Thompson Coburn LLP d/b/a Thompson Coburn Fagel Haber

Commercial Real Estate Commercial Real Estate Purchases and Sales:Purchases and Sales:Environmental IssuesEnvironmental Issues

Walter D. Cupkovic, Esq.Walter D. Cupkovic, Esq.Law Seminars International Advanced Real Estate Purchases Law Seminars International Advanced Real Estate Purchases and Sales and Sales March 10 and 11, 2008March 10 and 11, 2008

New Federal LegislationNew Federal Legislation

• ““All Appropriate Inquiry” Standards All Appropriate Inquiry” Standards under CERCLA include:under CERCLA include:– Instituting requirements for environmental Instituting requirements for environmental

professional supervising the workprofessional supervising the work– Interviews with Interviews with

• past and present owners, operators and past and present owners, operators and occupants of the property, andoccupants of the property, and

• neighboring property owners for abandoned neighboring property owners for abandoned propertiesproperties

New Federal LegislationNew Federal Legislation

• ““All Appropriate Inquiry” Standards All Appropriate Inquiry” Standards under CERCLA include: (cont’d)under CERCLA include: (cont’d)– Establishment of period of historical Establishment of period of historical

examination to its first usesexamination to its first uses– Examination of local, state and federal Examination of local, state and federal

recordsrecords

Phase I – “All Appropriate Phase I – “All Appropriate Inquiry”Inquiry”• U.S. EPA Rule effective 11/1/2006 U.S. EPA Rule effective 11/1/2006

supplement to ASTM E 1527-05supplement to ASTM E 1527-05• Ten Mandatory Steps for Innocent Ten Mandatory Steps for Innocent

Landholder CERCLA ProtectionLandholder CERCLA Protection• Requires 5 to 10 Days from On-Site Requires 5 to 10 Days from On-Site

Inspection Inspection • Identifies “Recognized Environmental Identifies “Recognized Environmental

Concerns,” i.e., potential liabilitiesConcerns,” i.e., potential liabilities

Phase II – Environmental Phase II – Environmental Site AssessmentSite Assessment• U.S. EPA and ASTM Standards for U.S. EPA and ASTM Standards for

Characterizing Site Media, i.e., soils, Characterizing Site Media, i.e., soils, groundwater, building materials, groundwater, building materials, asbestos, radon, surface water, drainage, asbestos, radon, surface water, drainage, zoning, permits, PCB’s, air quality, zoning, permits, PCB’s, air quality, mold, etc.mold, etc.

• Operational Compliance Audit to Operational Compliance Audit to determine any permitting issues & finesdetermine any permitting issues & fines

Phase II – Environmental Phase II – Environmental Site AssessmentSite Assessment• Requires 20 to 60 Days from Requires 20 to 60 Days from

completion of Phase Icompletion of Phase I

• Identifies, Prioritizes and Costs Identifies, Prioritizes and Costs Environmental Liabilities for both the Environmental Liabilities for both the Site and Operation on either a Stock or Site and Operation on either a Stock or Asset Deal Acquisition BasisAsset Deal Acquisition Basis

Phase I – “All Appropriate Phase I – “All Appropriate Inquiry”Inquiry”• Environmental Inquiry / Investigation Environmental Inquiry / Investigation

Performed by Qualified ProfessionalPerformed by Qualified Professional

• Visual Inspection of Property and Visual Inspection of Property and Adjoining Areas, especially areas of Adjoining Areas, especially areas of chemical storage, use and waste chemical storage, use and waste managementmanagement

Phase I – “All Appropriate Phase I – “All Appropriate Inquiry”Inquiry”• Interviews with Past and Present Interviews with Past and Present

Owners, Operators and Occupants Owners, Operators and Occupants concerning environmental issuesconcerning environmental issues

• Review of Historical Sources, i.e., Review of Historical Sources, i.e., aerials, deeds, zoning records aerials, deeds, zoning records

• Review of Government Records, Review of Government Records, permits, waste disposal invoicespermits, waste disposal invoices

Phase I – “All Appropriate Phase I – “All Appropriate Inquiry”Inquiry”• Search for recorded environmental Search for recorded environmental

cleanup liens and agency noticescleanup liens and agency notices

• Consider “specialized knowledge” Consider “specialized knowledge” regarding the subject acquisition and regarding the subject acquisition and surrounding propertiessurrounding properties

• Consider relationship of purchase to Consider relationship of purchase to fair market value of facility, if not fair market value of facility, if not contaminatedcontaminated

