The contractual language appearing in purchase or lease agreements for industrial property is critical. I have seen a number of contracts that were fraught with vague terms or even silent on liability allocation. Those contracts now define the company’s liability exposure. Protections the company thought they may have are either non-existent or in question.
That is why it is so important to pay very careful attention to the environmental provisions in the contract for sale or lease of property. Particularly important are the representations, indemnity and release provisions. On an industrial property with a legacy of environmental issues, these provisions can often be the most difficult to negotiate because they shape liability risks for years to come.
A recent federal court ruling provides further proof of the importance of paying careful attention to contract provisions allocating environmental liability. The Court in United States v. ARG Corporation, Case No. 10-3111 (N.D. Ind. 2011) dismissed a complaint filed by the seller which sought to recover $841,000 in response costs incurred by U.S. EPA in performing clean up activities at the former industrial site. In dismissing the complaint, the Court found that the purchase contract contained a clear allocation of environmental liability. In essence, the purchaser avoided nearly $1 million in clean up costs based on the contractual provisions it negotiated prior to purchase.
The contract language at issue stated as follows:
The Seller shall remain solely financially responsible for the Remediation Activities arising from the Seller’s ownership, use or operation of the property prior to the Closing Date, provided however, that the Purchaser covenants not to execute against the Seller’s assets to satisfy the Seller’s financial responsibilities for remediation of pre-closing environmental damage except for the proceeds of recoveries under the general liability policies issued to the seller prior to closing.
The Purchaser shall be solely financially responsible for the Remediation Activities arising from the Purchaser’s ownership, use or operation of the property after the Closing Date.
"Remediation Activities" shall mean investigation and remediation activities, including but not limited to installing, operating, and maintaining all monitoring wells; collecting soil and/or groundwater samples; measuring groundwater levels in measuring wells; soil removal; groundwater treatment; and performing other related assessment activities, necessary to investigate and remediate environmental damage caused by the release of hazardous substances in accordance with any environmental laws.
The Court held that
"this language unambiguously states that ARG is solely responsible for remediating hazardous substances on the property arising from ARG’s ownership, use, or operation prior to the closing…South Bend is solely responsible for remediating hazardous substances on the property arising from South Bend’s ownership, use, or operation after the closing date.
The Court also held that if South Bend believes ARG is responsible for cleaning up pre-closing hazardous substances, it will only seek recovery from ARG’s insurance policies. The court found the contract did not indicate South Bend would indemnify ARG if ARG was forced to pay the Government for remediating hazardous substances.
This case is a good example of the benefits of clear contractual language when allocating environmental liabilities. Due to the high costs involved with clean up, there is a strong incentive for the party on the losing end to put forth creative interpretations of the language in an attempt to pass on or mitigate their liability. Clear and unambiguous terms can be your best defense in such an instance.