7 Contracts

Depending upon the EHS experience of the legal team working on the contracts, you may want to be involved in the contracts.  Although you may not be a lawyer, your EHS background and experience may provide a different view than the legal team. 

I was originally going to provide example contract language but decided it would be better to provide everything in layman’s terms that you could provide to, or discuss with, your legal department.  The language you want to include, or exclude, may depend upon which side of the deal you are situated (i.e., buyer or seller, lessee or lessor).  Some of these concepts are also discussed in the due diligence section. 

7.1 Terms and Definitions

Contracts that you will be involved with will typically contain some common terms and definitions that are pertinent.  The following sections provide information on these terms and definitions.

7.1.1 Contamination and Cleanup

The definition of contamination can be very complicated and understanding how this term could be used is important to the definition.  It may be used as a benchmark or threshold for determining if the site requires cleanup or remediation (i.e., removal or stabilization of the contaminants).  Below are some questions to consider.

  • Does the contamination definition take into account naturally occurring background concentrations or pre-existing contamination?

Some materials occur naturally in the environment, such as arsenic, barium and radon, and may not be indicative of man-made contamination.  Therefore, you may have a clause that excludes naturally occurring materials from consideration as contamination or you might require cleanup only to background levels.

If a site has or is suspected of having existing contamination, the contract may define contamination or the need for cleanup based on contamination above this existing contamination.  This typically requires establishment of a baseline level of contamination typically through a Limited Site Investigation Limited Site Investigation (LSI).

  • What are the cleanup goals?

It is important to clarify or define the cleanup goal since, due to the costs of cleanup, both parties will likely have differing views.  One choice is to let the applicable regulatory agency decide what an appropriate cleanup goal entails.  Some companies may not accept this goal for a number of reasons including:

  • It requires disclosure of the contamination to the regulatory agency
  • It may allow risk-based cleanups that result in institutional controls (e.g., a prohibition on certain activities at the site such as installing a well or a basement) that can limit future activities

Another option is to define the cleanup goals based on applicable Preliminary Remediation Goals which, according to the Environmental Protection Agency are:

“… the maximum level of residual risk that will be considered acceptable.”

and

“…the average concentration of a chemical in an exposure area that will yield the specified target risk in an individual who is exposed at random within the exposure area.”[1]

One issue with this basis is determining the “average concentration” can be complicated due to temporal and spatial variation and heterogeneity of contamination.  Also, construction activities that require excavation and disposal of soil may be more expensive due to the presence of the contamination.

  • What materials are considered contaminants?

This important issue is discussed in Section 7.1.5 below. 

7.1.2 Environmental Laws and Requirements

The definition of environmental law may be used in several contexts: compliance with environmental laws or releases of materials.  For example, a facility could be in compliance with environmental laws, but still contaminate the soil if, over the years, the legal release (in compliance with a permit) of small quantities of a chemical accumulates in the soil.

The definition will typically mention federal, state, local or other laws, statutes, regulations, ordinances, rules, orders or decrees.  It may provide a list of laws such as:

  • Clean Air Act (CAA), 42 United States Code (U.S.C.) §7401 et seq.
  • FWPCA, 33 United States Code (U.S.C.) §1251 et seq., Clean Water Act Clean Water Act (CWA) and the Water Quality Act of 1987
  • Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980, 42 United States Code (U.S.C.) §9601 et seq., as amended by the Superfund Amendment and Reauthorization Act (SARA)
  • Emergency Planning and Community Right-To-Know Act (EPCRA), 42 United States Code (U.S.C.) 11001 et seq.
  • Federal Insecticide, Fungicide and Rodenticide Act (FIFRA), 7 United States Code (U.S.C.) 136 to 136y
  • Occupational Safety and Health Administration (OSHA), 29 United States Code (U.S.C.) 651 et seq
  • Oil Pollution Act (OPA), 33 United States Code (U.S.C.) 2701 et seq.
  • Resources Conservation and Recovery Act (RCRA), 42 United States Code (U.S.C.) §6901 et seq., as amended by the Hazardous and Solid Waste Amendments of 1984
  • Safe Drinking Water Act (SDWA), 42 United States Code (U.S.C.) §300f et seq.
  • Toxic Substance Control Act (TSCA), 15 United States Code (U.S.C.) §2601 et seq.