Phase I – “All Appropriate Phase I – “All Appropriate Inquiry”Inquiry”• Evaluate any commonly known information Evaluate any commonly known information

about the property and/or companyabout the property and/or company• Consider the “degree of obviousness of Consider the “degree of obviousness of

contamination”contamination”

Visual Inspections – Seymour, Visual Inspections – Seymour, CT Site via Google EarthCT Site via Google Earth

Obvious Natural Environmental Obvious Natural Environmental Setting – Wildlife Refuge Since Setting – Wildlife Refuge Since 19531953

Degree of Obviousness –Degree of Obviousness –Sludge Lagoons $3.2MMSludge Lagoons $3.2MM

Weather Limited Observation – Weather Limited Observation –

Vacant Site Due Diligence, Vacant Site Due Diligence, Ohio EPA InquiryOhio EPA Inquiry

Better Weather Observation – Better Weather Observation – Superfund $1.7MM Legacy CostSuperfund $1.7MM Legacy Cost

Consider Specialized Consider Specialized Knowledge – “All Tanks Leak”Knowledge – “All Tanks Leak”

Options for Dealing with Options for Dealing with Environmental ExposureEnvironmental Exposure• If Seller sells real estate in “AS IS” If Seller sells real estate in “AS IS”

condition, andcondition, and

• Buyer releases and indemnifies Seller Buyer releases and indemnifies Seller from environmental liability,from environmental liability,

• This is not sufficient to protect Seller This is not sufficient to protect Seller from further environmental exposurefrom further environmental exposure

Options for Dealing with Options for Dealing with Environmental ExposureEnvironmental Exposure• Seller may have exposure for environ-Seller may have exposure for environ-

mental condition of real estate to third mental condition of real estate to third parties, includingparties, including– state and federal environmental agencies, state and federal environmental agencies,

andand– private third partiesprivate third parties

Options for Dealing with Options for Dealing with Environmental ExposureEnvironmental Exposure• Satisfactory Satisfactory

contractual solution contractual solution that mitigates that mitigates exposure to Seller exposure to Seller and Buyerand Buyer– Phase One environ-Phase One environ-

mental assessmentmental assessment

Options for Dealing with Options for Dealing with Environmental ExposureEnvironmental Exposure• If Phase One discloses condition If Phase One discloses condition

requiring further review or investigationrequiring further review or investigation– Phase Two environmental assessment Phase Two environmental assessment

obtainedobtained

• If Phase Two identifies environmental If Phase Two identifies environmental remediation requiredremediation required– Estimated cost of remediation is determinedEstimated cost of remediation is determined

Options for Dealing with Options for Dealing with Environmental ExposureEnvironmental Exposure• If estimated cost of remediation If estimated cost of remediation ≤ baseline ≤ baseline

remediation amountremediation amount– Seller performs required remediationSeller performs required remediation– Undertakes measures to obtain aUndertakes measures to obtain a

“no further action” letter or covenant“no further action” letter or covenantnot to sue from appropriate governmental agencynot to sue from appropriate governmental agency

• If estimated cost of remediation > baseline If estimated cost of remediation > baseline remediation amountremediation amount– Seller has right to terminate AgreementSeller has right to terminate Agreement

Options for Dealing with Options for Dealing with Environmental ExposureEnvironmental Exposure• If Seller’s remediation of property If Seller’s remediation of property

completed after Closing, Buyer shallcompleted after Closing, Buyer shall– give Seller accessgive Seller access– not interfere with remediation processnot interfere with remediation process– not contribute to or exacerbate condition not contribute to or exacerbate condition

of Property of Property

Thompson Coburn LLP d/b/a Thompson Coburn Fagel Haber

Commercial Real Estate Commercial Real Estate Purchases and Sales:Purchases and Sales:Environmental Environmental ConsiderationsConsiderationsWalter D. Cupkovic, Esq.Walter D. Cupkovic, Esq.Law Seminars International Advanced Real Estate Purchases Law Seminars International Advanced Real Estate Purchases and Sales and Sales March 10 and 11, 2008March 10 and 11, 2008

Case Study: Property Case Study: Property Subject To Voluntary Subject To Voluntary Remediation Plan (Seller)Remediation Plan (Seller)

Real Estate AgreementReal Estate Agreement

• Seller Perspective Seller Perspective

• Property Subject to Voluntary Property Subject to Voluntary Remediation Plan Remediation Plan

Buyer "Due Diligence" Buyer "Due Diligence" Contingency PeriodContingency Period• 30 to 90 Days30 to 90 Days

"Due Diligence"/Buyer "Due Diligence"/Buyer Termination Right Termination Right • No land fills or similar impediments to No land fills or similar impediments to

Buyer's use/developmentBuyer's use/development

• Engineering, drainage, soil and substrata Engineering, drainage, soil and substrata conditions acceptable to Buyerconditions acceptable to Buyer

• Environmental conditions acceptable Environmental conditions acceptable

• Buyer termination right during Buyer termination right during Contingency Period Contingency Period

• Null and void (No!)Null and void (No!)

