, it is obvious that sampling should be performed.

33 | Other Things to Look for in a Phase I Environmental Site Assessment Report An opinion – The environmental professional must describe any conditions indicative of releases or threatened releases – “Recognized Environmental Conditions” (RECs). This is the whole point of the process. Make the consultant say what he/she believes – no squishy language, no passive voice. Identification of data gaps – How do those data gaps impact the environmental professional’s opinion? Qualifications of environmental professional (resume) Statement that environmental professional is such and a signature

34 | Other Things to Look for in a Phase I Environmental Site Assessment Report Statement that report and work done complies with the 40 CFR 312 rules Statement that report and work done complies with the ASTM E standard Statement that report and work done complies with any state law requirements Certification of the environmental professional at the end of the report using language consistent with 40 CFR 312

35 | Other Things to Look for in a Phase I Environmental Site Assessment Report Contains the sections identified in Appendix X4 of the ASTM E standard – recommended table of contents. Conclusions that contain a summary of all Recognized Environmental Conditions. Conclusions which contain the statement contained in paragraph of ASTM E The report was prepared or updated in the last 6 months. Reliance on the report is authorized to any party other than the original party for whom the report was prepared.

36 | Other Things to Look for in a Phase I Environmental Site Assessment Report May address non-scope items described in paragraph of the ASTM E standard Asbestos Radon Lead-based paint Lead in drinking water Wetlands Regulatory compliance Cultural or history resources Industrial hygiene, health & safety Ecological resources, endangered species Indoor air quality Biological agents, mold

37 | Phase II Environmental Site Assessments Invasive investigation of Recognized Environmental Conditions (RECs) How much testing is enough? Soil borings around perimeter of site Soil borings in hazardous material areas Looking for the right chemicals – EPA analytical test methods Looking in right media – soil, groundwater, soil gas, sediment, surface water This is case-by-case, and a matter of professional judgment. You must be confident in your environmental consultant and environmental lawyer.

38 | State Voluntary Cleanup Programs Should I get a No Further Remediation letter before the closing? Do not be in a hurry. Lengthen the due diligence period. Recognize the limitations – basically, it is protection from state enforcement. Compliments your environmental due diligence, does not replace it. Reopeners

39 | State Voluntary Cleanup Programs Tiered cleanup standards: 1 - default, 2 – site specific with standard equations, or 3 - specialized Land use based cleanup standards: residential, industrial/commercial Chemicals of concern: VOCs, SVOCs, pesticides, PCBs, metals, petroleum compounds, chlorinated solvents Pathways analysis: soil (ingestion, inhalation, dermal contact, vapor intrusion), groundwater (ingestion, vapor intrusion) Institutional controls Engineered barriers

40 | Hiring and Environmental Consultant Look for the following in the proposal/contract: States that the work will meet requirements of 40 CFR 312. States that the work will meet requirements of ASTM E States that the work will meet any state requirements Look at the limitation of liability. Look at the indemnity. Look at the price – is it realistic? Who will actually be doing the work – is he/she competent?

41 | Most Phase I Environmental Site Assessments Fail to Meet the Standard EPA Must Implement Controls to Ensure Proper Investigations Are Conducted at Brownfields Sites, US EPA Office of Inspector, Report No. 11-P-0107 (February 14, 2011) “EPA has relied on the environmental professional conducting the AAI to self-certify that requirements are met. Of the 35 AAI reports we reviewed, from three EPA regions, none contained all the required documentation elements.”

