Environmental statutes impose broad liability on owners of contaminated property. However, under both federal and New Jersey state law, purchasers of property may be protected from cleanup liability if they can show that they undertook appropriate due diligence before acquisition of the site and didn’t know of the contamination. Purchasers of property should also make sure that they are aware of other potential environmental constraints on a site. Real estate contracts now routinely contain due diligence provisions and the implementation of the due diligence process often dictates the outcome of the transaction. Identifying potential pitfalls in the due diligence process, such as those listed below, is critical to the success of any acquisition.
Know the standards that apply.
In order to achieve innocent purchaser protection for a site located in New Jersey, a purchaser performing due diligence should follow both the federal requirements as set forth in the United States Environmental Protection Agency (USEPA) regulations and the New Jersey state requirements set forth in the New Jersey Department of Environmental Protection (NJDEP) rules. This means that for a New Jersey site, the due diligence must at a minimum cover the scope for a phase-one environmental site assessment meeting the USEPA rules, and a New Jersey Preliminary Assessment under NJDEP regulations. Many attorneys and environmental consultants are not aware of these overlapping requirements, leaving clients potentially unprotected.
Don’t forget about ISRA
Although, some question whether the New Jersey Industrial Site Recovery Act (ISRA) still has meaning, it remains in full force and effect and should be considered during due diligence. Under ISRA, the sale of or cessation of operations at a subject industrial establishment triggers an obligation to notify NJDEP and pursue a remediation of the site. It is important to determine early on if the property is an ISRA subject facility and to consider the implications when structuring a deal.
Understand the supervision of an LSRP
Remediation of contaminated property in New Jersey is done under the supervision of a Licensed Site Remediation Professional (LSRP). LSRP’s have certain independent reporting obligations to the NJDEP. As a result, sellers of property frequently prohibit buyers from using an LSRP to conduct due diligence, even though it is not so clear that the independent reporting obligation applies. This is not a fatal flaw from a buyer’s perspective, but one should take steps to ensure that due diligence material generated by a non-LSRP will be usable by an LSRP when a transaction closes and there are post-closing remediation requirements. One way of addressing this concern is to hire a firm that employs both LSRP’s and non-LSRPs for the due diligence process.
Pay attention to building interiors
Although not necessarily required by NJDEP or USEPA regulations, when buying an existing building, some attention should be paid to the inside of the building. Historically, materials including lead, asbestos, polychlorinated biphenyls (PCBs) and mercury were used in building materials or wall coatings. If these materials are present, there can be risks associated with using or demolishing existing structures. As environmental regulations have evolved, there is also greater concern with indoor air quality whether related to radon, or the potential that volatile organic substances could be entering the building from contaminated ground water.
Investigate compliance history
Due diligence should include investigation whether operations at the property were done in compliance with environmental regulations. Violations of environmental standards could lead to liens being imposed on a property, even if done by a predecessor owner.
Identify other constraints
Environmental laws and regulations impose requirements on the use and development of property. Due diligence should consider whether particular requirements are applicable to the use or development of a site. Consideration should be given to whether a site contains wetlands, is in a flood hazard area or is subject to buffers that limit development. Notably, a buffer may exist on a property as a result of a regulated feature on and adjacent site. A determination whether a property is in a sewer service area, and if sewer and other utility capacity exists, is also crucial. These are only some of the issues that we see when undertaking due diligence. Of course each site and deal is different. Those who ignore due diligence do so at their own peril.
Dennis M. Toft is a member of the 130 attorney firm of Chiesa Shahinian & Giantomasi of West Orange, NJ where he co-chairs the environmental practice. Mr. Toft was actively involved in the process of developing and implementing the Site Remediation Reform Act on behalf of the regulated community. He can be reached at (973) 530-2014 or by email at email@example.com.