You should verify that the Environmental Law definition does not exclude a law that could be advantageous to the other party or disadvantageous to you.  For example, if the contract definition excludes the Resources Conservation and Recovery Act (RCRA), it may not cover spills or releases of hazardous wastes even if the contract definition includes the Emergency Planning and Community Right-To-Know Act (EPCRA).

7.1.3 Governmental Entity

The legal document may define the applicable governmental entities that exercise executive, legislative, judicial, regulatory or administrative functions.  This may include:

  • Nation or government or quasi-governmental body
  • State
  • Local or political subdivision
  • Court
  • Administrative agency
  • Regulatory body
  • Instrumentality
  • Authority
  • Entity
  • Official

This definition may be included in other definitions such as hazardous materials and permits.

7.1.4 Hazardous Material, Environmental Contaminant and Pollutant

Contracts and legal documents may define hazardous materials, contaminants and/or pollutants.  This definition may serve several purposes: to identify what might have caused contamination, to exclude or control the use of certain materials on-site (e.g., for leases and access agreements), to require removal at the end of contracts.

I have seen lots of different definitions, but they typically refer to items identified as hazardous chemicals, materials, substances or wastes defined by environmental laws (i.e., as defined above).  I use caution when defining these items to exclude materials that are not normally considered hazardous or may be hazardous, but are not intended to be addressed as such in the contract.  For example, the definition may not be intended to address building materials, which could include asbestos, lead paint, PCB-containing light ballasts and urea formaldehyde foam insulation.  If you require these to be remove at the end of a lease, you might be left with no working lights.  Other items that could inadvertently be included are combustible dusts, janitorial supplies, naturally occurring chemicals, etc.

When the Occupational Safety and Health Administration (OSHA) adopted the Global Harmonization Standard (GHS) in 2012, combustible dusts became a hazardous substance.  Overnight, industries that would not normally be considered to have hazardous substances (e.g., wood cutting, grain processing, etc.) now had hazardous substances since they generated combustible dusts.  A company I worked for was then violating some lease agreements because these agreements precluded storage or handling of hazardous substances.  We had to add clauses exempting combustible dust.

Below are some examples of items that may be identified as hazardous materials or environmental contaminants.

  • Agricultural chemicals
  • Asbestos and any substance containing asbestos
  • Chemicals known to cause cancer or reproductive toxicity
  • Contaminants
  • Corrosives
  • Effluents
  • Emissions
  • Explosives
  • Flammables
  • Hazardous wastes
  • Hydrocarbons
  • Lead-based paint
  • Pesticides
  • Per and Poly-Fluoro Alkyl Substances (PFAS)
  • Petroleum and petroleum products
  • Pollutants
  • Polychlorinated Biphenyls (PCB)
  • Radioactive materials
  • Reactive materials
  • Toxics

Because the contract may require disclosure of hazardous materials used on-site or prohibit the use for leases, you may see an exception for usual and customary cleaning and other supplies necessary for the normal operation, maintenance and/or occupancy of the property.  You may also include a schedule attached to the contract that identifies specific materials or chemicals that are allowed to be used, stored or handled on-site.

7.1.5 Knowledge

You may see language in a contract that includes the clause “knowledge” or “to the knowledge of”.   The definition of knowledge may include the knowledge such persons would have if they made due inquiry with respect to the matters in question.  This part of the definition may be added to assure that an effort is made related to the disclosure and the company is not willfully ignorant.

For example, a sales agreement might require the seller to state that “to their knowledge, the site did not have spills or releases of hazardous materials.”  Without this clause, the company would be making a statement that may not be true: It is unlikely that the company knows about everything that happened on the property. 

