Anyone who buys or sells potentially contaminated real estate should negotiate contract terms to allocate the risk of an environmental cleanup, which can be a significant post-closing cost.  Contractual indemnity has long been one of the chief mechanisms to allocate environmental liabilities between buyers and sellers of real estate. A party is generally entitled to contractual indemnification where the “intention to indemnify can be clearly implied from the language and purposes of the entire agreement and the surrounding facts and circumstances.” Drzewinski v. Atlantic Scaffold & Ladder Co., Inc., 70 N.Y.2d 774, 777 (1987).  Such provisions must be strictly construed, however, to avoid imposing a duty that the parties did not intend.  See State v. Tartan Oil Corp., 219 A.D.2d 111, 115 (3d Dep’t 1996). Thus, it is vital that environmental indemnity provisions be clear and unambiguous.

RECENT DECISION IN BERO FAMILY PARTNERSHIP V. ELARDO EMPHASIZES THE IMPORTANCE OF CLEAR CONTRACTUAL INDEMNIFICATION  CLAUSES

A recent decision of the Appellate Division, Fourth Department, Bero Family Partnership v. Elardo, 122 A.D.3d 1279 (4th Dep’t 2014), illustrates the importance of clear drafting.  In this case, the Appellate Division examined contractual indemnity obligations in the context of environmental contamination in a combined note and mortgage that was discharged of record after satisfaction by payment.

A.  BACKGROUND FACTS

In Bero, Phillips Lytle LLP represented the plaintiff, Bero Family Partnership (“Partnership”), along with its current and former members.  The Partnership acquired from Bero Construction certain property that Bero Construction had used to store gasoline, diesel  fuel, and waste oil in underground storage tanks (“USTs”).  After purchasing the property, the Partnership hired L.M. Sessler Excavating & Wrecking, Inc. (“Sessler”) to remove the USTs.  Five years later, the Partnership sold the property to Donald Elardo (“Elardo”) for less than a quarter of its assessed value. As part of the purchase agreement, Elardo executed a combined note and mortgage that provided, in relevant part:

[i]f [Elardo] learns or is notified that any removal or other remediation of any hazardous substance is necessary, [Elardo] shall promptly take all necessary remedial actions, and will indemnify and hold Mortgagee[s] harmless for all damages, costs and expenses of any kind . . . related to any such removal or remediation, regardless of the source or cause of the contamination or other environmental law violation.

122 A.D.3d at 1280 (alterations in original) (emphasis added) (internal quotation marks omitted).

The mortgagees under the combined note and mortgage were three of the Partnership’s partners.  Elardo paid all the amounts owed under the note, and the mortgage was discharged of record.  Two years later, the New York State Department of Environmental Conservation (“DEC”) notified the Partnership that petroleum contamination had been detected in the former UST pits, and the DEC held the Partnership’s members responsible for the cleanup.

The Partnership completed the cleanup pursuant to a stipulation with the DEC.  It then sued Elardo and Sessler to recoup the cost of the remediation.  The Partnership ultimately moved for, and the trial court granted, summary judgment on liability against Elardo for breach of the environmental-indemnity provision contained in the combined note and mortgage.

B.  THE APPELLATE DIVISION UPHOLDS INDEMNITY OBLIGATIONS FOR ENVIRONMENTAL REMEDIATION

On appeal, the Appellate Division affirmed the trial court, holding that the indemnity provision “clearly expresses the intention of the parties to the note that Elardo would indemnify plaintiffs for the costs of any environmental remediation.”  Bero, 122 A.D.3d at 1280-81. Notably, the Appellate Division specifically affirmed the trial court’s finding that the discharge of the mortgage did not extinguish Elardo’s obligation to indemnify the Partnership for the costs of an environmental cleanup. The Appellate Division also rejected Elardo’s argument that “hazardous substance” as used in the indemnification provision did not include petroleum.  Although the definition of “hazardous substance” in the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. § 9601(14)) does not include petroleum, there was nothing in the record to support Elardo’s contention that the parties intended to adopt that definition.  The Appellate Division also rejected Elardo’s further contention that the indemnification provision was intended to benefit the mortgagees only, rather than the Partnership.  The Court decided that, even if it were to agree with Elardo’s argument that the indemnification provision was intended to benefit the mortgagees rather than the Partnership, Elardo’s obligations under that provision would remain the same.  The Court explained that Elardo’s obligations were not limited by virtue of the fact that they were owed to only three of the Partnership’s partners, rather than to the Partnership.

TAKEAWAY: ENVIRONMENTAL INDEMNIFICATION PROVISIONS SHOULD BE CAREFULLY DRAFTED

The Appellate Division’s decision in Bero illustrates why particular attention should be paid to any environmental-indemnity provision contained in a note or mortgage.  The Partnership protected itself from a significant liability with a clear and unambiguous environmental- indemnity provision that, as the Appellate Division confirmed, survived the discharge of the note and mortgage.  Conversely, Elardo was not allowed to limit the scope of the indemnity provision by defining a term (“hazardous waste”) according to a federal statute, where there was no clear evidence that the parties meant the statute’s definition to govern. If Elardo had wanted to incorporate that definition, he would have had to insist on language explicitly stating as much.

Environmental cleanup can be enormously costly.  When negotiating the purchase or sale of real estate that may require environmental remediation, it is vital that the parties clearly express their agreement for how the risk of that expense should be allocated in the future.