August Mack Newsletter | July, 2019

Lenders, Landlords and Tenants - Avoiding Environmental Liabilities of Others
by Kent Johnson

When a borrower stops paying their commercial loan, lenders will begin a process of trying to work with their borrower restore repayment.  There are times that both the lender and borrower can agree on new terms and the loan is put back in good standing.   Unfortunately, there are other times when the lender needs to move towards foreclosure.  In this position, the lender is now facing the potential to be responsible for environmental liabilities of the real estate and proper action should be taken by lenders during the foreclosure process to avoid shifting this liability from their defaulting borrower. 

Actions lenders can take during this time include: 

  • Conducting or directing environmental assessments a facility (Phase I/II Environmental Site Assessment)
  • Taking a security interest in the contaminated property;
  • Including environmental representations, warranties, and covenants in loan documents;
  • Monitoring or enforcing a borrower's compliance with environmental covenants;
  • Requiring a cleanup;
  • Enforcing default rights in loan documents that relate to environmental compliance;
  • Providing financial or other advice or counseling in an effort to mitigate, prevent, or cure default or diminution in the value of the facility;
  • Restructuring, renegotiating or otherwise agreeing to alter the terms and conditions of the extension of credit or security interest, including exercising forbearance
 

Lenders should avoid getting too involved in the day-to-day decision making of the defaulting business because if the wrong steps are taken by the lender during this time, the lender may be viewed as acting as an “owner or operator” of their defaulting clients' site.  For example, if the Lender exercises control at a level similar to that of a manager of the facility or if a lender exercises decision-making control regarding environmental compliance related to the facility; they may become the “owner and operator” by default.  Such a position puts the lender in a scenario where they can now “own” the liability.  This scenario is well documented in the case of HSBC Bank versus the State of New York where actions taken by HSBC during the foreclosure process caused them to be found responsible for environmental response, clean-up costs, and fines in excess of $950,000. 

Likewise, landlords and tenants can find themselves in a similar position with respect to being responsible for the environments sins of others.  If either party is not careful during the lease, one party may find themselves responsible for the other environmental problems.  New tenants who lease space with a long history can be blamed for contamination left behind by prior tenants and landlords can be left to deal with environmental issues left behind by departing tenants. In order to avoid such situations, both parties should perform some level of due diligence prior to lease, during the lease and prior to lease termination as follows:

Pre-Lease

  • Evaluate what the tenant will do & how they will do it
  • Know the building history
  • Lease language & agreements
  • Pre-lease due diligence (establish a baseline prior to lease)
 

During Lease

  • Conduct & document routine inspection of “high risk” tenants (needs to be agreed up-front)
  • Keep records
 

Prior to Lease Termination

  • Have an environmental professional inspect the space
  • Perform due diligence to compare to baseline
 

Our August Webinar on this topic will discuss all these strategies to ensure all parties maintain their liability protections and keep the responsible parties on the hook for addressing environmental issues caused by their activities.  Register today!


Kent Johnson is the Transaction Program Development Manager with August Mack Environmental, Inc. in the Indianapolis office. He has more than 20 years experience with extensive knowledge regarding Brownfield site investigation and remediation, Phase II subsurface investigation, Underground Storage Tank (UST) removal and closure, groundwater monitoring sampling programs, asbestos and lead investigations and management, as well as indoor air quality investigations. Kent can be reached at 317.916.3177 or via e-mail at kjohnson@augustmack.com.


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