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ENVIRONMENTAL CONSIDERATIONS IN BUSINESS AND REAL PROPERTY TRANSACTIONS CATIC Breakfast Seminar Series May 25, 2005 Presented by John E. Wertam, Esq. Shipman.

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Presentation on theme: "ENVIRONMENTAL CONSIDERATIONS IN BUSINESS AND REAL PROPERTY TRANSACTIONS CATIC Breakfast Seminar Series May 25, 2005 Presented by John E. Wertam, Esq. Shipman."— Presentation transcript:

1 ENVIRONMENTAL CONSIDERATIONS IN BUSINESS AND REAL PROPERTY TRANSACTIONS CATIC Breakfast Seminar Series May 25, 2005 Presented by John E. Wertam, Esq. Shipman & Goodwin LLP One Constitution Plaza Tel. (860) 251-5813 Email:

2 ENVIRONMENTAL CONSIDERATIONS IN BUSINESS AND REAL PROPERTY TRANSACTIONS John E. Wertam, Esq. Shipman & Goodwin LLP May 25, 2005 A.Introduction: Why bother? What's the big deal about environmental issues? 1.You buy it, you own it. 2.Significant cost associated with environmental remediation. 3.Significant penalties associated with non-compliance. 4.Disgruntled clients lead to malpractice claims. 5.However, environmental issues become "The Hot Potato": No one wants the problem.

3 B.First things First: Is there an environmental problem? 1.Conduct an Environmental Site Assessment Environmental Site Assessment standard of care for qualifying for innocent purchaser defense under Federal "all appropriate inquiry" EPA developing guideline Current standard is ASTM Guideline, and, in Connecticut, the Transfer Act Site Assessment Guidance Document

4 2.Consider: Does Seller do audit in advance? Knowledge of condition will require disclosure to Buyer No sharing of costs Disclosure of certain environmental conditions to Connecticut Department of Environmental Protection ("DEP") may be required

5 3.Due Diligence in context of transaction: developing a Site Access Agreement for Buyer Cost allocation Timing Disposal of wastes generated Disclosure of conditions Indemnity

6 4.What environmental conditions cause the most concern: Underground Storage Tanks Spills/releases of hazardous waste or hazardous substances Soil contamination (Use is important: residential vs. industrial/commercial) Groundwater contamination (Location is important: GA vs. GB areas) Asbestos (maybe) Lead and radon (mainly residential issues)

7 5.Conduct an Environmental Compliance Audit (especially if business operations will continue after Closing) Wastewater discharges Air pollution sources UST's Hazardous waste Disclosure under EPCRA, OSHA, SARA

8 6.Is further site characterization necessary? Phase II Site Assessments Phase III Site Assessments 7.Is the site an "Establishment" under Connecticut Transfer Act? Make sure Environmental Compliance Audit or Phase I covers the issue Why is it important? See below.

9 C.I have some environmental concerns. Now what do I do? Environmental elements to consider in the Purchase and Sale Agreement: 1.Is the Transfer Act implicated? (Patience. More on that later.) 2.Is there need to provide site access? For Buyer's due diligence For Seller's post closing obligations, if necessary

10 3.Environmental escrow agreement provisions The escrow agent Dispersal provisions Terminating the agreement Setting remediation goals and standards 4.UST Issues Notification upon transfer Revising Registration Forms 5.Obligations of the parties Allocation of environmental responsibility with or without Transfer Act obligations

11 6.Indemnity and termination 7.Ownership of environmental reports 8.Notification obligations

12 9.Environmental Land Use Restriction reservations (for Seller with post closing remedial obligations) 10.Setting remediation goals and standards (again) How do I know when the site is clean? (or, when am I really finished?) LEP verification DEP audit/approval/inaction

13 D.Lenders Concerns: How do I finance contaminated property? 1.Very good question. Good luck. 2.The Connecticut Superlien 3.Lender liability protection under State and Federal Law 4.Transfer Act exemption (taking title, but not for re- transfer) 5.That's all very well – but lenders are conservative. No kidding. 6.Lender has same concerns as Buyer, but are often more conservative: the pessimist of the deal Make escrow available to Lender Loan agreement provisions: your first born and more

14 E.So we have an Establishment under the Transfer Act. What now? 1.Definition of "Establishment" a.After Nov. 19, 1980, more than 100 kg of hazardous waste generated b.In any one month c.Except for "Remediation of polluted soil, groundwater or sediment" d."Automatic" establishments (dating back to May 1, 1967) The process of dry cleaning Furniture stripping Vehicle body repair facility ("vehicle" now defined, but excludes descriptions of some vehicles) e.Any facility that accepts hazardous waste generated at a different location in any amount

15 2.Transfer Act Exemptions a.Definition of "Transfer of Establishment" i.All transfers of real property or business operations, except for the following (see statute for exact language): a)Easements b)Judicial and municipal foreclosures c)Deed in lieu of foreclosure d)Security interests (including mortgages) e)Conveyance, assignment or termination of a Lease for a period of less than 99 years from the date of such conveyance, etc., including options or extensions of such period f)Trusts and Estate type transfers g)Corporate Reorganizations not substantially affecting the ownership of the Establishment h)Issuance of stock or other securities i)Transfer of stock, securities or other ownership interests representing less than forty percent of the ownership of the entity that owns or operates the Establishment

