Prospective Purchaser Agreements (covenant not to sue)

Status, Comfort and No-Action Letters (no further action letter)

Negotiated Cleanup Standards (You Don’t Need a Cadillac Cleanup to Park Your Pickup)

Consent Decree (government version of a settlement agreement)

Lease from Redevelopment Agency

Environmental Liability Acquisition Companies

Indemnities and Releases

Environmental Risk Insurance

Comment: Complete article below is from 1996 but still is a great introduction to strategies for limiting environmental liability.

The grass grows greener in a brownfield - contaminated property - Southern California Real Estate: What’s the Mix in ‘96?

http://findarticles.com/p/articles/mi_m5072/is_n4_v18/ai_18007215 - link to article

Kenneth W. Swenson

It is not the conventional wisdom, but buying or leasing a contaminated property - known as a “brown-field” - might help your bottom line, if you can minimize the environmental risks. Why? These properties are usually located in existing industrial areas with existing buildings, and offer a neighboring and trained work force, public transit, established shipping routes, and existing infrastructure, resulting in an economy of scale that reduces up-front and operating costs. “Greenfields,” on the other hand, consisting of “virgin” properties in outlying areas, offer none of these advantages.

Recognizing this, governments and entrepreneurs are developing strategies which can minimize the environmental exposure that has businesses avoiding otherwise economically preferable sites. Taking advantage of these risk reduction strategies may also achieve “non- balance sheet” benefits, such as the public and municipal goodwill that goes with urban redevelopment and environmentally-sensitive business decisions. This article will briefly discuss eight such strategies.

Prospective Purchaser Agreements

In this, the strongest weapon in the arsenal of liability minimizing strategies, the environmental enforcement agency agrees not to sue the property owner/operator for preexisting contamination. The federal Environmental Protection Agency has established certain criteria which must be met before the EPA will enter into such an agreement. First, a cleanup action must be ongoing or expected (by any party, not necessarily the prospective purchaser). Second, the prospective purchaser must demonstrate that it will not only operate the site, but will upgrade it - that is, it will take precautions to prevent future environmental problems. Third, the EPA must determine that continued operation on the site will not exacerbate the existing problems. Fourth, the prospective purchaser must financially viable, so that it has the means to carry out its promises. Finally, the EPA must benefit directly (for example, by a cash payment) or indirectly (for example, by jobs creation, addition of a tax base, or establishment of effective affirmative action programs) from entering into the prospective purchaser agreement. Because the prospective purchaser agreement is, in effect, a settlement by the government with a prospectively liable party under the Comprehensive Environmental Response, Compensation and Liability Act, CERCLA will protect the purchaser from third party suits. Additionally, the benefits under such an agreement are assignable.

Of course, the prospective purchaser agreement is not without its drawbacks. Among them, it is time consuming (for example, it often takes a minimum of four to six months to obtain such an agreement, although state and local governments can be faster), EPA agreements only apply to all or any portion of a Superfund site, the EPA disfavors such agreements except in extraordinary circumstances, and cash payments may diminish or destroy the up-front cost savings from developing a brownfield instead of a greenfield. Moreover, while third party. suits brought under environmental laws are barred by such an agreement, third party tort suits - nuisance and trespass, for example - are not.

Status, Comfort and No-Action Letters

A status, comfort or no-action letter from an enforcement authority often can provide the impetus needed to go forward on a development project, but they do not provide the same safety net obtained with a prospective purchaser agreement. Neither, however, are such letters as difficult to obtain. Such letters generally state that the governmental authority does not presently view the new owner/operator as a responsible party for existing contamination, or that the agency does not presently require any remedial action or investigation. While this language is not as strong as a covenant not to sue, agencies generally do not issue such letters without a full factual investigation and so it is usually certain that they will be honored. Unfortunately, in part because of this factual investigation, these letters have their drawbacks, too. They can be time-consuming and costly to obtain because of the agency’s need to evaluate full environmental reports. Additionally, third party suits, even those under environmental laws, are not barred by these letters, and the benefits under such letters are not assignable to third parties.