During the Contingency During the Contingency PeriodPeriod• Buyer, its employees, agents and Buyer, its employees, agents and

designated representativesdesignated representatives

• Right to enter upon the PropertyRight to enter upon the Property

• Prior notice to Seller Prior notice to Seller

• Representative designated by SellerRepresentative designated by Seller

• Conduct soil tests, borings, Conduct soil tests, borings, environmental, engineering, tests or environmental, engineering, tests or studies studies

Buyer IndemnityBuyer Indemnity

• Defend, indemnify and hold harmless Defend, indemnify and hold harmless Seller Seller

• Liability, loss, claims, demands or Liability, loss, claims, demands or damages damages

• Buyer’s or its employees’, agents’ or Buyer’s or its employees’, agents’ or designated representatives’ entry upon the designated representatives’ entry upon the PropertyProperty

• Survive Closing or Agreement Survive Closing or Agreement terminationtermination

Buyer RemediationBuyer Remediation

• Remediate damage caused to the Remediate damage caused to the PropertyProperty

• Survive Agreement terminationSurvive Agreement termination

InsuranceInsurance

• Evidence of insuranceEvidence of insurance– Liability for Personal Injury and Property Liability for Personal Injury and Property

DamageDamage– Worker's CompensationWorker's Compensation

• Seller as additional insured Seller as additional insured

Seller Deliveries (Seller)Seller Deliveries (Seller)

• Surveys, drawings, reports, tests or Surveys, drawings, reports, tests or studiesstudies

• Seller's possession Seller's possession

• Seller makes no representations or Seller makes no representations or warranties as to the correctness, warranties as to the correctness, validity or accuracy validity or accuracy

Seller Deliveries (Buyer)Seller Deliveries (Buyer)

• Confidential Confidential • ExceptionsExceptions

– Share with Buyer’s agents or designated Share with Buyer’s agents or designated representatives in performance of tests or studies representatives in performance of tests or studies

– Agents or designated representatives agree to keep Agents or designated representatives agree to keep the information confidential the information confidential

– Court order or law Court order or law

– Agreement terminated, Buyer promptly return Agreement terminated, Buyer promptly return deliveries deliveries

Buyer’s Tests and StudiesBuyer’s Tests and Studies

• Buyer's expenseBuyer's expense

• Results confidential Results confidential

• ExceptionsExceptions– Court order or lawCourt order or law

Voluntary Remediation Voluntary Remediation Program (“VRP”)Program (“VRP”)• Seller and Buyer acknowledge that as of the Seller and Buyer acknowledge that as of the

Agreement DateAgreement Date– Contaminant releases on the Property ("VRP Incident Contaminant releases on the Property ("VRP Incident

Releases") Releases")

– Disclosed to State Department of Environmental Protection Disclosed to State Department of Environmental Protection ("DEP") ("DEP")

– VRP Incident Remediation Plan developed thereunder VRP Incident Remediation Plan developed thereunder between Seller and DEP ("VRP Incident Remediation Plan")between Seller and DEP ("VRP Incident Remediation Plan")

– Remediate the Property Remediate the Property

– Regulatory standards for the continued commercial/industrial Regulatory standards for the continued commercial/industrial use ("Commercial/Industrial Standards") use ("Commercial/Industrial Standards")

VRP Incident Remediation VRP Incident Remediation Plan CompliancePlan Compliance• Seller/Buyer obligationsSeller/Buyer obligations

• Memorialized in Environmental Memorialized in Environmental Indemnity Agreement Indemnity Agreement

• Exhibit to Agreement Exhibit to Agreement

Environmental "Due Diligence”/ Environmental "Due Diligence”/ Seller Termination RightSeller Termination Right• Buyer’s environmental tests or studiesBuyer’s environmental tests or studies

– Identify releases on the Property Identify releases on the Property

– Not in compliance with Commercial/Industrial StandardsNot in compliance with Commercial/Industrial Standards

– Non-VRP Incident ReleasesNon-VRP Incident Releases

– Not identified in the VRP Incident Remediation Plan Not identified in the VRP Incident Remediation Plan (“Non-VRP Incident Remediation”) AND(“Non-VRP Incident Remediation”) AND

– Estimated cost to perform the Non-VRP Incident Estimated cost to perform the Non-VRP Incident Remediation > $500,000.00 ANDRemediation > $500,000.00 AND

