ENVIRONMENTAL CONSIDERATIONS IN BUSINESS AND REAL PROPERTY TRANSACTIONS

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ENVIRONMENTAL CONSIDERATIONS IN BUSINESS AND REAL
PROPERTY TRANSACTIONS

• CATIC Breakfast Seminar Series
• May 25, 2005
• Presented by
• John E. Wertam, Esq.
• Shipman Goodwin LLP
• One Constitution Plaza
• Tel. [phone]
• Email jwertam_at_goodwin.com

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ENVIRONMENTAL CONSIDERATIONS INBUSINESS AND REAL
PROPERTY TRANSACTIONSJohn E. Wertam,
Esq.Shipman Goodwin LLPMay 25, 2005

• Introduction Why bother? What's the big deal
  about environmental issues?
• You buy it, you own it.
• Significant cost associated with environmental
  remediation.
• Significant penalties associated with
  non-compliance.
• Disgruntled clients lead to malpractice claims.
• However, environmental issues become "The Hot
  Potato" No one wants the problem.

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• First things First Is there an environmental
  problem?
• Conduct an Environmental Site Assessment
• Environmental Site Assessment standard of care
  for qualifying for innocent purchaser defense
  under Federal "all appropriate inquiry"
• EPA developing guideline
• Current standard is ASTM Guideline, and, in
  Connecticut, the Transfer Act Site Assessment
  Guidance Document

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• Consider Does Seller do audit in advance?
• Knowledge of condition will require disclosure to
  Buyer
• No sharing of costs
• Disclosure of certain environmental conditions to
  Connecticut Department of Environmental
  Protection ("DEP") may be required

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• Due Diligence in context of transaction
  developing a Site Access Agreement for Buyer
• Cost allocation
• Timing
• Disposal of wastes generated
• Disclosure of conditions
• Indemnity

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• What environmental conditions cause the most
  concern
• Underground Storage Tanks
• Spills/releases of hazardous waste or hazardous
  substances
• Soil contamination (Use is important
  residential vs. industrial/commercial)
• Groundwater contamination (Location is important
  GA vs. GB areas)
• Asbestos (maybe)
• Lead and radon (mainly residential issues)

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• Conduct an Environmental Compliance Audit
  (especially if business operations will continue
  after Closing)
• Wastewater discharges
• Air pollution sources
• UST's
• Hazardous waste
• Disclosure under EPCRA, OSHA, SARA

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• Is further site characterization necessary?
• Phase II Site Assessments
• Phase III Site Assessments
• Is the site an "Establishment" under Connecticut
  Transfer Act?
• Make sure Environmental Compliance Audit or Phase
  I covers the issue
• Why is it important? See below.

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• I have some environmental concerns. Now what do
  I do? Environmental elements to consider in the
  Purchase and Sale Agreement
• Is the Transfer Act implicated? (Patience. More
  on that later.)
• Is there need to provide site access?
• For Buyer's due diligence
• For Seller's post closing obligations, if
  necessary

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• Environmental escrow agreement provisions
• The escrow agent
• Dispersal provisions
• Terminating the agreement
• Setting remediation goals and standards
• UST Issues
• Notification upon transfer
• Revising Registration Forms
• Obligations of the parties
• Allocation of environmental responsibility with
  or without Transfer Act obligations

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1. Indemnity and termination
2. Ownership of environmental reports
3. Notification obligations

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• Environmental Land Use Restriction reservations
  (for Seller with post closing remedial
  obligations)
• Setting remediation goals and standards (again)
• How do I know when the site is clean? (or, when
  am I really finished?)
• LEP verification
• DEP audit/approval/inaction

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• Lenders Concerns How do I finance contaminated
  property?
• Very good question. Good luck.
• The Connecticut Superlien
• Lender liability protection under State and
  Federal Law
• Transfer Act exemption (taking title, but not for
  re-transfer)
• That's all very well but lenders are
  conservative. No kidding.
• Lender has same concerns as Buyer, but are often
  more conservative the pessimist of the deal
• Make escrow available to Lender
• Loan agreement provisions your first born and
  more

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• So we have an Establishment under the Transfer
  Act.What now?
• Definition of "Establishment"
• After Nov. 19, 1980, more than 100 kg of
  hazardous waste generated
• In any one month
• Except for "Remediation of polluted soil,
  groundwater or sediment"
• "Automatic" establishments (dating back to May 1,
  1967)
• The process of dry cleaning
• Furniture stripping
• Vehicle body repair facility ("vehicle" now
  defined, but excludes descriptions of some
  vehicles)
• Any facility that accepts hazardous waste
  generated at a different location in any amount

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• Transfer Act Exemptions
• Definition of "Transfer of Establishment"
• All transfers of real property or business
  operations, except for the following (see statute
  for exact language)
• Easements
• Judicial and municipal foreclosures
• Deed in lieu of foreclosure
• Security interests (including mortgages)
• Conveyance, assignment or termination of a Lease
  for a period of less than 99 years from the date
  of such conveyance, etc., including options or
  extensions of such period
• Trusts and Estate type transfers
• Corporate Reorganizations not substantially
  affecting the ownership of the Establishment
• Issuance of stock or other securities
• Transfer of stock, securities or other ownership
  interests representing less than forty percent of
  the ownership of the entity that owns or operates
  the Establishment

