Indemnitors should also think carefully about what exactly is covered by the environmental indemnities that they are giving and may need to grapple with the broad scope of indemnities that, in their eyes, appear unfair. For example, lenders often impose full environmental liability on indemnitors even when third parties (e.g., tenants, midnight dumpers or adjacent property owners) are the cause of the environmental damage. While it is understandable that lenders do not want to assume such liability, there should be appropriate limitations.

For instance, indemnitor liability should not be triggered by losses arising from the gross negligence or willful misconduct of lenders, their successors and assigns, or their employees, agents and/or related parties. Moreover, an indemnitor's liability should only cover actual realized losses resulting from actual violations of environmental laws. In addition, indemnitor liability should cease after a lender or their nominees acquire title to the subject property (whether by foreclosure, deed in lieu of foreclosure or otherwise).

Narrow the breadth of environmental representations—only represent what you actually know

Representations related to the environmental history of a property should carve out everything that is disclosed by the environmental reports delivered to and/or prepared for lenders. And, even then, representations should be limited to actual knowledge without additional inquiry or investigation.

Restrict inspection rights—just when lenders believe a release has occurred or is imminent

To avoid granting lenders unfettered (and potentially disruptive) environmental inspection rights, limit their future inspections to when they have a good faith, reasonable belief that a release of hazardous substances has actually occurred or is imminent.

Protect yourself with a cross-indemnity—don't be left on the hook for more than your fair share

In a multiple indemnitor scenario, liability is typically joint and several. This can lead to a situation where the lender only pursues one indemnitor even though other indemnitors were parties to the environmental indemnity agreement.

To avoid a situation in which an unlucky indemnitor is unable to recoup its losses, consider entering into a cross-indemnity providing for reimbursement from each of the borrower's other members or from the other indemnitors for their respective shares of liability. Optimally, this cross-indemnification agreement would be entered into prior to or contemporaneously with the execution of an environmental indemnity agreement. To the extent that an indemnitor is a member of the borrower entity, a simpler approach might be to include an indemnification provision covering members from environmental liability in the borrower's operating agreement or other governing documents.

Narrowly defined key terms—specificity may avoid broad liability

Narrowly defining key terms may help to significantly reduce the scope of environmental liability. For example, the term “Hazardous Materials” should not include a broad reference to any hazardous substances, but should be narrowly tailored to expressly exclude substances of kinds and in amounts customarily and ordinarily stored or used in similar properties for the purposes of cleaning, other maintenance or operations or held for resale so long as they comply with applicable environmental laws. In addition, the term “Indemnified Parties” should exclude any party who acquires title to the property as a result of foreclosure, deed in lieu of foreclosure or another type of transfer. And further, the term “Losses” should exclude punitive, special and consequential damages.

Final Thought

It is critical to consider how environmental indemnities may expose indemnitors to liability for events that are often outside of their control. Once liability is triggered, the consequences may be much broader and more significant than originally contemplated. As a result, environmental indemnities should be carefully negotiated before execution.

Kim Alexander is of counsel with A.Y. Strauss LLC, based in Rosenland NJ. The opinions expressed in this article are not intended to create an attorney-client relationship and do not constitute legal advice. Neither the transmission of the information contained within this article nor the use of the information or communication with A.Y. Strauss LLC creates an attorney-client relationship with A.Y. Strauss LLC.

ROSELAND, NJ—Most commercial real estate lenders require indemnification for environmental liability. This requirement is generally reasonable in light of the fact that lenders should not incur liability arising from hazardous substances merely because they have security interests in contaminated properties. However, a careful analysis of requested environmental indemnities should be performed to seek to significantly limit the liability of indemnitors. Below are some paramount provisions that environmental indemnitors should carefully consider as they maneuver through the environmental landscape and negotiate the scope and terms of their indemnities:

Consider when indemnities should terminate—after payoff

While indemnitors will rarely succeed in negotiating away environmental indemnities in their entirety, indemnitors should focus on seeking to limit the perpetual nature of indemnities. One approach is to negotiate a termination of environmental indemnities upon payment in full of the loan (assuming there are then no pending or threatened indemnified environmental conditions existing at the property). If cutting off liability immediately after payoff does not provide the lender with an adequate cushion against environmental liability, then another approach is to negotiate a termination of environmental indemnities after the expiration of a fixed time period following payoff of the loan (e.g., three years after payment in full of the debt) provided a clean environmental report is delivered to the lender.

