Expect the Unexpected: New Jersey Appellate Division Rules That Language of Pre-SRRA Contract Requires Remediation Under New Rules

It is universally recognized that the 2009 Site Remediation Reform Act (SRRA) completely overhauled the process of site remediation in New Jersey. Less obvious, perhaps, was how the new statute could affect contractual cleanup obligations in agreements that predate SRRA’s enactment. In 89 Water Street Associates LLC v. Reilly, the Appellate Division held that the language of a purchase-and-sale agreement from 2004 required the seller to meet all of the requirements of the later-enacted statute, even if the cleanup takes much longer, and costs much more, than originally envisioned.

The saga begins in 2004, when the plaintiff entered into a contract to purchase an industrial property in Bridgeton from the defendant’s predecessors in interest. The owner had already been through one remediation process, having obtained a “no further action” letter (NFA) from the New Jersey Department of Environmental Protection (NJDEP) under the Industrial Site Recovery Act (ISRA) (then known as the Environmental Cleanup Responsibility Act). The owner leased the site to a company (NRI) that he controlled in 1984.

Fast forward twenty years, when the parties entered into a contract to transfer the property for $475,000. The agreement set a closing date, which could be extended by six months, but did not permit termination of the contract if the closing did not occur on time.

In the intervening decades, under the tenancy of NRI, the site had experienced contamination that required remediation, which the contract disclosed. It also required the owner, as a condition precedent to closing, to clean up the site and to obtain a “Clearance Document” from NJDEP showing that the cleanup was complete. The Clearance Document could be any of several then-available NJDEP documents or “some other document from the [NJ]DEP indicating that no further action is required with respect to any environmental remediation of conditions on the Property.” The parties also acknowledged that ISRA and its implementing regulations “and any amending or successor legislation and regulations” applied to the transaction. The buyer could terminate the agreement if the seller could not obtain the required Clearance Document, but not if the seller was diligently pursuing that document. The contract set no limit on the time or costs that the seller could have to spend on the cleanup.

NRI made some progress over the next several years, and although the contemplated closing date had long passed, neither party sought to either terminate the agreement or insisted that the closing occur. In 2010, NJDEP informed NRI about the passage of the SRRA, and of its requirement to retain a licensed site remediation professional (LSRP) to oversee the remediation. The completion of the cleanup would no longer be signified by an NFA; instead, the LSRP would issue a response action outcome (RAO). During the same period, the buyer suggested that the closing take place, with the seller completing the cleanup after the closing, but the seller refused to close until a Clearance Document – now, an RAO – had been obtained. In late 2012, the seller changed its tune, and – perhaps realizing that the total cleanup cost would approach or exceed the sale price that had been set eight years earlier – sought to terminate the contract. The buyer rejected the notion of terminating the agreement, and filed suit, seeking a declaratory judgment that the contract remained in effect and that it was not obligated to close on the deal until an RAO was issued.

Trial testimony in the Law Division indeed revealed that total cleanup costs had already approached $400,000 and could eventually exceed $700,000. All of those costs, however, were borne by NRI, and the seller/owner was not required to reimburse NRI. The trial judge found that the parties had originally anticipated that a Clearance Document could be obtained quickly and cheaply, as an “administrative formality.” The judge concluded that the SRRA’s new requirements effectively relieved the seller of its cleanup obligations, because an RAO was not among the alternative Clearance Documents listed in the contract, and that the seller could no longer work in good faith to obtain such a document from NJDEP. Moreover, citing the Supreme Court’s 1991 opinion in Dixon Venture v. Joseph Dixon Crucible Co. and the Appellate Division’s 1992 opinion in Feighner v. Sauter, the trial judge concluded the seller could only be obligated to spend only “a reasonable sum in relation to the selling price” on remediation, and could not be obligated to obtain an RAO because the cost to obtain such a document was not contemplated by the parties and exceeded the purchase price. The trial judge also ruled that if the plaintiff chose to purchase the parcel without an RAO, the defendant would not have to obtain one post-closing, but that “the unique circumstances of the case” required a later allocation of the cost of obtaining an RAO between the buyer and the seller.

On appeal, the Appellate Division reversed, rejecting both the critical factual findings and the legal conclusions of the trial judge. There was no evidence, the Court found, regarding the parties’ initial expectations regarding the duration and cost of the process to obtain a Clearance document. Indeed, the defendant’s conduct until late 2012 betrayed no concern at all about the time or expense of obtaining an RAO. More importantly, the Appellate Division held that the language of the contract could not be read to limit the seller’s obligation to obtain a Clearance Document to those documents that were available under ISRA in 2004. The agreement’s reference to “any amending or successor legislation and regulations” meant that after 2009, the SRRA governed the sale, and that the seller was obligated to pay the cost of obtaining an RAO, as “some other document from [NJ]DEP indicating that no further action is required” to remediate the site. The fact that an RAO is obtained from an LSRP, and not from NJDEP, did not bother the Court. An RAO serves the same purpose as an NFA, and the SRRA defines a “final remediation document” to include both. Finally, the Appellate Division distinguished both Dixon Venture and Feighner, as both cases involved contracts that were entered into prior to the effective date of the Environmental Cleanup Responsibility Act (ECRA).

The seller in 89 Water Street Associates likely would have faced the same delays and steadily rising cleanup costs even if the SRRA had not been enacted; while the statute dramatically changed the administrative process for remediating a contaminated site, the technical requirements remain essentially the same. Nevertheless, the decision highlights the importance of careful contract drafting, and of equally careful review of old contracts for their potential effects on future liabilities. Unpredictable changes in the law have a way of surprising the parties to agreements with broad language such as that found in the agreement for the sale of the Bridgeton property. And if the bargain truly is based on certain expectations, those expectations should be explicitly spelled out, as should any adjustments that will be made to the deal if those expectations are not met. Drafters do not have a crystal ball, so they need to ensure that contract provisions are drafted so that if circumstances change, their clients’ goals can still be achieved.

Paul M. Hauge, Counsel in the Gibbons Environmental Department, authored this post.
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