While the credit crisis has cooled of the commercial and industrial real estate market, transactions continue to occur at a slower pace. Allocation of risk and liability for environmental contamination is an important consideration in transactions that involve properties in which manufacturing, transportation or other commercial businesses operated.
In allocating responsibility for environmental clean up costs and damages, carefully crafted contract language can determine who will be responsible for hundreds of thousands if not millions of dollars in liability. A federal case from this summer shows Courts will look closely for language demonstrating liabilities are "assumed" during the sale before assigning responsibility for costs or damages to buyers of contaminated property:
Indemnity versus assumption of liability- Carefully drafted indemnity clauses are important consideration in transactions involving environmental liabilities. These clauses are used to allocate the risks associated with liability based upon past and future activities that occur on the property. Recently, the District Court for the Eastern District of Pennsylvania distinguished between indemnity and assumption of liability. The Court decided their was no direct action available against the purchaser of contaminated property based upon the indemnity clause of a settlement agreement between the seller and buyer Here is what the Court found:
[T]he parties chose to never use the terms "liabilities" or "obligations" and only use the word "assume" in reference to assuming defenses. There is no language in the settlement agreement that implies that Sunoco agreed to be AR’s legal successor…The contracting parties specifically chose the language "shall defend and hold harmless," and did not elect to include any language regarding assumption of liabilities or successor liability. United States v. Sunoco, Inc. (No. 05-633) (E.D. Pa 2009)
Based on this finding the Court said the United States could not sue Sunoco directly to compel clean up. The indemnity clause was only triggered by a suit against AR as a prerequisite.
Going Beyond a Warranty Disclaimer– Land sale contracts will sometimes include "as is" clauses. Courts will look to interpret the meaning of the clause based upon the contractual language used in the agreement. An "as is" clause without language demonstrating the buyer "assumes" all environmental liabilities could be interpreted by Courts to be only a disclaimer of any warranties regarding the condition of the property. In Niecko v. Emro, the Court found assumption of liability had occurred because the contract included the following language:
[Seller] makes no "warranties or reps" as to soil conditions, and that [buyers] assume all responsibility for any damages caused by the conditions on the property upon transfer of title. Niecko v. Emro 973 F.2d 1296 (6th Cir. 1992)
These cases demonstrate that for an assumption of all environmental liabilities to occur, Courts will expect to see express language demonstrating clear intent to transfer that liability.