Environmental indemnity agreements have become a standard practice in many real estate transactions, especially those involving commercial properties. These agreements serve to protect lenders and mitigate the risks associated with potential environmental contamination or liability issues.
While these agreements may seem strict, they are a necessary step to protect the interests of both lenders and borrowers in real estate transactions involving contaminated properties.
Risk mitigation
Lenders are aware of possible environmental liabilities. When a borrower signs these agreements, the lenders can transfer a part of the risk to the property owner or borrower.
Protection of loan collateral
Lenders care about protecting the collateral that secures the loan. In real estate transactions, the property itself often serves as collateral. 4.08 million units sold in the United States in the 3rd quarter of 2023. If these homes become contaminated later on, property values will likely decline. This makes it harder to sell the home. That is why these agreements are so important.
Compliance with regulatory requirements
If you do not follow regulatory rules, you might get fined. Lenders want to ensure that the properties they finance are compliant with these regulations. Environmental indemnity agreements encourage borrowers to fix any problems that could cause legal issues and affect their ability to repay the loan.
Lender liability protection
Lenders may become liable for environmental cleanup costs. This occurs when they have “participated in the management” of the contaminated property. With an agreement, lenders can prove that they did not actively take part in the property’s management or environmental practices, thus reducing their potential liability.
Requiring an environmental indemnity agreement is part of the due diligence process, demonstrating that the lender has taken steps to address and mitigate potential environmental concerns.