Sussman Shank. attorneys. Contractual Tools for Allocating Liability. Patrick G. Rowe

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1 Sussman Shank attorneys llp Contractual Tools for Allocating Liability Patrick G. Rowe SW Broadway, Suite 1400 Portland Oregon

2 CONTRACTUAL TOOLS FOR MITIGATING & ALLOCATING ENVIRONMENTAL RISK GENERAL RULE: Seller who owned property during release of contamination strictly liable for environmental contamination and will remain liable after selling property Buyer of real property becomes strictly liable for any contamination on the property that pre-dated the sale, even if it was caused by the seller 2

3 SELLER REPRESENTATIONS Purpose: Protection for purchaser or lender. Can affect or be affected by the due diligence process Some typical Representations Current and past compliance with environmental laws Disclosure of any pending or threatened regulatory actions, requests for information, etc. Identify known past releases Identify current or prior potential sources of contamination e.g., ASTs, USTs, PCBcontaining equipment Knowledge qualifiers reps based on seller s knowledge 3

4 AS-IS PROVISIONS 4

5 AS-IS PROVISIONS 5

6 AS-IS PROVISIONS 6

7 AS-IS PROVISIONS It is hereby agreed that [other than conditions noted in the Representations section] the premises are sold in an "as is" condition and Buyers hereby agree to accept said property in its present condition and without any warranty as to the condition thereof. Courts consistently require that in order to contractually allocate/shift environmental liability that intention must be clearly stated 7

8 AS-IS PROVISIONS Tips for a strong As Is provision: 1. Expressly allocate environmental liability in clear, unequivocal language 2. Include a buyer s signed statement re: environmental conditions 3. Allow reasonable time for the buyer to inspect, survey and conduct environmental site assessments 8

9 INDEMNIFICATION PROVISIONS CERCLA 107(e): No indemnification, hold harmless, or similar agreement or conveyance shall be effective to transfer from the owner or operator of any vessel or facility or from any person who may be liable for a release or threat of release under this section, to any other person the liability imposed under this section. Nothing in this subsection shall bar any agreement to insure, hold harmless, or indemnify a party to such agreement for any liability under this section. 42 U.S.C. 9607(e) Practical Effect: Indemnified party remains liable to the government / can t require government to pursue the party providing the indemnification. BUT Indemnified party can seek indemnification from the other party if government pursues the indemnified party 9

10 INDEMNIFICATION PROVISIONS Scenario 1 SALES AGREEMENT DATED JANUARY 24, 1986: Seller will also indemnify purchaser for the cost of additional cleanup, including penalties or fines, required by DEQ or any Governmental Agency during the next ten years, for existing contamination 10

11 INDEMNIFICATION PROVISIONS 11

12 INDEMNIFICATION PROVISIONS Scenario 2 For a period of 5 years from the date of Closing [Seller] hereby agrees to defend, indemnify and hold harmless Purchaser... from and against liabilities, claim, fines, penalties and remedial action costs... arising from or relating to the release of Hazardous Material... located on the Premises as of the date of Closing.... if such release of Hazardous Materials is discovered during Purchaser s preparation of the site for subsequent development, as a result of any third-party discovery... and the release is above the Oregon cleanup standards requiring remedial activity... // Indemnification included deductible of $250,000 and capped Seller s liability at $4 million 12

13 INDEMNIFICATION PROVISIONS Issue Time limits Dollar limits Indemnifica4on trigger 4ed to government enforcement Tip Party receiving the indemnifica1on should make sure the 1me limit is reasonable in light of their plans for the property and possible delays Party receiving the indemnifica1on should assess worst case scenario costs and make sure the limit is reasonable in light of poten1al costs Make sure the terms of the indemnity are clear with respect to what specific environmental claims or losses are covered Does the indemnity cover a le?er from the government or must it be a formal demand or Complaint? Does the indemnifica1on include an obliga1on to defend against both government enforcement and third party claims? 13

14 INDEMNIFICATION PROVISIONS Issue Indemnifica4on trigger 4ed to discovery of pre-sale contamina4on Scope of area covered Scope of costs Tip Expressly state what documents establish the pre-closing environmental baseline Clearly state areas covered, including whether indemnifica1on covers off-site contamina1on Clearly state costs covered include off-site disposal, a?orney fees, consultant fees, business interrup1on costs? Indemnifica4on sa4sfac4on 4ed to regulatory approval Clearly state what cons1tutes approval (uncondi1onal NFA, NFA with deed restric1ons?) 14

15 HOLD BACK PROVISIONS Holdback - a deferral of payment of some portion of the purchase price. Example: Hold Back. Five Hundred Thousand and No/100 Dollars ($500,000.00) of the Purchase Price shall be held back by the Purchaser (the "Hold Back Amount") pending Seller obtaining and providing to Purchaser a Washington Department of Ecology WDOE [a] No Further Action certificate... Holdback. On Closing, Two Hundred Thousand Dollars ($200,000.00) of the Purchase Price (the Holdback Amount) shall be retained by the Purchaser and applied by the Purchaser towards any costs that the Purchaser, acting in its sole discretion, incurs in connection with bringing the Property into compliance with Environmental Laws and/or removing Hazardous Substances from the Property 15

16 ESCROW ARRANGEMENTS Escrow funds are available to the purchaser or other indemnified parties as needed to fulfill remediation or indemnification obligations The escrow may be funded by a set-aside from the purchase price or, in the case of a remedial cost-sharing arrangement by a contribution from both parties to the transaction Administered by an independent 16

17 Owner/Consultant Aligned Interest Contract Environmental consultant retained to conduct due diligence and remediation Consultant agrees to cap or reduce fees if more contamination needs to be remediated than expected or discovered in areas not identified in due diligence 17

18 Sussman Shank attorneys llp Questions? Thank you for your time! 1000 SW Broadway, Suite 1400 Portland Oregon