– Buyer does not elect to terminate Agreement THENBuyer does not elect to terminate Agreement THEN

– Seller right to terminate this Agreement, without liabilitySeller right to terminate this Agreement, without liability

Seller Non-VRP Incident Seller Non-VRP Incident Remediation ObligationRemediation Obligation• Buyer's environmental tests or studiesBuyer's environmental tests or studies

– Identify Non-VRP Incident Releases AND Identify Non-VRP Incident Releases AND

– Estimated cost to perform the Non-VRP Incident Estimated cost to perform the Non-VRP Incident Remediation Remediation << $500,000.00 AND $500,000.00 AND

– Buyer does not elect to terminate Agreement ORBuyer does not elect to terminate Agreement OR

– Identify Non-VRP Incident Releases AND Identify Non-VRP Incident Releases AND

– Estimated cost to perform the Non-VRP Incident Estimated cost to perform the Non-VRP Incident Remediation > $500,000.00 ANDRemediation > $500,000.00 AND

– Neither Buyer nor Seller elect to terminate Neither Buyer nor Seller elect to terminate Agreement THENAgreement THEN

Seller Non-VRP Incident Seller Non-VRP Incident Remediation ObligationRemediation Obligation• Seller perform Non-VRP Incident Remediation Seller perform Non-VRP Incident Remediation • Comply with the Commercial/Industrial Comply with the Commercial/Industrial

Standards Standards • Undertake those legally required measures to Undertake those legally required measures to

obtain from DEP (IMPORTANT!)obtain from DEP (IMPORTANT!)• Certificate of Completion and Covenant not to Certificate of Completion and Covenant not to

Sue c/k/a No Further Action/Remediation Sue c/k/a No Further Action/Remediation Letter Letter

Seller No Non-VRP Seller No Non-VRP Incident Remediation Incident Remediation ObligationObligation• Buyer's environmental tests or studiesBuyer's environmental tests or studies

– Identify no Non-VRP Incident Releases Identify no Non-VRP Incident Releases and no Non-VRP Incident Remediation and no Non-VRP Incident Remediation

– Seller no non-VRP Incident Remediation Seller no non-VRP Incident Remediation obligationobligation

"AS IS" "AS IS" Transaction/Limited Transaction/Limited Representations and Representations and Warranties Warranties

Environmental Indemnity Environmental Indemnity Agreement/Seller VRP Agreement/Seller VRP Incident Remediation PlanIncident Remediation Plan• Seller and Buyer acknowledgeSeller and Buyer acknowledge

– VRP Incident Releases VRP Incident Releases – VRP Incident Remediation Plan VRP Incident Remediation Plan

developed developed – Between Seller and DEP Between Seller and DEP – Remediate the Property Remediate the Property – Commercial/Industrial Standards Commercial/Industrial Standards

Environmental Indemnity Environmental Indemnity Agreement (Definitions)Agreement (Definitions)• VRP Incident Environmental VRP Incident Environmental

Liabilities Liabilities – Liability for VRP Incident Remediation Liability for VRP Incident Remediation

Activities/VRP Incident ReleasesActivities/VRP Incident Releases

Environmental Indemnity Environmental Indemnity Agreement (Definitions)Agreement (Definitions)• VRP Incident Remediation Activities VRP Incident Remediation Activities

– Investigation and remediation activitiesInvestigation and remediation activities• Install, operate, and maintain monitoring wellsInstall, operate, and maintain monitoring wells

• Collect soil and/or groundwater samplesCollect soil and/or groundwater samples

• Measure groundwater levels in monitoring wellsMeasure groundwater levels in monitoring wells

• Soil removal Soil removal

• Related assessment and remediation activities Related assessment and remediation activities

• Investigate and remediate VRP Incident Releases Investigate and remediate VRP Incident Releases

• In accord with the VRP Incident Remediation In accord with the VRP Incident Remediation Plan Plan

Seller IndemnitySeller Indemnity

• Of Buyer Of Buyer • VRP Incident Environmental LiabilitiesVRP Incident Environmental Liabilities• VRP Incident Remediation Plan Non-VRP Incident Remediation Plan Non-

ComplianceCompliance• Terminate upon completion of VRP Terminate upon completion of VRP

Incident Remediation Plan ANDIncident Remediation Plan AND• Certificate of Completion and Covenant Certificate of Completion and Covenant

not to Suenot to Sue

Seller InsuranceSeller Insurance

• Evidence of insuranceEvidence of insurance– Liability for Personal Injury and Property Liability for Personal Injury and Property