On one lease agreement, the lessor wanted to identify the specific people that the knowledge was based (i.e., related to spills and releases).  In this case, it was me and the site superintendent.  This is understandable since the people involved with the lease agreement (i.e., our lawyers) and signatories (the Chief Executive Officer) likely had little knowledge of spills or releases at this site. 

7.1.6 Liabilities

Liabilities come in many forms, but in the EHS world, liabilities may involve, but are not limited to:

  • Chemical spills and releases resulting in on and off-site damage, injuries and contamination
  • Citizen suits
  • Employee injuries (i.e., in addition to injuries from chemical spills and releases)
  • Environmental reserves (Costs to cleanup contamination) and asset-retirement obligations (e.g., underground storage tank removal costs, asbestos abatement costs)
  • Environmental Protection Agency (EPA), Occupational Safety and Health Administration (OSHA) and other EHS regulatory agency violations

The liability definition is generally written in a broad context to address other liabilities and the legal document may attempt to assign liabilities or require disclosure.

7.1.7 Materiality

The concept of materiality is used in financial accounting standards and is important to a company’s financial disclosures[2].  Specifically, you can consider something to be material if: 

“…there is a substantial likelihood that a reasonable investor would have considered the information important in making his or her investment or voting decision[3].”

Materiality does not have a monetary threshold because it is dependent on the situation.  What may not be pertinent or financially important to a billion-dollar company, may be to a smaller company.

In legal contracts, you may see materiality used as a caveat.  In other words, one or more contract parties may be required to state that you they disclosed all ‘material’ EHS issues.  Therefore, you may not need to disclose minor violations, injuries and other EHS problems, but again that is dependent upon the magnitude of the contract.

7.1.8 No-Dig or No-Hunt

A ‘no-dig’ or ‘no-hunt’ clause or provision:

  • Prohibits the purchaser from conducting and/or disclosing environmental investigations unless required by a regulatory agency
  • Nullifies seller indemnification if the purchaser conducts and/or discloses environmental investigations unless required by a regulatory agency[4]

This clause may have a timeframe associated with it (i.e., after a certain date, the purchaser may conduct and/or disclose environmental investigations not required by a regulatory agency).

7.1.9 Permits

Permits may be defined in legal documents when hiring a contractor to work on-site, providing site access or when purchasing a company or site.  In a contract, you may require a contractor to obtain the necessary permits (e.g., building permits, demolition permits) or have certain licenses (e.g., asbestos abatement licenses) prior to conducting work on your site. 

If you are purchasing a company or a facility, you likely want to make certain they have the permits necessary to conduct their operations.  For example, if you purchase a facility and they do not have a required air operating permit, you may not legally operate the facility.  Therefore, you want them to disclose whether they have the necessary permits.

Permits may be a generic term that is broadly defined to include rights from, and filings with, any Governmental Entity including:

  • Permits
  • Licenses
  • Qualifications
  • Approvals
  • Authorizations
  • Orders
  • Consents
  • Other rights from, and filings with, any Governmental Entity of any jurisdiction relating to the conduct of the business

7.1.10 Sunset

A sunset clause will apply to one or more provisions and puts a timeframe or deadline on that provision.  In the EHS realm, a sunset clause may be applied to indemnifications or a warranty that the company followed applicable regulations at the time of sale.  Once the provision sunsets, the indemnification or warranty will no longer be in effect.

7.2 Representations and Warranties

Legal agreements may contain sections that require one or more parties to make representations and warranties related to EHS.  The following are some of the representations and warranties that I have encountered in legal agreements.