42 | Environmental Due Diligence Advice Start early Take it seriously Involve competent and smart people Manage expectations Be creative Make a record

43 | Environmental Due Diligence: Negotiating Environmental Clauses Jill B. Richardson, Esq. Cole Schotz 900 Third Avenue New York, NY (646)

44 | Environmental Due Diligence Why Do We Do It? Valuation of Environmental Impacts on Asset –Is the site developable for the desired project –Remedial costs –Incremental construction costs Statutory Protection –Meet innocent purchaser requirements under federal and state law –Protection from state environmental agency claims vs. by third parties –ASTM standard vs. specific state requirements and land use requirements Negotiating Environmental Clauses

45 | Environmental Due Diligence Duration and Documents Produced Duration –Typically days after execution of contract or lease –Sometimes with right to extend Seller’s Production of Environmental Documents –Be clear as to what documents are included in the delivery and that there is enough time to effectuate the delivery –Seller may be required to provide a copy of all environmental documents or just access to the documents –Seller may be required to schedule the documents in the agreement Negotiating Environmental Clauses

46 | Environmental Due Diligence Sample Clauses: Documents Produced –Seller shall permit Purchaser and/or Purchaser’s agents or representatives, on or before the forty-fifth (45th) day following the full execution and delivery of this Agreement (the “Inspection Period”) reasonable access to the Property Documents (as hereinafter defined), for purposes of reviewing and inspecting the Property Documents. Purchaser shall give Seller reasonable (but in no event less than two (2) days) prior notice of Purchaser’s intention to conduct any inspection of the Property Documents. –Within two (2) business days after the Effective Date hereof, Seller shall deliver to Purchaser, to the extent in Seller’s possession or control (and to the extent not in Seller’s possession or control, Seller shall have no obligation to deliver same): (i)all soils and geotechnical reports; and (ii)all reports, studies, assessments, test results or other documents relating to the environmental condition of the Property. Negotiating Environmental Clauses

47 | Environmental Due Diligence Scope of Work Scope of Work –Scope and limitations of the environmental inspection prescribed by the contract –Competing interests: Seller frequently wants to narrow the scope; Buyer wants a broad right of due diligence –The more limited the scope of work, the greater the risk of missing a pollution condition Morristown Associates v. Grant Oil Co., 432 N.J. Super. 287 (App. Div. 2013). Negotiating Environmental Clauses

48 | Environmental Due Diligence Sample Clause: Scope of Work Through the period ending on the date which is forty-five (45) days after the date of this Agreement (the “Due Diligence Period”), Purchaser may perform, or cause to be performed, tests, investigations and studies of or related to the Property, including, but not limited to, soil tests and borings, ground water tests and investigations, percolation tests, surveys, architectural, engineering, subdivision, environmental, access, financial, market analysis, development and economic feasibility studies and such other tests, investigations or studies as Purchaser, in its sole discretion, determines is necessary or desirable in connection with the Property and may inspect the physical (including environmental) and financial condition of the Property, including but not limited to, the Contracts, engineering and environmental reports, development approval agreements, permits and approvals. Negotiating Environmental Clauses

49 | Environmental Due Diligence Sample Clause: Other Considerations for Seller Limitations on Intrusive Work –Seller shall permit Purchaser, and/or Purchaser’s agents, reasonable access to the Property (during normal business hours) for purposes of conducting physical or environmental inspections of the Property, however, physical testing or the collection of samples from the Property shall be prohibited without the prior written consent of Seller. Purchaser shall give Seller reasonable (but in no event less than two (2) days) prior notice of Purchaser’s intention to conduct any inspection of the Property. –If as a result of Purchaser’s Phase I, Purchaser determines that it will require a Phase II environmental audit of the Real Property, Purchaser shall notify Seller on or before expiration of the Due Diligence Period, and the Due Diligence Period shall be extended for such additional period as reasonably may be required in order to complete, receive and review the Phase II report. Negotiating Environmental Clauses

50 | Environmental Due Diligence Sample Clause: Other Considerations for Seller Non-disclosure of Buyer’s Findings –Only upon Seller’s written request therefor, Purchaser agrees to provide to Seller copies of all environmental, structural, engineering and other reports or studies prepared by outside consultants (other than such reports prepared by legal counsel that are subject to an attorney-client privilege) undertaking inspections of the Property Documents and/or the Property, or any portion or component thereof or condition affecting the same, for or on behalf of Purchaser (collectively, the “Property Inspection Reports”). Negotiating Environmental Clauses

