keith-1By Keith Dunnagan, BPE Law President & Managing Attorney

When commercial financing is secured by real property the lender will want to make sure that their collateral remains in good environmental standing.

There are a plethora of environmental laws and regulations at a state and federal level including:
– the Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
– the Resource Conservation and Recovery Act of 1976,
– the Superfund Amendments and Re-Authorization Act of 1986,
– the Hazardous Materials Transportation Act of 1985,
– the Carpenter-Presley-Tanner Hazardous Substance Account Act,
– the Hazardous Waste Control Law,
– the Safe Drinking Water and Toxic Enforcement Act of 1986,
– the Underground Storage of Hazardous Substances Act,
– the Porter-Cologne Water Quality Control Act,
– the California Environmental Quality Act (commonly known as CEQA),
– the National Environmental Policy Act,
– the Subdivision Map Act,
– the Clean Water Act,
– and the Endangered Species Act.

The violation of any one of these can have can create significant cleanup obligations and subsequent environmental testing. These obligations run not only to the owner of the property, but also to lenders whose debts are secured by the property. As such, many lenders will require borrowers to indemnify the lender if the lender incurs any cost related to the violation of an environmental law.

This is especially important to lenders because these environmental laws are strict liability laws. That means that regardless of the intent of the owner or lender, the mere violation of the law, even if a reasonable accident or an act of god, creates the liability to clean up the contamination. The reasoning behind this is that as a society we do not want hazardous materials leaching from one property to another and the public at large suffering the consequences of the contamination. Additionally, the liability attaches to lenders in addition to current and prior owners to ensure that someone is on the hook to pay for the cleanup.

The potential costs of an environmental contamination can include initial testing of potential hazardous conditions, first responder cleanup costs, litigation involving claims of a hazardous condition, long-term cleanup costs, as well as post-cleanup testing. If any of these costs are paid by the lender, the environmental indemnity will require the borrower to reimburse the lender. Depending on the type of business being conducted on the property, it may also require the borrower to pay for testing at various intervals to ensure compliance with all environmental laws and generally to check for any contamination issues.

An environmental indemnity can be risky for a borrower because it ensures that the borrower will pay for all costs of environmental cleanup if there is a spill or other type of contamination on the property. All payments from the lender to help with the cleanup will be repaid by the borrower. Unfortunately, because of the large potential cost of cleanup, it is unlikely that a lender will waive this requirement.

Another agreement that will likely be required by a lender is an Operations and Maintenance Agreement. This is an agreement between the owner of the property and the person or business that will be utilizing the property, the operator, which defines the terms and conditions allowing the operator to continue operating the property. Lenders will often require these agreements, and will also require that their approval for the operator or any changes, to give them some control over who will be running the day-to-day operations at the property. They will want to make sure not only that the property is generating the funds necessary to service the underlying debt, but also that the operator is credible enough to operate the property in a businesslike manner and to act as an additional indemnitor in case of a hazardous condition.

Environmental contamination can lead to expensive cleanup costs and penalties under various state and federal laws. A lender loaning funds secured by real property is likely going to require a borrower to agree to indemnify them for all environmental issues. Their attorneys will make the terms as far reaching as they can imagine. The attorneys at BPE Law Group can help you understand and weigh the consequences of that liability.

BPE Law President and Managing Attorney, Keith Dunnagan, practices exclusively in the area of commercial transactions and finance. If you have any questions, you can reach him at 916-966-2260 or

For over 20 years, the attorneys of BPE Law Group, P.C. have been assisting our clients with their real estate, business, and other legal needs. We’re currently assisting a number of parties that are pursuing or developing cannabis operations in California. If you have questions concerning real estate, business, or any other legal matter, give us a call at (916) 966-2260 to schedule a Consultation with one of our experienced attorneys.

This article is not intended to be legal advice, lending advice, or a specific recommendation of any particular lender or company, and should not be taken as such advice.