7.2. Compliance With Laws

7.2.1.1 Purchases, Sales and Leases

When one company is acquiring a business that they will operate, they may want to know if that business has been operating in compliance with EHS laws, since that could impact their operation once they acquire that business.  This may reference or include the definitions of ‘Environmental Laws’ and ‘Permits’ discussed in the previous section.  You may see the term ‘materiality’ used in this representation or warranty: For example, you may not need to identify “other than serious” Occupational Safety and Health Administration (OSHA) violations or late submittal of an Environmental Protection Agency (EPA) Tier 2 report.  However, it is important to note that materiality is relative to the size and scope of the contract.  If a party needs to disclose material non-compliance issues, these are often spelled out in a ‘Schedule’, which is typically an attachment or addendum to the contract.

7.2.1.2 Contractors

When hiring contractors or providing access to your property (e.g., access agreements or leases of your property), you may also want a requirement that that they comply with laws while on-site or during the during the contract term.

7.2.2 Permits

7.2.2.1 Purchases, Sales and Leases

Like the previous “Compliance with Laws’ section, when one company is acquiring a business that they will operate, they may want to know if that business has the EHS regulatory approvals (e.g., permits) needed to operate legally.  This is not referring to internal permits, such as Occupational Safety and Health Administration (OSHA) confined space permits, hot work permits, etc. that are not submitted to regulatory agencies.  This will typically reference permits required by ‘Environmental Laws’ and/or ‘Government Entities’ defined in the previous section and the contract. 

The contract may also require a listing or EHS regulatory permits, disclosure of permit violations as well as identifying if any permits might be threatened with a notice of cancellation, dispute, revocation, need for modification or other issue that might threaten the validity of the permit.

One item that I do not often see included in the contract is an evaluation if the permits are transferable.  This may not be known to the permit holder, but evaluation should be considered by a company before executing the contract since the company may not be able to operate without it.  You may require one or more parties to approve the permit transfer, so it may be important to contractually-require a party to transfer the permit.  If an EHS permit, plan or program is transferable, a purchaser or lessee may want them as part of the purchase or lease.  Language to consider adding to the agreement include:

  • Identify the party responsible for transferring the permit, plan or program.
  • Include indemnification for the former owner or lessor: The purchaser or lessee takes the permits, plans and programs as is.
  • Prior to the agreement finalization, provide the applicable permits or plans to the purchaser or lessee and identify a review period.
  • Identify how the owner or lessor will provide the documents (i.e., electronic and/or printed format). 

You may want a form that you can edit to change the company name and/or modify as needed.

7.2.2.2 Contractors

When hiring contractors or providing access to your property (e.g., access agreements or leases of your property), you may also want a requirement that party is responsible for obtaining and complying with required EHS permits for work on-site during the contract.

7.2.3 Releases

7.2.3.1 Purchases, Sales and Leases

Due to potential liability and interference with operations, a company acquiring property wants to know if that property has contamination caused by the release of hazardous materials.    This will typically reference the definition of ‘Hazardous Material’, ‘Environmental Contaminant’ or ‘Pollutant’ addressed in the previous section and the contract.

The property owner or operator may be asked to provide a warranty or representation that no hazardous materials have been released and if they have, provide a disclosure of the releases.  This hazardous materials list may be used by the prospective purchaser to conduct a site investigation (e.g., soil and groundwater sampling) to verify the presence, extent, and concentration.

The wording of this representation and/or warranty can make a significant difference.  The following bullet items are example language and potential issues with this language.

  • The property does not contain hazardous materials

This is a strong statement that, without caveats, may be difficult to provide representation or warranty.  If the definition of hazardous materials includes hazardous building materials (e.g., asbestos, lead paint, polychlorinated biphenyls), those items would need to be disclosed.  Also, some areas contain natural background concentrations of chemicals (e.g., arsenic, barium), which the owner may or may not know about.  Finally, even if a company has conducted assessments on their property, it would be difficult to know about all types of contamination across the entire property, so this may need to be limited to the “knowledge” of the property owner.

