Reducing Long-Term Risk and Exposure to Environmental Liabilities

Despite the impact of COVID-19 on other areas of commercial real estate, the industrial sector continues to thrive as the e-commerce industry seeks properties for warehousing and logistics centers, especially in close proximity to New Jersey’s advantageously-placed ports and arterial highways that provide “last mile” delivery capabilities.  The fact that many of these properties are located within industrial or former industrial areas has not stopped purchasers who have become increasingly more comfortable with sites that are environmentally impacted, even in some instances taking on long-term, ongoing environmental obligations.  Although opportunities abound to offload these properties and their environmental burdens, sellers should be mindful of limiting their exposure to liabilities that may manifest after the sale.  Though most owners of contaminated property can never completely eliminate the threat of future liability, below are a number of practical tips and considerations for addressing and reducing long-term environmental risks, many of which are applicable to the sale of any type of contaminated property.

• Indemnities and Releases – The most common contractual tools that sellers use to protect themselves from post-closing liabilities are indemnities and releases.  In brief, an indemnity requires one party (e.g., the buyer) to defend and reimburse another (e.g., the seller) for specified  claims, liabilities, damages, cost, expenses, etc., while a release prohibits one party (e.g., the buyer) from making certain claims against another party (e.g., the seller).  Sellers offloading contaminated properties should pay careful attention to the scope of any indemnities and releases.  If a seller wants to transfer all environmental responsibility and liability to its buyer, seller may want to ensure that the indemnities and releases are drafted as broadly as possible and include any environmental cleanup obligations that might fall on seller in the future as well as any third-party claims, whether by a governmental entity for, say, natural resource damages or by a neighboring property owner or future occupant of the property for personal injury.  Alternatively, if a seller intends to retain certain liabilities, then those liabilities should be specifically excluded from any indemnities and releases, and, in fact, seller may indemnify buyer for such liabilities.  In any event, the scope of the indemnities and releases is a crucial tool for allocating environmental responsibility and should match the intent of the parties.

• Financial Protections – Although indemnities and releases may provide useful protection, sellers sometimes also rely on additional financial protections, especially given that an indemnity is only valuable if the entity providing the indemnity has the resources to satisfy potential claims.  In fact, because many developers purchase properties through a single purpose entity and the only asset it owns is the property itself (which may be encumbered by financing or diminished in value as a result of environmental contamination), the indemnity may not be sufficient.  When this is an issue, sellers often consider requiring a parent company or personal guaranty or some other financial protection like an appropriate escrow.  These protections endeavor to guarantee that resources will be available to satisfy a purchaser’s responsibilities.

• Post-Remedial Obligations/Financial Assurance – Where contamination remains on-site underneath  an engineering control (e.g., a cap), the control  must be monitored and maintained over time in accordance with required permits.  If seller will retain responsibility for these obligations, it should insist on an express right to access the property after the sale.  In fact, seller may want to create a stand-alone access agreement that is recorded on the land so that if the property is subsequently sold, seller’s right to access runs with the land and is binding on subsequent owners.  Alternatively, if it will be the buyer that assumes these obligations – (which is the more common scenario, as buyer will be in the best position to perform the necessary monitoring and maintenance of the cap after the property is sold) – seller should ensure that buyer affirmatively assumes all of the obligations, including posting appropriate financial assurance.

• Extending Seller Protections to Future Owners – Often a purchaser will develop a property and then sell it to an end user, and inevitably the property may change owners over time.  This can leave the original seller exposed if its direct purchaser either does not continue to comply with its long-term environmental obligations or if it does not appropriately transfer those obligations to a subsequent purchaser.  While there is no silver bullet to protect from this risk and each approach has its shortcomings, one way to attempt to address this concern is including indemnities, releases and other affirmative environmental obligations in the recorded deed of sale.  Another way is to use a rollover provision in the sales contract that would expressly require purchaser to include language in any future sales agreement that obligates the new purchaser to indemnify and release original seller and to assume the ongoing environmental obligations. 

• Reopeners and Changes in Controls and Property Use – Another risk to sellers is that the remediation of the property may be subject to what we commonly refer to as a “reopener.”  For example, if unknown contamination is found, remediation standards change, or the property is put to a new use that requires additional remediation, seller, as the original responsible party, may have a legal responsibility to address the reopener.  Given this risk, the parties should consider explicitly identifying which party will be responsible for these obligations via the contract of sale.  Also, since the property may not be in its final form to accommodate warehousing or another ultimate end use at the time of the sale, the contract should specify which party is responsible for any changes to the institutional and engineering controls and modifications to any permits that may be necessary to accommodate the redevelopment.  While these may seem like small details, specifically addressing these items adds clarity to the parties’ responsibilities, which can limit future disputes.

• Self-Help Provisions – While sellers regularly endeavor to put themselves in the best position to avoid unknown liabilities that may arise in the future, it is important to plan for the worst-case scenario.  Thus, in the event that the purchaser does not live up to its contractual obligations, seller should consider including in its sales agreement a “self-help” provision that would allow it to return to the property to address any environmental situation.  Sometimes, when a purchaser defaults, it is better to take affirmative steps and limit any additional damage than to wait for the purchaser to address it. 

• Insurance – In addition, or as a supplement, to the protections mentioned above, environmental insurance can be a good way to fill some of the risk gaps in specific transactions, especially for remediation of unknown environmental conditions and third-party bodily injury and property damages claims that may arise after the sale, and which are often difficult to investigate during acquisition.  Seller may want to purchase, or obligate its buyer to purchase, an environmental insurance policy to cover certain environmental liabilities related to the property.  While an insurance policy can be a good way to transfer risk (especially to a party outside the transaction), a note of caution – environmental policies have many exclusions and should be carefully negotiated and tailored to fit the specific needs of the property and transaction.  Experienced insurance brokers and environmental legal counsel can guide sellers through this process.

While sellers would love to sell a property and never look back, the reality is that long-term environmental risks and future liabilities cannot be completely eliminated.  As such, sellers should consider taking appropriate steps to limit their exposure and the potential for future disputes.  Each transaction is different and individual properties have their unique sets of issues and considerations, so it is important to engage experienced counsel to assist in addressing and mitigating these risks.

For more information, please contact the author Jaan M. Haus at jhaus@riker.com or any attorney in our Environmental Practice Group.