51 | Environmental Due Diligence Sample Clause: Other Considerations for Seller In addition to a general confidentiality clause, prohibit use of a state licensed site professional (LEP, LSP, LSRP) without Seller’s prior consent –Purchaser shall not utilize an LSRP to conduct an environmental investigation regarding the Real Property without the prior consent of Seller. Right to be present during the work –Seller reserves the right to have a representative present during any or all inspections of the Property and/or Property Documents conducted by Purchaser or its agents. Right to collect split samples Negotiating Environmental Clauses

52 | Environmental Due Diligence Sample Clause 1: Buyer’s Indemnity and Insurance for Access Indemnity/Insurance Buyer indemnifies Seller for losses that arise out of due diligence and Buyer maintains insurance during due diligence period –Prior to entering upon the Property, Purchaser shall provide Seller with certificates of insurance for each and every entity entering the Property evidencing public liability insurance in standard form naming Seller and Purchaser as additional insureds, in the amount of Two Million ($2,000,000.00) Dollars per occurrence for personal injury and property damage which must include pollution coverage. Purchaser agrees that it shall, at its sole expense restore the Property to their original condition prior to the performance of said inspections. Purchaser shall indemnify, defend and save harmless Seller from all claims, expenses and liabilities which may arise pursuant to any action taken by Purchaser, its agents, employees and contractors in connection with the performance of said inspections. Negotiating Environmental Clauses

53 | Environmental Due Diligence Sample Clause 2: Buyer’s Indemnity and Insurance for Access Prior to entering upon the Property, Purchaser shall cause each and every entity entering the Property in connection with Purchaser's access, to maintain, and Purchaser shall provide to Seller, certificates of insurance evidencing commercial general liability insurance in the amount of Two Million ($2,000,000.00) Dollars per occurrence; contractor's pollution liability insurance in the amount of Two Million ($2,000,000.00) Dollars per occurrence; automobile insurance in the amount of Two Million ($2,000,000.00) Dollars per occurrence; and worker's compensation insurance in statutorily required amounts. All of the foregoing shall be on an occurrence basis, except for worker's compensation insurance, and shall name Seller as an additional insured. Said insurance may be satisfied through Purchaser’s or its affiliates’ blanket or umbrella insurance policies. Negotiating Environmental Clauses

54 | Environmental Due Diligence Sample Clause 2 (cont’d): Buyer’s Indemnity and Insurance for Access Purchaser shall: Indemnify, hold harmless and defend Seller from any damages, losses, liabilities, actions, claims, judgments, expenses or costs, including reasonable attorney fees, (“Losses”) to the extent caused by Purchaser’s physical investigations hereunder, but expressly excluding Losses arising out of latent defects, the displacement or disturbance of Hazardous Materials as defined in any Environmental Law (as hereinafter defined), not placed on the Real Property by Purchaser or its consultants, the discovery of pre-existing conditions, the negligence or misconduct of Seller, tenants or their agents or representatives, or any diminution in value in the Real Property arising from, or related to, matters discovered by Purchaser during its investigation of the Real Property. If this Agreement is terminated, Purchaser shall repair any damage to the Real Property to the extent caused by its entry thereon and shall restore the same to the condition in which it existed prior to such entry; provided, however, that Purchaser shall have no obligation: to repair any damage to the extent caused by Seller’s or a tenant’s negligence or misconduct; to remediate, contain, abate or control any Hazardous Materials not placed on the Real Property by Purchaser or its consultants; or to repair or restore any latent condition discovered by Purchaser or its consultants. Negotiating Environmental Clauses

55 | Environmental Due Diligence Other Considerations for Buyer Cooperation by Seller in Gaining Access –During the Due Diligence Period, Purchaser, its agents, representatives and contractors, shall have unlimited access to the Property, upon prior notice to Seller, and other information pertaining thereto in the possession or within the control of Seller for the purpose of performing such studies, tests, borings, investigations and inspections for the purposes described in this Paragraph. Seller shall cooperate with Purchaser in facilitating its due diligence inquiry and shall obtain, and use its reasonable efforts to obtain, any consents that may be necessary in order for Purchaser to perform same. Negotiating Environmental Clauses

56 | THANK YOU! QUESTIONS?


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