The Environmental Indemnity Clause: Shifting the Burden of Environmental Cleanup Costs in Commercial Contracts in New York

Commercial property owners in New York may be held strictly liable (i.e. regardless of fault) for soil and groundwater contamination under certain state and federal laws. See e.g. New York Navigation Law Section 181 and the federal Comprehensive Environmental Response & Cleanup Liability Act (“CERCLA”). Therefore, when entering into a contract of sale or lease for commercial property in New York, the parties may wish to allocate the risk of known and potential environmental cleanup costs in their agreement.

For example, the purchaser of real property developed with a gasoline service station may request indemnification with respect to any pre-existing environmental contamination. The purchaser of a manufacturing business may agree to accept all of the assets and liabilities of the seller, including any known environmental cleanup costs, which costs may be reflected in the purchase price. A tenant operating a public utility/wireless telecommunications facility may agree to defend and indemnify the land owner with respect to any third party environmental claims.
Parties who fail to specifically address indemnification for environmental liabilities in the conrtact may pay a hefty price. For example, courts have held that absent a clear intention of the parties to shift the environmental liability, a seller who discharged petroleum may be held liable for cleanup costs despite a clause in the contract stating that the property was being sold “as-is.” Umbra USA Inc. v. Niagra Frontier Transportation Authority, 262 A.D.2d 980 (4th Dept. 1999).

Courts have held that a prior owner of real property did not have any obligation under New York Navigation Law to indemnify a subsequent property owner for clean-up costs associated with a petroleum spill from underground tanks located on the property, since the subsequent owner expressly acknowledged in the contract that the prior owner had complied with all obligations in connection with transfer of the property, and the subsequent owner otherwise did not show that prior owner owed it a duty with respect to the discharge. See e.g. Dora Homes, Inc. v. Epperson, 344 F.Supp.2d 875 (2004).
Environmental indemnification may also be negotiated in the context of a commercial lease. See State v. Robin Operating Corp., 3 A.D.3d 757 (3rd Dept. 2004)(Sublessees had no contractual obligation to remediate petroleum spill on lessor’s property and to indemnify the Lessor for cleanup costs associated with spill that occurred prior to Lessee’s assignment of lease to Sublessees).

In addition to performing a Phase I Environmental Site Assessment and negotiating the environmental liability clause, in certain cases a purchaser/lessee may wish to explore environmental insurance. The modern Comprehensive/Commercial General Liability (CGL) policy contains a “absolute pollution exclusion” which has given rise to specialized insurance policies such as the Pollution Legal Liability policy or other policies insuring against Environmental Impairment Liability, General Liability or Errors and Omissions. The policies should be reviewed carefully in order to understand the exclusions, terms and conditions. For example, the defense costs may be capped or unlimited and the insured may have the option to choose its attorney or bound by the carrier’s choice of counsel.

Performing a Phase I Environmental Site Assessment, negotiating a strong indemnification clause and understanding the terms and conditions of insurance policies all help minimize the risk of incurring unexpected environmental cleanup costs.

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