Limit the scope of liability and to whom you are liable—don't be stuck with liability to third parties

Indemnitors should also think carefully about what exactly is covered by the environmental indemnities that they are giving and may need to grapple with the broad scope of indemnities that, in their eyes, appear unfair. For example, lenders often impose full environmental liability on indemnitors even when third parties (e.g., tenants, midnight dumpers or adjacent property owners) are the cause of the environmental damage. While it is understandable that lenders do not want to assume such liability, there should be appropriate limitations.

For instance, indemnitor liability should not be triggered by losses arising from the gross negligence or willful misconduct of lenders, their successors and assigns, or their employees, agents and/or related parties. Moreover, an indemnitor's liability should only cover actual realized losses resulting from actual violations of environmental laws. In addition, indemnitor liability should cease after a lender or their nominees acquire title to the subject property (whether by foreclosure, deed in lieu of foreclosure or otherwise).

Narrow the breadth of environmental representations—only represent what you actually know

Representations related to the environmental history of a property should carve out everything that is disclosed by the environmental reports delivered to and/or prepared for lenders. And, even then, representations should be limited to actual knowledge without additional inquiry or investigation.

Restrict inspection rights—just when lenders believe a release has occurred or is imminent

To avoid granting lenders unfettered (and potentially disruptive) environmental inspection rights, limit their future inspections to when they have a good faith, reasonable belief that a release of hazardous substances has actually occurred or is imminent.

Protect yourself with a cross-indemnity—don't be left on the hook for more than your fair share

In a multiple indemnitor scenario, liability is typically joint and several. This can lead to a situation where the lender only pursues one indemnitor even though other indemnitors were parties to the environmental indemnity agreement.

To avoid a situation in which an unlucky indemnitor is unable to recoup its losses, consider entering into a cross-indemnity providing for reimbursement from each of the borrower's other members or from the other indemnitors for their respective shares of liability. Optimally, this cross-indemnification agreement would be entered into prior to or contemporaneously with the execution of an environmental indemnity agreement. To the extent that an indemnitor is a member of the borrower entity, a simpler approach might be to include an indemnification provision covering members from environmental liability in the borrower's operating agreement or other governing documents.

Narrowly defined key terms—specificity may avoid broad liability

Narrowly defining key terms may help to significantly reduce the scope of environmental liability. For example, the term “Hazardous Materials” should not include a broad reference to any hazardous substances, but should be narrowly tailored to expressly exclude substances of kinds and in amounts customarily and ordinarily stored or used in similar properties for the purposes of cleaning, other maintenance or operations or held for resale so long as they comply with applicable environmental laws. In addition, the term “Indemnified Parties” should exclude any party who acquires title to the property as a result of foreclosure, deed in lieu of foreclosure or another type of transfer. And further, the term “Losses” should exclude punitive, special and consequential damages.

Final Thought

It is critical to consider how environmental indemnities may expose indemnitors to liability for events that are often outside of their control. Once liability is triggered, the consequences may be much broader and more significant than originally contemplated. As a result, environmental indemnities should be carefully negotiated before execution.

Kim Alexander is of counsel with A.Y. Strauss LLC, based in Rosenland NJ. The opinions expressed in this article are not intended to create an attorney-client relationship and do not constitute legal advice. Neither the transmission of the information contained within this article nor the use of the information or communication with A.Y. Strauss LLC creates an attorney-client relationship with A.Y. Strauss LLC.