  • No hazardous material has been released

The term ‘release’ can be problematic since a business may have air and/or wastewater permits that allow the legal release of chemicals that may be defined as hazardous materials.  However, this does not mean that these legal releases do not contaminate the property.  They may or may not.  Also, a site can be contaminated due to small and/or unseen releases (e.g., fueling stations) that the property owner will not have knowledge.  This is one example of the limitations of a property owner’s knowledge, which is unlikely to include the entire site’s history.

  • No hazardous material has been stored

For industrial properties, hazardous material storage is commonplace in which case the owner or operator would disclose the hazardous materials stored.  If the definition of hazardous materials includes hazardous building materials (e.g., asbestos, lead paint, polychlorinated biphenyls), those items would need to be disclosed.  The current owner and operator may have limited knowledge of the entire site’s history.

The contract may also require representation that no hazardous material has been disposed or remediated on-site.  These may be less troublesome, but like the statements above, would likely be limited to the owner or operator’s knowledge.

Some leases have a provision requiring, or providing the lessor the option to require, a Phase 2 Environmental Site Assessment or Limited Site Investigation (LSI) at the end of the lease term.  The contract may limit the scope of the Phase 2 Environmental Site Assessment or Limited Site Investigation (LSI) to the hazardous materials used by the lessee or identified as allowable materials in the contract.  The lessee will likely want this to avoid being held responsible for contamination that was on-site prior to their operations.  The lease may contain a provision that the lessee clean-up or remediate contamination identified by the Phase 2 Environmental Site Assessment or Limited Site Investigation (LSI).  Another option is the lease may contain a provision where the lessee has to reimburse the lessor for the corresponding environmental cleanup and remediation.

7.2.3.2 Contractors

When hiring contractors or providing access to your property (e.g., access agreements or leases of your property), you may also want a requirement that the party is responsible for releases during work on-site.  I like to have a clause requiring the contractor to notify applicable personnel if they have spills, releases, injuries or property damage.

7.2.4 Violations

7.2.4.1 Purchases, Sales and Leases

Like the ‘Compliance with Laws’ and ‘Permits’ representations and warranties, a company may want to know if the business or company they are looking to acquire has EHS violations, including prior, existing and threatened.  This will typically reference violations of ‘Environmental Laws’ and issued by ‘Government Entities’ defined in the previous section and the contract as well as health and safety lawas.  The contract may also require a listing of violations. 

An agreement may include a provision that the seller or lessor guarantees or warrants that the facility complies with applicable safety requirements such as handrails, stairs, etc.  If the company will not provide a guarantee or warranty, some companies will include a provision allowing an audit and then a request to modify the purchase or lease cost accordingly (i.e., adjust the cost to account for the money spent making the EHS corrections).

Some contracts will require lessees or contractors to report violations.  The contracts often will not define violation and a broad interpretation can result in overburdensome reporting.  A violation could include paperwork issues like an employee neglecting to record a regulatory-required inspection.  This likely does not cause EHS harm and is unlikely to result in a citation by itself.  However, repeated minor issues may be seen as a harmful trend and they might want this level of reporting.

Contracts may also require a periodic EHS audit, sometimes using an independent third party or allowing the lessor to conduct an EHS audit.  If an independent third party will be hired, the contract should spell out the party responsible for identifying and approving the auditor and bearing the audit cost.  The contract should spell out the audit scope, since I have found wide variability in the extent (e.g., regulatory programs, operations, number of years to review). 

7.2.4.2   Contractors

Some companies will review their contractor’s EHS programs and violations and/or set minimum requirements for their contractors.  This is a requirement under Occupational Safety and Health Administration’s (OSHA) Process Safety Management (PSM) and Environmental Protection Agency’s (EPA) Chemical Accident Prevention Program (CAPP) regulations.  Some service providers act as a clearinghouse and will collect the information and evaluate it for you.  

7.3 Other Items to Address

The following sections identify other items you may run across or want to address in a contract.

