ROSELAND, NJ – Most commercial real estate lenders require compensation for environmental liability. This requirement is generally appropriate given that lenders should not assume responsibility for hazardous substances simply because they have security rights in contaminated real property. However, a careful analysis of the environmental compensation requested should be carried out in order to significantly limit the liability of persons entitled to compensation. Here are some important provisions that environmental compensation advocates should carefully consider when maneuvering in the environmental landscape and negotiating the scope and terms of their compensation: For this reason, it is important that guarantors try to limit the scope of the indemnification agreement to the extent that a lender allows it. First, the guarantor should consider how to revise the most important defined terms in the indemnification agreement. One of the most important ancillary documents in commercial real estate loans is environmental clearing. According to federal and state environmental laws, a homeowner is strictly responsible for remediating contamination with hazardous substances on these properties. The guarantor must also endeavour to limit its compliance obligations «to the extent necessary» under environmental law and to the extent that these obligations do not conflict with other obligations of the owner and/or guarantor (e.g. B obligations arising from co-ownership documents). Granting a lender and using non-ownership assets can have potentially damaging consequences for the guarantor. In the case of mortgages, the lender often requires the owner of the property being developed to have an environmental compensation agreement signed by a natural or legal person – also known as a «guarantor». The guarantor should also consider ways to revise the representations, warranties and representations contained in the indemnification agreement. However, some lenders are not willing to accept such provisions unless the guarantor provides a «clean» Phase I environmental report when paying or rejecting the loan.
In this article, we look at some of the issues that guarantors should consider when considering definitions, insurance, guarantees, and obligations in a compensation agreement, and suggest some ways in which a guarantor may limit the scope of compensation to better protect its interests. The guarantor may limit its liability by including company-specific exceptions, including anything identified in the environmental reports provided to the lender. As is customary in indemnification agreements, the guarantor should continue to try to qualify his insurance as being given on the basis of his «actual knowledge». The guarantor must also be careful not to give assurance as to the property`s previous compliance or non-compliance with applicable environmental laws. In addition, the guarantor should consider modifying its obligations under the indemnification agreement. In particular, liabilities should be limited to those «sought or invoked against» by the guarantor. If possible, the guarantor should revise the definition to include only federal, state, and local environmental laws. In addition, the definition of «hazardous substances» should be redefined to allow the owner to use hazardous substances in species and quantities normally and usually used in similar properties. In such agreements, the Guarantor will (a) make certain representations and warranties with respect to the existing environmental conditions on the Property, (b) undertake that all activities on the Property comply with applicable environmental law, and (c) indemnify the Lender from any liability arising from environmental matters relating to the Property, including remediation costs and any depreciation of the Property; caused by an environmental material. This wording was interpreted to exclude coverage of costs incurred by the lender in assessing the environmental condition of the property where the assessment was not related to a lawsuit. (See VFC Partners 26, LLC vs.
Cadlerocks Centennial Drive, LLC) Finally, the term «liabilities» should include a complete list of all liabilities for which the guarantor is held liable. In addition, the list should not include environmental costs before or after the creditor`s failure to assess the ecological status of the property. Post-Covid: How to Avoid Excessive Property Tax Appeal Fees and Save Thousands Holly Marcille ChamberlainPartnerT. +1 704 348 5121holly.chamberlain@cwt.com By Dennis Sughrue and Adam Hirst, Pryor Cashman LLP Alan W. LawrencePartennialT. +1 212 504 6332alan.lawrence@cwt.com Melissa C. HinklePartnert +1 212 504 6972melissa.hinkle@cwt.com To say goodbye to 2019, we look forward to the outlook for 2020 and the new decade. *Can exclude premium content Already have an account? «Northland has recognized the irreplaceable nature of this asset marking its entry into the Denver market. In addition, the definition of «loss» should be limited to actual damages (as opposed to indirect or punitive damages) suffered by the lender in connection with third-party claims against indemnified parties […].