Negotiated Cleanup Standards - “You Don’t Need a Cadillac Cleanup to Park Your Pickup”

Often it is not necessary to obtain a full-blown prospective purchaser agreement, or even a status, comfort or no-action letter. Environmental liabilities occur when existing contaminant levels exceed government-established minimum contaminant level standards. If these standards are adjusted upward, then no “contamination” - and no liability - technically exists. In recognition of the fact that industrial uses simply do not require the same cleanup standards as playgrounds, government agencies have begun raising the allowable contaminant levels on sites which are to be maintained in an industrial use. Usually these standards can be documented by letter agreement with the agency, and so long as the new owner/operator does not cause its own pollution problems, it can be assured of not incurring liability for preexisting conditions which do not exceed the new levels.

Consent Decree

If the site is the subject of an ongoing remediation, the prospective purchaser/tenant can sign a consent decree, if one exists. A consent decree is the government version of a settlement agreement; in government-ordered environmental cleanups, the government may require the parties to enter into a consent decree to establish rights and responsibilities respecting the cleanup. Consent decrees contain all of the benefits of the prospective purchaser agreements. Thus, for a minimum contribution to future cleanup or for some alternative consideration, a prospective purchaser can essentially buy into the covenant not to sue, enforceable against third parties. Like the prospective purchaser agreement, though, the drawbacks to the consent decree are that it requires an ongoing remediation, it does not prevent third party tort suits, and negotiation and drafting may be time consuming.

Lease from Redevelopment Agency

Another strategy, useful in areas subject to redevelopment, is to lease the property from the local redevelopment agency. These agencies have broad cleanup powers in California. Moreover, these agencies have immunity from Superfund liability, and this immunity is transferrable by law. Of course, redevelopment projects have their own sets of hurdles to cross and are not for the faint of heart. Moreover, redevelopment agencies do not have protection from the ever present threat of third party lawsuits based in tort.

Environmental Liability Acquisition Companies

Environmental Liability Acquisition companies buy and remediate contaminated property or take over remediation obligations for existing owners and operators, making their profit from the discounted value on purchase of a property and from their efficiencies and special knowledge in environmental remediations. Unfortunately, agreements between private parties to assign environmental liabilities are not binding on governments or third parties, who may still sue the original responsible party (which under CERCLA can be any current owner or operator, regardless of fault). Also, these companies have not been tested by time, so their effectiveness and capitalization are still open issues. Moreover, since these companies are effectively middlemen in the remediation/liability process, their added cost may diminish or destroy the cost differential which makes brown-fields attractive over greenfields.

Indemnities and Releases

Everyone is familiar with environmental indemnities and releases and understands that they are only as good as the indemnitor is solvent. However, indemnifies should not be overlooked, and may be combined with any of the other risk minimizing strategies to add overall strength to the risk reduction package. Also, environmental indemnities may be bolstered by letters of credit, pledges of security, escrow holdbacks, blocked accounts, or bonds, among other things, thereby decreasing reliance on the underlying indemnitor.

Environmental Risk Insurance

Environmental risk insurance has recently become more widely available, and policies underwritten by several reputable general risk insurers can be obtained. Such policies can be obtained to address specific risks (including insuring against loss which might be suffered in connection with an existing problem), but are also available to insure against costs of cleanup associated with any environmental problem. The premiums for this type of insurance are highly variable, depending on the nature of the problems, the type of use, whether or not agency comfort documents have been issued and other underwriting factors. Of course, if it appears that potential liability may accrue to a prospective purchaser for an on-going problem, then no policy will be issued, or any existing problems may be excluded. Also, brownfield properties are likely to incur higher premiums than uncontaminated properties.

Economic reality has set in at the federal, state and local environmental oversight agencies, and new and creative risk-reduction are regularly being proposed to encourage development of the urban interior to prevent blight, deterioration, and “industrial flight.” While ownership of contaminated properties will never be completely risk free, the strategies discussed in this article, used separately or especially in combination, should assure significant risk reduction such that the benefits of brownfield ownership and operation will outweigh the risks.

Kenneth W. Swenson is a partner of Buchalter, Nemer, Fields & Younger (http://www.buchalter.com/) , specializing in transactional real estate and transactional and administrative environmental law.

COPYRIGHT 1996 CBJ, L.P.
COPYRIGHT 2004 Gale

This entry was posted on Wednesday, August 8th, 2007 at 10:38 am and is filed under ●Brownfields 101, ●Brownfields Corporate World: SOX,FIN 47,Sell or Not?, ●Brownfields Developer's Corner, ●Brownfields Financing, ●Environmental Agencies, ●Environmental Liability Issues.

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