DamageDamage– Worker's CompensationWorker's Compensation

• Buyer as additional insured Buyer as additional insured

Seller RemediationSeller Remediation

• Remediate damage caused to the Remediate damage caused to the Property from VRP Incident Property from VRP Incident Remediation Activities Remediation Activities

Seller AgreementSeller Agreement

• Buyer not assuming Buyer not assuming

• VRP Incident Environmental VRP Incident Environmental Liabilities Liabilities

Seller AgreementSeller Agreement

• Complete VRP Incident Remediation Complete VRP Incident Remediation Activities Activities

• Compliance with VRP Incident Compliance with VRP Incident Remediation Plan Remediation Plan

• Secure Certificate of Completion and Secure Certificate of Completion and Covenant Not to Sue Covenant Not to Sue

• Minimize disruption to PropertyMinimize disruption to Property

Buyer AgreementBuyer Agreement

• Seller access to PropertySeller access to Property– Prior notice, except emergencyPrior notice, except emergency

• Limited purpose to complete VRP Incident Limited purpose to complete VRP Incident Remediation Activities Remediation Activities

• Terminate upon completion of VRP Incident Terminate upon completion of VRP Incident Remediation Plan ANDRemediation Plan AND

• Certificate of Completion and Covenant Not to Certificate of Completion and Covenant Not to Sue Sue

• Exception: Periodic Groundwater Monitoring Exception: Periodic Groundwater Monitoring

Buyer AgreementBuyer Agreement

• Cooperate with Seller in VRP Incident Cooperate with Seller in VRP Incident Remediation Activities Remediation Activities

• Not interfere with VRP Incident Remediation Not interfere with VRP Incident Remediation Activities Activities

• Not contribute to or exacerbate the condition Not contribute to or exacerbate the condition of the Propertyof the Property– Increase cost of VRP Incident Remediation Increase cost of VRP Incident Remediation

Activities Activities

– Scope of work of VRP Incident Remediation Scope of work of VRP Incident Remediation Activities Activities

Case Study: Standard Case Study: Standard Acquisition Of Property Acquisition Of Property (Buyer)(Buyer)

Real Estate AgreementReal Estate Agreement

• Buyer Perspective Buyer Perspective

Buyer "Due Diligence" Buyer "Due Diligence" Contingency PeriodContingency Period• 30 to 90 Days 30 to 90 Days

• Buyer termination right during Buyer termination right during Contingency Period if dissatisfied with Contingency Period if dissatisfied with PropertyProperty

Seller Representations and Seller Representations and WarrantiesWarranties• No notice of violation of lawNo notice of violation of law

• No pending or threatened litigation or No pending or threatened litigation or administrative proceeding administrative proceeding

• Property in compliance with lawsProperty in compliance with laws– Emissions, disposal, dumping, burial, Emissions, disposal, dumping, burial,

treatment or storagetreatment or storage– Hazardous wastes, hazardous substances, Hazardous wastes, hazardous substances,

regulated substances, and pollution regulated substances, and pollution

Seller Representations and Seller Representations and WarrantiesWarranties• No hazardous wastes, hazardous No hazardous wastes, hazardous

substances, regulated substances, and substances, regulated substances, and pollution pollution – Buried, discharged, disposed of or stored Buried, discharged, disposed of or stored – On, in or under PropertyOn, in or under Property

Seller Representations and Seller Representations and WarrantiesWarranties• No leaks of hazardous wastes, No leaks of hazardous wastes,

hazardous substances, regulated hazardous substances, regulated substances, and pollution substances, and pollution – From underground storage tanks From underground storage tanks

("UST's") and piping("UST's") and piping– UST's and piping in compliance with UST's and piping in compliance with

laws laws

Seller Representations and Seller Representations and WarrantiesWarranties• Survive closingSurvive closing

• Seller indemnity for breachSeller indemnity for breach

Seller Representations and Seller Representations and WarrantiesWarranties• Do not rely uponDo not rely upon

• Why?Why?

Seller Representations and Seller Representations and WarrantiesWarranties• Single asset SellerSingle asset Seller

– Judgment ProofJudgment Proof

• Costly litigationCostly litigation

Seller Representations and Seller Representations and WarrantiesWarranties• Limited Limited

– Knowledge of SellerKnowledge of Seller• ActualActual

• ConstructiveConstructive

– Survival Period Survival Period

• Use to elicit information from SellerUse to elicit information from Seller

“Everyone has the will to win…

That is not the question…

It is the will to prepare to win.”

- Bobby Knight

Do Your Own Do Your Own Environmental Due Environmental Due DiligenceDiligence