7.3.1 Access Agreements

The agreement may include a provision allowing the purchaser or lessee to conduct due diligence activities such as a Phase 1 Environmental Site Assessment (ESA).  The provision may identify specific timeframes when the purchaser, lessee or their agent can access the site (e.g., they have three months from the start of the agreement).  If the deal is confidential, applicable confidentiality requirements should be identified in the agreement.  This can be problematic if you have on-site personnel who may not know that the site may be sold.  To avoid this issue, you can conduct the site visit on a weekend when the site is not in operation or using the guise that the visitors are real estate appraisers or insurance adjuster.

If the company wants to conduct obtrusive work on-site (i.e., soil or groundwater sampling, drilling, direct push, etc.), they will sign a formal access and non-disclosure agreement.  If they are only conducting a Phase 1 Environmental Site Assessment (ESA), you may be able to use an existing agreement (e.g., letter of intent, etc.) if it limits the distribution of the work product.

From an environmental standpoint, you will want the access agreement to address the following if they are conducting obtrusive activities:

  • They are responsible for conducting a utility locate including public and private utilities (i.e., the “one-call” regulations do not require or provide private utility locates, so they will need to do this or pay a company to do this)
  • They must coordinate their activities, so it does not interfere with your operations (e.g., their drill rig or direct push equipment does not block traffic)
  • They are responsible for repairing any damage caused by their activities including any lost revenues (e.g., if they knock out electricity because they drill through an electrical line, and you cannot operate for several days)
  • They must containerize and dispose of all spoils (soil and groundwater pulled up during drilling) off-site unless they can demonstrate that the spoils are non-hazardous and will not contaminate your property (i.e., you do not want them to spread them on the ground, which could be a common practice of some companies).
  • They must provide a copy of the results of the work conducted on-site, if requested
  • The access agreement should contain the following exhibits:
  • A specific description of the activities that they will conduct on-site
  • A diagram delineating, and limiting, the geographic scope of their proposed activities
  • They should provide evidence of the applicable insurance limits of which would typically be dictated by the type of work and your company’s risk tolerance:
  • Pollution liability insurance or Contractor’s Pollution Liability insurance
  • Workers compensation with Employer’s liability
  • General liability
  • Auto liability

I typically discuss the appropriate limits with my insurance group or outside representative.

Obtrusive activities may open a can of worms if they discover contamination.  A non-disclosure agreement can protect the owners from distribution of the results but reporting contamination may be required by law in that state or municipality.  Because of this, an owner or operator may be reticent to allow obtrusive investigations.  The reporting laws vary between jurisdictions.  The definition of the party obliged to report (e.g., responsible party) is one of the items that vary: The responsible party is typically the person or entity that released the materials, but applicable regulations may require reporting obligations for other parties.

7.3.2 Insurance

The following sections address minimum insurance coverage you may want to specify in the contract.  I provided general information on what is covered by the insurance, but you may want more specifics in your contract, and you also may need to review specific coverages identified in the insurance policy.  I always left the insurance coverage levels up to our insurance department who may have a better understanding of typical coverage levels and claim costs.  Proof of coverage may be requested by a lessor throughout the term of the contract.  One party may request being added as an additional insured on the insurance.

7.3.2.1 Automobile Liability Coverage

Depending upon the activities conducted you may want automobile liability coverage for owned, non-owned and hired autos.

7.3.2.2 Errors and omissions

This insurance, which may be called professional liability insurance, is meant to address errors and omissions in the conduct of professional services such as design, engineering, environmental, industrial hygiene and safety consulting services[5].  This would provide coverage if your company suffered a financial impact because a consultant left information out or made an error during the performance of their work[6].

1.3.2.3   General liability

General liability insurance, or commercial general liability insurance provides coverage for bodily injury and property damage[7].

7.3.2.4 Pollution liability

Depending upon the work conducted by the contractor or consultant, you may want to require pollution liability (e.g., environmental) insurance, which will provide coverage if they cause contamination during the conduct of their work.  Activities that may necessitate pollution liability insurance include:

  • Hazardous materials use such as use of fuels, oils, paints, pesticides, and solvents
  • Intrusive environmental investigations (e.g., drilling borings and installing wells) although conducted by environmental professionals can spread contamination by putting conduits through confining geologic layers, purging groundwater and spreading soil cuttings onto the ground.