16 j)Intra-family transfers and inter-vivos trust transfers k)Subdivisions where less than 50% of land area is conveyed, and no spills, or DEP is notified by filing an ECAF 60 days prior to such conveyance l)Conveyance of a service station not otherwise an establishment m)Conveyance of an establishment which, prior to July 1, 1997, had been developed solely for residential use and such use has not changed n)Any conveyance of an establishment created or operating under Chapters 130 or 132, or to a Rehabilitation Agency, or to a municipality under §32-224, or to CDA o)Conversion of general or limited partnership to a limited liability company under §34-199 p)The transfer of general partnership property held in the names of all of its general partners to a general partnership which includes as general partners immediately after the transfer all of the same persons as were general partners immediately prior to the transfer

17 q)The transfer of general partnership property held in the names of all of its general partners to a limited liability company which includes as members immediately after the transfer all of the same persons as were general partners immediately prior to the transfer r)Transfers associated with assembling parcels for Adriaen's Landing or the Stadium at Rentschler Field (see implementing legislation for such projects) s)Condemning Authorities t)Universal Wastes? See House Bill 6803

18 3.Definition of "Hazardous Waste" a.RCRA and DEP defined i.Universal Wastes as Hazardous Wastes: Fluorescent bulbs Used Electronics Recycled Batteries Others b.PCB's over 50 ppm c.Except sewage sludge and lead paint abatement wastes

19 4.Definition of "Hazardous Substance" a)CERCLA hazardous substance and petroleum products or by-products where a standard is established under the RSRs 5.Other Elements to Consider a.Licensed Environmental Professionals b.Environmental Condition Assessment Form ("ECAF") Required for all forms except Form IIs c.Certifications and verifications need to be in accordance with prevailing standards and guidelines

20 6.Procedure Established a.Filing of Form I and II Within 10 days after transfer to DEP Prior to transfer - with transferee Form II requires written determination of Commissioner that site is remediated to standards Form I requires ECAF Filing Requires a written certification by LEP that no release of hazardous wastes or hazardous substances has occurred (or that hazardous substance remediated to prevailing standards and guidelines)

21 b.Filing of Form III and IV For sites where releases of hazardous wastes or hazardous substances have occurred Not later than 10 days after transfer, to DEP (transferor obligation) Prior to transfer with other party (transferor obligation) If no one else signs and files, Transferor now obligated to do so Both forms must be accompanied by an ECAF i.DEP, within 30 days, makes completeness determination ii.DEP, within 45 days of completion, determines if it will review, or if site may proceed with an LEP iii.If LEP reviews, schedule submitted for investigation and cleaning up parcel

22 2 years to complete study 3 years to initiate cleanup Notice of clean up required iv.If DEP reviews, then schedule to be submitted for review and approval v.Notice required for clean ups

23 Newspaper and Sign, or Abutter notice vi.For real property being transferred where: Form I or II filed with DEP after October 1, 1995 or Form III or IV filed and verified/certified in writing that RSR met, and Site has been an establishment since Form I or II filed; then compliance with Transfer Act waived

24 7.Voluntary Remediations System Established a.Certain sites may seek determination from Commissioner or be evaluated by LEP. See 22a- 133x and 22a-133y of the General Statutes b.Within 30 days of submitting an ECAF (for sites under §22a-133x), DEP will determine if LEP or DEP will review site i.If LEP reviews, schedule required ii.If DEP reviews, schedule required iii.If LEP certifies site is clean, then Form II may be filed upon subsequent transfers c.Notice required under both programs prior to initiating remediation

25 8.Licensed Environmental Professionals a.Definition of Environmental Professional (qualified by reason of knowledge and experience) b.DEP establishes a State Board of Environmental Professionals c.Standard of care established d.Fees established, registry maintained e.Standards created by Board Investigation experience BA or better, or P.E. Pass Test f.Board Powers

26 9.Environmental Use Restrictions – Selected Elements a.Availability (See Remediation Standard Regulation and §22a-133o) b.Notice requirements c.Decision Document/Commissioner Determination d.Subordination Agreements Required of all encumbrances, provided Commissioner may waive such requirement if he finds that the interest is so minor as to be unaffected by the ELUR e.Title certificate required to show subordination agreements recorded

27 F.What if I'm only transferring business operations? 1.See all of the above, including Transfer Act 2.Transfer of DEP permits 3.SEC disclosures 4.Compliance considerations are amplified: Enforcement actions Permits Record keeping

28 G.Some Parting Thoughts 1.As Buyer, negotiate the deal with consideration as to how will you re-transfer the property/business Questionable items will surely be raised again Consider timeframe to complete remedial obligations

29 2.Work to simplify the Deal The most complicated and difficult transaction is where Seller retains obligation to remediate environmental conditions post closing. Concerns: –Site access –Buyer loss of control of project and timing –ELUR recording –Escrow difficulties –Seller's financial condition –Resale difficulties

30 3.Leasing: Topic for another day But: keep site from becoming an "Establishment" Establish a "Environmental Condition" baseline Create an escrow that is returnable at end of lease if no environmental condition created

31 4.A word about Environmental Insurance It's not for every deal Very expensive Coverage may not be what you think Large deductibles 5.Avoid "as is" clauses 6.Bankruptcy and Environmental Obligations 7.Isn't that enough?! #403345

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