Environmental Indemnities

It is not often that one discovers that a senior housing facility was once an oil exploration complex or the site of a former dry cleaner but it does happen, and while your company may get comfortable with the acquisition and your lender comfortable with extending credit, it is important that the necessary disclosures and/or carve outs make their way into the environmental indemnity and any related documentation. While serious current environmental problems may provide an out under the purchase and sale agreement and otherwise prevent financing at a favorable rate or prevent lenders from providing financing altogether, how your company will be permitted to address future, past and more minor present issues will be guided by the language in this document, should the deal proceed. Further, the environmental indemnity will likely govern how the parties will address any known and unknown contaminate releases, inspections, clean-ups, and losses, as well as apportion liability as between your company and the lender for actions by your resident and non-resident tenants and other third-parties. In turn, these points will influence the allocation of risk and may ultimately impact the cost of financing. That allocation of risk becomes all the more critical when you consider that liability under an environmental indemnity often also triggers liability under any related non-recourse carve out guaranty, and liability may not terminate upon a sale or worse, foreclosure.

In addition to having your environmental consultant produce, and having your environmental counsel review, a Phase I environmental site assessments and any subsequent Phase II reports during the due diligence period, it is important to have the representations, warranties and covenants contained in your environmental indemnity and other loan documentation reviewed not only by your financing counsel but also reviewed by people who are most intimately familiar with the operations on the property. These people may include your internal property management team, key employees at a third party manager, or your own acquisition team who have at least walked the property. These persons may be able to help identify if there is a property condition that should be flagged and carved out in the loan documents. Any areas flagged by your operations people for further review should then be passed on to your financing and environmental counsel so that they can collaborate on how best to proceed. In general, the earlier issues are identified and disclosed the easier it is to find an economical solution satisfactory to all parties.

Written by:  Mark Heimendinger and Jonathan P. Huels

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