7.3.2.5 Worker’s compensation

If an employee is injured or killed while working, workers compensation insurance will pay medical costs, lost wages and death benefits[8].    It also protects companies from being sued by employees for workplace conditions that can cause an injury or illness.  Although worker’s compensation insurance is required in most states, some business may be exempt (sole proprietorships or self-employed), so companies may stipulate this in a contract to be certain[9].

7.3.3 Proposals

It is not uncommon to require the use of EHS consultants and service providers as part EHS compliance.  When reviewing proposals, I look for the following:

  • A description of the proposed work.  If this work is meant to meet a regulatory requirement or standard, this should be specifically identified in the proposal (e.g., prepare a Spill Prevention Control and Countermeasures (SPCC) plan in accordance with 40 Code of Federal Regulations (CFR) 112).
  • Individual activities should be performed in accordance with certain EHS regulations, that should be spelled out (e.g., dispose of the waste in accordance with applicable Federal, State and local laws).  This includes obtaining the necessary permits for their services if required (e.g., building and demolition permits).
  • They will follow your company and site requirements such as attending training required for contractors and visitors, signing in and out, getting hot work and confined space permits, etc.
  • Proof of insurance as discussed previously

7.3.4 Purchase and Sale Agreements

Negotiating purchase and sale agreements can be a complex dance trying to avoid liability for actual or potential contamination.  Since you might be on either side of this negotiation, I am simply providing options that either party may select.

  • Put mutually agreed upon indemnifications into the agreement where the seller indemnifies the buyer for known or unknown environmental contamination.

The seller will want to try to limit the scope of the indemnification (e.g., the type of liability, the costs, the timeframe) and the purchaser will want it as extensive as possible.  If environmental contamination is not known, you may see a no-dig clause since the seller does not want the purchaser to actively search for contamination.

  • The indemnification may have a sunset clause: The indemnification may expire after a certain extent of time.  

The purchaser may want to evaluate the financial condition of seller to see if they have the assets to pay for the environmental contamination.  This can be an issue when the seller is an individual or family since they may have limited assets and if/when they pass away, it can be difficult to track down inheritance.

  • Put money in escrow to address potential costs of investigation or cleanup

If you can estimate potential costs to address the contamination (e.g., remediate), you can put money in escrow.  You could also do this if you do not know if the property has contamination, but it may be difficult to determine or agree upon a monetary amount.

  • Get an environmental insurance policy for pre-existing environmental conditions

If the site does not have known contamination, the seller or buyer can try to get an environmental insurance policy that would provide coverage if contamination is discovered at a later date.  You could request environmental insurance for a site that has known contamination, but you may have difficulty getting coverage or the policy could be expensive. 

  • Document the potential contamination when culpability for the contamination is obvious

If the purchaser’s operations have different chemicals than the seller’s, the responsibility for the contamination should be clear.  The Phase 1 Environmental Site Assessment (ESA), which is often conducted to document current and past site operations and conditions, can be used to document responsibility.  If the site is in a state or environmental region where they are unlikely to make current landowners cleanup past owner’s contamination, this may be an option. 

For example, I was helping a family member sell some land that formerly had some gasoline and diesel fuel storage tanks.  One interested purchaser was going to build a gas station and they were requesting extensive environmental investigations and indemnifications.  They knew that liability for potential fuel contamination on-site might be unclear since they would be using similar chemicals.  Another potential purchaser was going to open a restaurant and since the potential contamination was not in an area that would interfere with their operations (e.g., vapor intrusion), they were less concerned and demanded less environmental investigation.

