Looking to purchase property with contaminated soil and groundwater? Probably not, unless you are a brownfield’s redeveloper. Most purchasers of commercial property are counting on their property being “clean.” Environmental due diligence occurs in two phases: 1) review the current and historic activities at the property to determine if there exist areas of concern; and 2) if areas of concern exist, testing them to determine if they contain hazardous substances in excess of allowable standards. If contamination is found, a purchaser can then walk away, or negotiate a process whereby the property is remediated.
However, if this review is not conducted by a properly qualified expert, it becomes meaningless. And if all appropriate inquiries are not made, then proper due diligence has not occurred.
Strict Liability for Environmental Cleanup Costs and Damages
In New Jersey, as is typical nationwide, environmental liability is strict liability, attaching to any person who has discharged a hazardous substances, or who is in any way responsible for any hazardous substance. Simply purchasing contaminated property, where the buyer knew or should have known of that a hazardous substance had been discharged at the real property, makes the property owner liable, without regard to fault, for all cleanup and removal costs. Each person who may be held liable is jointly and severally liable and, therefore, may be held responsible for 100% of all costs.
A person purchasing property, therefore, must be concerned with what they “should know.” Ignoring potential liability, making only light inquiries, or relying on anecdotal assurances that the property has always been fine (yes I have seen this) – these do not relieve a purchaser from what it “should have known” had proper inquiries been made.
All Appropriate Inquiries
Therefore, the law defines when a purchaser may be considered an “innocent owner.” The most common circumstances of qualifying for “innocent owner” status occur when the landowner establishes by a preponderance of the evidence, the following: (a) the person acquired the real property after the discharge of that hazardous substance at the real property; (b) at the time the person acquired the real property, the person did not know and had no reason to know that any hazardous substance had been discharged at the real property; (c) the person did not discharge the hazardous substance, is not in any way responsible for the hazardous substance, and is not a corporate successor to the discharger or to any person in any way responsible for the hazardous substance or to anyone liable for cleanup and removal costs pursuant to this section; and (d) the person gave notice of the discharge to the department upon actual discovery of that discharge.
Additionally, in New Jersey, the law is clear on how a purchaser demonstrates they had no reason to know of the discharge. The purchaser must make all appropriate inquiries into the previous ownership and uses of the property by obtaining a preliminary assessment, and a site investigation if the preliminary assessment indicates that a site investigation is necessary. Phase I assessments are conducted by properly qualified environmental consultants, and comply with very specific industry standards.
If, as a result of environmental inquiries, contamination is discovered, the purchaser may agree to remediate the contamination as per applicable requirements. Upon receipt of a final remediation document, the purchaser may then claim innocent owner status with respect to any other contamination, later discovered, which occurred prior to purchase and otherwise meets the statutory requirements.
Anyone looking to own, lease, finance, inherit/grant by will, or otherwise operate at a potentially contaminated property should carefully review the applicable laws. Additional exemptions from liability exist, however, without careful compliance with exemption requirements, strict liability is a real and costly concern.
Phase I – Not Just for Commercial Funding
Phase I environmental assessments are a common requirement in commercial and industrial lending. However, purchasers should weigh the cost/benefit of being able to claim innocent owner status, even when not required by their lender. For example, with cash deals or quasi-residential deals, purchasers may decide to conduct lesser environmental inquiries. In much of New Jersey, agricultural lands are bought and sold, including many farms being purchased for organic farming, wineries, or specialty produce to serve the needs of nearly urban areas. These farms may have contained historic dumps, utilized sizeable underground gasoline tanks, or applied pesticides now deemed hazardous materials. Where smaller farms contain a house to be occupied by the purchaser, and are funded by a standard residential loan, the Phase I environmental assessment may be not required by a lender. Even newer houses sited on lands subdivided from a farm may contain abandoned tanks and similar farm-sourced hazardous substances.
Negotiating Environmental Due Diligence
Real estate negotiations should consider the necessity of such Phase I and Phase II investigations, and contracts must address the competing concerns of purchasers versus sellers when granting site access and setting forth respective obligations for these purposes. Phase II’s may be agreed upon in an addendum to the initial contract. Remediation agreements may be made thereafter. Such contracts and addenda must understand the scoping of environmental liability, applicable remediation requirements, and potential remediation end points appropriate for the property and its use. It is important that purchasers of potentially contaminated property use an attorney who understands these issues as well as the interplay of environmental laws, real estate laws, financing requirements, and similar complexities.
Realistically, known and unknown contaminated properties surround us. Thousands of properties are affected by hazardous substances in our region. With the proper guidance, these may be remediated and re-purposed for a better use. And, not all soil or groundwater contamination is equal. While contamination can be financially devastating, smaller or older releases may be very manageable and need not present a barrier to redevelopment of the property with proper legal counsel.