A separate agreement under which the borrower and guarantors indemnify the lender for environmental liabilities, usually surviving repayment and foreclosure.
The longer version
Environmental exposure is carved out of the loan documents and handled separately because it behaves differently. The indemnity is typically full recourse even on a non-recourse loan, and it survives both repayment and the lender taking title, since liability can attach long after the loan is gone.
That survival is the point of negotiation. Indemnitors push for the obligation to end at some interval after the lender no longer holds an interest, or for a carve-out for contamination first occurring after the lender took possession. Whatever is agreed should be clearly drafted, because this is the document most likely to be read years later.
Common questions
- Why is the environmental indemnity a separate document?
- So it can be full recourse and survive events that terminate the loan. Folding it into the loan agreement would subject it to the non-recourse provisions and to release on repayment.
- Does it survive foreclosure?
- Usually yes. That is deliberate, because a lender taking title can inherit environmental liability, and the indemnity is what it looks to.
- Who signs it?
- The borrower and the same creditworthy principals who sign the carve-out guaranty, since an indemnity from a single purpose entity with no assets is of little use.