7.3.5 Removal of hazardous materials including hazardous wastes.

7.3.5.1 Purchases, Sales and Leases

Materials left by previous owners and operators can be problematic and expensive to dispose.  If you do not know the what the materials are, you might have to conduct testing to properly characterize the materials for disposal (e.g., prove they are not hazardous wastes) since a landfill or hazardous waste treatment facility will require that information before accepting the waste.  Therefore, you may want a clause the requires the previous owner or operator to remove certain materials prior to ownership or operation.  The purchaser or lessee may include a schedule in the agreement identifying the materials and equipment that need to be removed and the timeframe for the removal.  A penalty for not removing the materials may be added to assure compliance with this provision or make the purchaser or lessee whole if they have to pay for the removal and disposal.

7.3.5.2 Contractors

I have had contractors leave their materials on-site (e.g, paints, sealants, etc.).  They may have thought this was helpful, but since we did not need or use these materials, they ended up as hazardous wastes costing us time and money to dispose.  Therefore, you should consider clauses that require them to remove, take responsibility (e.g., sign hazardous water manifests) and properly dispose of materials they bring on-site or generate during the course of their work.  An exception to this is if the contractor project is to remove your hazardous wastes (e.g., cleaning out a tank), you will be responsible for signing the manifests and ultimate disposal. 

7.3.6 Restrictions On Use Or Operations

Some leases will include a restriction on allowed on-site activities including a schedule of hazardous materials that may be used at the site.  The lease may also include a procedure for review and addition of new materials.  Some items to consider are:

  • Make sure the procedure is not too onerous by setting reasonable timeframes for the lessee to propose new materials and the lessor to review and approve.
  • Try to use material groups with similar hazards rather than specific materials where feasible.  For example use “non-chlorinated solvents” instead of listing out xylene, toluene, etc.

Another consideration for site operations is the evaluation of the utility use, specifically the water source and disposition.   If the property has water limitations or would require backflow preventers, make sure these are addressed.  If the site has a septic system, make sure only sanitary waste will be discharged into the septic system.

7.4 For Additional Information

Return to Home

7.5 References

[1] “Calculating Preliminary Remediation Goals (PRGs)” Environmental Protection Agency website accessed November 24, 2021 (https://www.epa.gov/risk/calculating-preliminary-remediation-goals-prgs)

[2] “Materiality: The Word that Launched a Thousand Debates” Harvard Law School Forum on Corporate Governance website, accessed November 24, 2021 (https://corpgov.law.harvard.edu/2021/05/14/materiality-the-word-that-launched-a-thousand-debates/)

[3] “SEC Release on the Materiality in Financial Disclosure” FindLaw® for Legal Professionals website, accessed November 27, 2021 (https://corporate.findlaw.com/finance/sec-release-on-materiality-in-financial-disclosure.html)

[4] “Allocating Environmental Risks in the Transaction Agreement” LexisNexis website accessed December 30, 2021 (https://www.lexisnexis.com/authorcenter/the-journal/b/pa/posts/allocating-environmental-risksin-the-transaction-agreement)

[5] International Risk Management Institute website glossary on “Errors and Omissions”, (Errors and Omissions (E&O) Insurance | Insurance Glossary Definition | IRMI.com), accessed September 6, 2021.

[6] International Risk Management Institute website glossary on “Errors and Omissions”, (Errors and Omissions (E&O) Insurance | Insurance Glossary Definition | IRMI.com), accessed September 6, 2021.

[7] Insurance Information Institute “Commercial General Liability Insurance” website  Commercial general liability insurance | III accessed September 6, 2021.

[8] Progressive® Commercial “A Small Business Owner’s Guide To Workers’ Comp Insurance” website (Progressive Commercial A Small Business Owner’s Guide to Worker’s Comp Insurance), accessed September 6, 2021

[9] FindLaw® “What Is Worker’s Compensation” website Workers  (What Is Workers’ Compensation Insurance? – FindLaw), accessed September 6, 2021

I am always open to comments and suggestions. You can contact me using the form below.