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
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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
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Overview of Presentation
• Sources of Environmental Liability in real estate
transactions
• Environmental Due Diligence
• State Voluntary Cleanup Programs
• Negotiating Environmental Clauses
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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
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Environmental Due Diligence
• Phase I Environmental Site Assessments
– All Appropriate Inquiries
• Authority (beyond CERCLA)
• Criteria
• Other considerations
• Phase II Environmental Site Assessments
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State Voluntary Cleanup Programs
• Common Elements of State Programs
• No Further Remediation Letters
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Negotiating Environmental Clauses
• Document requests/duration of due diligence
period
• Scope of Work
• Non-disclosure of Buyer’s findings
• Indemnity/Insurance
• Site Access
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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
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Sources of Environmental Liabilities
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Federal Law
State Law
Local Law
Common Law
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Sources of Environmental Liability
• Statutes of concern
– CWA, CAA, RCRA, CERCLA, SARA,NEPA,
SMCRA, TSCA, OSHA
• Regulations and guidance
• Primary enforcement agency
• Delegated authority
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CERCLA
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Remedies abandoned sites
Addresses current releases
Strict joint and several liability
BP is easy
Four classes of persons are liable
Limited defenses
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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
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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
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Evolution of CERCLA Defenses
• Brownfields Revitalization Act
– Added new defenses
• Contiguous Property Owner
• Bona Fide Prospective Purchaser, and,
• Clarified requirements for Innocent Landowner
Defense
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Evolution of CERCLA Defenses
• Brownfields Revitalization Act
– Defenses have
• statutory threshold criteria
• require continuing obligations
– Defenses share “Common Elements”
– But also have key differences
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Common Elements
• Threshold Criteria
– Made All Appropriate Inquiry, AND
– Is not a potentially responsible party
– Has no affiliation with a potentially liable party
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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
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Key Points
• CERCLA issues won’t address:
– Ongoing operational compliance
– State Laws
– Common Law/Third Party
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Phase I & II Environmental Site
Assessments (ESAs)
Matthew E. Cohn
Arnstein & Lehr LLP
120 South Riverside Plaza
Chicago, Illinois 60606
mecohn@arnstein.com
(312) 876-7188
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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.
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What authority should I look to besides the
CERCLA statute?
• EPA regulations at 40 CFR 312
• ASTM E 1527-13 standard
• Federal Register publication of All Appropriate
Inquiries rule, 70 FR 66070-66113
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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
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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
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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.
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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
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Ten Criteria for All Appropriate Inquiries
(Must Be in the Phase I ESA Report)
5.
Review Government Records
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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
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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
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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
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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
281295 (N.D. Ill.)
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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
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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”
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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.
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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
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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 1527-13 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
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Other Things to Look for in a Phase I
Environmental Site Assessment Report
• Contains the sections identified in Appendix X4 of the
ASTM E 1527-13 standard – recommended table of
contents.
• Conclusions that contain a summary of all Recognized
Environmental Conditions.
• Conclusions which contain the statement contained in
paragraph 12.8.1 of ASTM E 1527-13.
• 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.
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Other Things to Look for in a Phase I
Environmental Site Assessment Report
May address non-scope items described in paragraph 13.1.5 of the
ASTM E 1527-13 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
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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.
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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
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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
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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
1527-13.
• 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?
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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.”
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Environmental Due Diligence Advice
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Start early
Take it seriously
Involve competent and smart people
Manage expectations
Be creative
Make a record
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Environmental Due Diligence:
Negotiating Environmental Clauses
Jill B. Richardson, Esq.
Cole Schotz
900 Third Avenue
New York, NY 10022
(646) 563-8953
jrichardson@coleschotz.com
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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
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Environmental Due Diligence
Duration and Documents Produced
• Duration
– Typically 30-120 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
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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.
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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).
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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.
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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.
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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”).
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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
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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.
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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.
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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.
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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.
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THANK YOU!
QUESTIONS?
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