It is hard to tell if Malcolm Carter Enterprises v. Microsemi Real Estate, Inc., 2011Cal. App. Unpub. LEXIS 3583 (Ct. App.-4th Div 5/12/11) is a case of buyer’s remorse, sloppy drafting or simply the lack of a meeting of the minds. It is surprising that what should have been a fairly straight-forward transaction resulted in a bench trial, a motion for summary judgment and two trips to the appeals court.
In this case, a two-acre parcel of real property inSanta Ana,California(Parcel 17) had been part of a larger manufacturing site. Parcel 17 had been used as the parking lot for the larger site. Because a cleanup was being performed at the adjacent manufacturing site, the defendant initially wanted to lease Parcel 17 until the cleanup at the adjacent site was completed. Thus, in 1996, plaintiff agreed to lease Parcel 17 and also executed a 30-year option purchase agreement. The option provided that it would terminate ninety days after the plaintiff obtained a no further action or other similar letter from the appropriate governmental agency upon completion of the “remediation of the environmental conditions on the Property as set forth in this Agreement or in the Lease”. Neither the lease nor the option agreement defined “environmental conditions” nor did they contain any exhibit or disclosure schedule identifying the “environmental conditions.”
Prior to the execution of these agreements, plaintiff provided defendant with a phase 1 report. The report indicated that Parcel 17 had been a parking lot and before then had been used for agriculture purposes. The report said there were no underground or aboveground storage tanks and no signs of significant staining or significant sources of contamination were observed. The report did indicate that pesticides, herbicides, and fertilizers may have been used on the site in connection with the past agricultural use but were unlikely to exist in concentrations that would pose a risk or that a government regulatory agency would require to be remediated. Indeed, the only potential environmental condition identified was petroleum hydrocarbons and VOCs that had leaked or overflowed from a clarifier and its associated surface drain at the adjacent manufacturing plant.. The report said subsurface investigations performed by a consultant for that site had not detected any significant contaminants on the Parcel 17 and that the soil contamination on the adjacent site had been remediate to the satisfaction of the California Regional Water Quality Control Board, Santa Ana Region (the Board). The report did indicate the Board had some concern for a residual plume of contaminated groundwater extending from the adjacent site and that additional groundwater monitoring was required to obtain closure. However, it was anticipated that closure would be obtained in the near future.
In July 2003, the Board issued a no further action letter to the environmental consultant for the adjacent site. The letter indicated that the clarifier and associated structures had been removed, 1,200 cubic yards of contaminated soil had been excavated and that the groundwater treatment had been shut down in 1995. The letter concluded that the site did not pose significant environmental threat and no further remediation or monitoring was required. Plaintiff’s environmental consultant obtained a copy of the Board letter in July 2004 and forwarded it to the defendant. The plaintiff informed defendant that the letter triggered the 90-day expiration period. Defendant waited more than 90 days to respond and disagreed with that the letter satisfied the option agreement.
As a result, plaintiff then filed a complaint in January 2005 seeking declaratory judgment that the that July 2003 letter satisfied that No Further Action Letter condition and that the Option Agreement had expired on October 14, 2004. The defendant argued the letter did not satisfy the contractual agreement because it was a year old and did not address the environmental conditions in the environmental report. The defendant claimed there were other environmental at the Parcel 17 including past storage of volatile chemicals and hazardous materials, an old spray booth area, past pesticide use, stained pavement, and possible groundwater contamination from other properties. Defendant’s executive vice-president testified that he saw drums and debris at the parcel. Defendant also said the Board letter had not been informed about the other environmental conditions discussed in the environmental report such as the chemical storage and spray booth area. The defendant’s expert suggested that these conditions could be an independent source of groundwater contamination and that the Board letter did not provide closure for past agricultural use, the stained pavement, the material storage, and the temporary structures observed in the historical photographs. The trial court granted summary judgment to the defendant, finding that the letter failed to trigger the expiration period because it was already a year old when plaintiff gave it to defendant, did not refer to Parcel 17, had not been issued to the plaintiff and did not mention the environmental report.
The appeals court reversed, holding that while a reasonable optionee may have preferred a different letter, defendant did not bargain for a different letter. The court said the defendant bargained for a letter stating no further action was needed to remediate environmental conditions “set forth in” certain documents. The court noted that the defendant had rejected a prior draft of the option agreement that provided the option expiration period would commence when plaintiff obtained a No Action Letter upon “remediation of the environmental conditions of the Property as set forth in the Environmental Report” and had insisted the final language refer “remediation of the environmental conditions of the Property as set forth in this Agreement or in the Lease.”
In addition, the appeals court ruled that the agreement did not require that the letter be obtained within any specified time after completion of remediation. Moreover, the appeals court said there was no language in the contract requiring the no action letter expressly identify Parcel 17 or reference the environmental report. The court also found that the letter only had address those environmental conditions set forth in the environmental report and not any other environmental conditions that might exist on the property. However, the appeals said there was a triable issue of fact if the letter addressed the environmental conditions set forth in the environment report and remanded the case.
After a bench trial, the trial court ruled in favor of the plaintiff. Regarding the other environmental problems on the Property, the trial court said there was no language in any of documents where plaintiff agreed to remediate “all inchoate environmental conditions”. Instead, the Option Agreement or Lease was limited to the environmental conditions that the environment report indicated required remediation.
The appeals court affirmed. The court agreed that the option agreement and lease do not “set forth” any environmental conditions on the Parcel 17 but only alluded to environmental conditions contained in the environmental report. Turning to the report, the court said it plainly stated “no significant sources of contamination existed” and “no significant indications of contamination were observed”. According to the report, the court continued, the only environmental conditions on the Parcel 17 that potentially required any remediation was the residual plume of contaminated ground water extending beneath the Parcel 17 from the adjacent site which the Board letter plainly said did not require any further action. Thus, the Board letter thus triggered the option expiration period
In response to defendant’s contention that the Board letter did not provide “closure” of the Parcel 17, the court said that condition was not what the option agreement required. The court said that if defendant wanted the option expiration period to be triggered by a letter providing no further action was required to remediate any environmental condition potentially affecting Parcel 17 had “closure” — it should have contracted for that condition. The court said the indemnity of the lease addendum buttressed this conclusion since it provided the plaintiff had to indemnify defendant for losses involving Hazardous Substances present at the Property on the Lease Commencement Date whether such Hazardous Substances are identified in any Environmental Report. The court said this was evidence that the parties knew how to craft contract language addressing all environmental conditions.
As I said at the outset, it is unclear if the defendant was trying to use the court to extract a concession it was unable to achieve through negotiation. However, it is also possible that the loose contractual language meant that the parties never reached a meeting of the minds on allocating environmental liability. In any even, this case reinforces the importance of clearly defining or describing the specific environmental issues being addressed and the specific type of closure or cleanup standard that must be achieved to satisfy a contractual obligation. For example, it is not unusual to see a schedule in a corporate transaction that serves as exceptions to representations and warranties in agreements to simply refer to all conditions identified environmental reports. This type of drafting is a recipe for litigation. If is far better to have the specific conditions discussed in the report to be identified in the schedule. It may be extra work especially where there may be a dozen or so reports that are referenced but it can prevent misunderstandings and litigation down the road. This kind of specificity will also help parties see if they have a fundamental misunderstanding on how they ate allocating environmental risks BEFORE the closing. As I tell my students, the last thing transacting parties want is to have a judge try to guess what the parties thought they meant by a certain provision.