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1. Intra-family transfers and inter-vivos trust
   transfers
2. Subdivisions where less than 50 of land area is
   conveyed, and no spills, or DEP is notified by
   filing an ECAF 60 days prior to such conveyance
3. Conveyance of a service station not otherwise an
   establishment
4. Conveyance of an establishment which, prior to
   July 1, 1997, had been developed solely for
   residential use and such use has not changed
5. Any conveyance of an establishment created or
   operating under Chapters 130 or 132, or to a
   Rehabilitation Agency, or to a municipality under
   32-224, or to CDA
6. Conversion of general or limited partnership to a
   limited liability company under 34-199
7. The transfer of general partnership property held
   in the names of all of its general partners to a
   general partnership which includes as general
   partners immediately after the transfer all of
   the same persons as were general partners
   immediately prior to the transfer

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• The transfer of general partnership property held
  in the names of all of its general partners to a
  limited liability company which includes as
  members immediately after the transfer all of the
  same persons as were general partners immediately
  prior to the transfer
• Transfers associated with assembling parcels for
  Adriaen's Landing or the Stadium at Rentschler
  Field (see implementing legislation for such
  projects)
• Condemning Authorities
• Universal Wastes? See House Bill 6803

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• Definition of "Hazardous Waste"
• RCRA and DEP defined
• Universal Wastes as Hazardous Wastes
• Fluorescent bulbs
• Used Electronics
• Recycled Batteries
• Others
• PCB's over 50 ppm
• Except sewage sludge and lead paint abatement
  wastes

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• Definition of "Hazardous Substance"
• CERCLA hazardous substance and petroleum products
  or by-products where a standard is established
  under the RSRs
• Other Elements to Consider
• Licensed Environmental Professionals
• Environmental Condition Assessment Form ("ECAF")
• Required for all forms except Form IIs
• Certifications and verifications need to be in
  accordance with prevailing standards and
  guidelines

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• Procedure Established
• Filing of Form I and II
• Within 10 days after transfer to DEP
• Prior to transfer - with transferee
• Form II requires written determination of
  Commissioner that site is remediated to standards
• Form I requires ECAF Filing
• Requires a written certification by LEP that no
  release of hazardous wastes or hazardous
  substances has occurred (or that hazardous
  substance remediated to prevailing standards and
  guidelines)

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• Filing of Form III and IV
• For sites where releases of hazardous wastes or
  hazardous substances have occurred
• Not later than 10 days after transfer, to DEP
  (transferor obligation)
• Prior to transfer with other party (transferor
  obligation)
• If no one else signs and files, Transferor now
  obligated to do so
• Both forms must be accompanied by an ECAF
• DEP, within 30 days, makes completeness
  determination
• DEP, within 45 days of completion, determines if
  it will review, or if site may proceed with an
  LEP
• If LEP reviews, schedule submitted for
  investigation and cleaning up parcel

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• 2 years to complete study
• 3 years to initiate cleanup
• Notice of clean up required
• If DEP reviews, then schedule to be submitted for
  review and approval
• Notice required for clean ups

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• Newspaper and
• Sign, or
• Abutter notice
• For real property being transferred where
• Form I or II filed with DEP after October 1, 1995
  or
• Form III or IV filed and verified/certified in
  writing that RSR met, and
• Site has been an establishment since Form I or II
  filed then compliance with Transfer Act waived

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• Voluntary Remediations System Established
• Certain sites may seek determination from
  Commissioner or be evaluated by LEP. See
  22a-133x and 22a-133y of the General Statutes
• Within 30 days of submitting an ECAF (for sites
  under 22a-133x), DEP will determine if LEP or
  DEP will review site
• If LEP reviews, schedule required
• If DEP reviews, schedule required
• If LEP certifies site is clean, then Form II may
  be filed upon subsequent transfers
• Notice required under both programs prior to
  initiating remediation

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• Licensed Environmental Professionals
• Definition of Environmental Professional
  (qualified by reason of knowledge and experience)
• DEP establishes a State Board of Environmental
  Professionals
• Standard of care established
• Fees established, registry maintained
• Standards created by Board
• Investigation experience
• BA or better, or P.E.
• Pass Test
• Board Powers

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• Environmental Use Restrictions Selected
  Elements
• Availability (See Remediation Standard Regulation
  and 22a-133o)
• Notice requirements
• Decision Document/Commissioner Determination
• Subordination Agreements Required of all
  encumbrances, provided Commissioner may waive
  such requirement if he finds that the interest is
  so minor as to be unaffected by the ELUR
• Title certificate required to show subordination
  agreements recorded

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• What if I'm only transferring business
  operations?
• See all of the above, including Transfer Act
• Transfer of DEP permits
• SEC disclosures
• Compliance considerations are amplified
• Enforcement actions
• Permits
• Record keeping

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• Some Parting Thoughts
• As Buyer, negotiate the deal with consideration
  as to how will you re-transfer the
  property/business
• Questionable items will surely be raised again
• Consider timeframe to complete remedial
  obligations

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• Work to simplify the Deal
• The most complicated and difficult transaction is
  where Seller retains obligation to remediate
  environmental conditions post closing.
• Concerns
• Site access
• Buyer loss of control of project and timing
• ELUR recording
• Escrow difficulties
• Seller's financial condition
• Resale difficulties

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• Leasing
• Topic for another day
• But keep site from becoming an "Establishment"
• Establish a "Environmental Condition" baseline
• Create an escrow that is returnable at end of
  lease if no environmental condition created

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• A word about Environmental Insurance
• It's not for every deal
• Very expensive
• Coverage may not be what you think
• Large deductibles
• Avoid "as is" clauses
• Bankruptcy and Environmental Obligations
• Isn't that enough?!

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