Site Remediation Reform Act: How Does the Act Impact My Next Brownfield Project, Property Sale or Other Business Transaction?

October 2nd, 2009 | Posted by: Christopher DeGrezia 0| comments:

Site Rememdation Reform Act 11The Site Remediation Reform Act (SRRA) will have significant impacts on commercial transactions.  In addition to the learning curve in familiarizing sellers, buyers and lenders with new terminology and the loss of some of the familiar mechanisms, such as the No Further Action (NFA) letter issued by NJDEP and the signed Covenant Not to Sue set forth in a NFA, SRRA requires some new strategic thinking by parties to a transaction.  Particular issues include broader obligations to report and remediate contamination and an impact on funding options.

Affirmative Obligation to Remediate

SRRA impacts both buyers and sellers by imposing an affirmative, immediate obligation to remediate in accordance with mandatory time frames.  A seller who learns of a discharge will no longer be able to choose the most favorable time to remediate.  Mandatory time frames will require remediation to proceed promptly, regardless of whether funding from a transaction or other source is available.  Property owners will need to seek counsel before taking actions that may lead to either an obligation to investigate, such as an ISRA triggering event, or the discovery of a discharge, such as a buyer’s due diligence.

Likewise, a buyer who takes title to contaminated property will be required to start remediating shortly after discovery of contamination, regardless of where the buyer is in its redevelopment plan for the site or the availability of funding for remediation.  Buyers will no longer be able to “buy and hold.”  Careful coordination of the sequence of events in a Brownfields redevelopment transaction, such as acquisition of title; obtaining development approvals; leasing; financing; construction and selling, with the mandatory time frames for remediation activities will be needed.  A remediation funding contingency may become a more important element of a purchase agreement for a Brownfields property, as money for cleanup will be needed almost immediately while other steps in the transaction are being completed.

Reporting Discovery of Contamination by LSRPs – How Does It Impact Due Diligence?

SRRA impacts a buyer’s due diligence by imposing direct reporting obligations on LSRPs.  The impact exists even if the buyer’s due diligence rights do not extend to conducting so-called “Phase II” (actual sampling) activities.  An LSRP could obtain information through activities that were previously perceived as relatively innocuous, such as reviewing historic documentation provided via access to a “data room.” Such documents could include information about uses of the site by a prior owner or disposal practices followed prior to the enactment of modern environmental laws.

An LSRP who uncovers evidence of a condition of immediate environmental concern (IEC) is required to report the IEC directly to NJDEP, in addition to advising the property owner.  IECs include: contamination of potable wells; vapor intrusion conditions; contamination of a nature that could result in an acute health risk; and any other condition that NJDEP believes poses an immediate threat to the environment or to public health and safety.  A seller runs the risk of both losing his deal and incurring an unexpected obligation if a buyer conducting due diligence uses an LSRP.

Prior to SRRA, many buyers and sellers entered into contractual arrangements under which the buyer was required to keep confidential the information discovered during due diligence (so-called “don’t ask, don’t tell”).  A buyer discovering contamination might make the decision not to purchase a property, but the seller, having no knowledge of the contamination, would not have an obligation to remediate.  Under SRRA, the buyer’s contractual obligation to keep confidential information discovered in due diligence is overridden by an LSRP’s statutory obligation to report.  On discovery of an IEC, an LSRP performing due diligence would report it to NJDEP, thereby triggering the seller’s affirmative obligation to remediate.  On learning of the IEC from its LSRP, a buyer could be expected to exercise its right to terminate the purchase agreement under a due diligence contingency.  The seller would be left with a new, presumably previously unknown, remediation obligation, no transaction to generate cash to fund the remediation and an obligation to commence remediation promptly.  In some cases, therefore, the use of a non-LSRP environmental consultant should be considered for initial due diligence projects.

Even if the condition identified by the LSRP is not an IEC, if the LSRP obtains specific knowledge that a discharge has occurred on a contaminated site for which it has been hired, the LSRP must notify the person responsible for conducting the remediation and NJDEP of the discharge.  A literal reading of SRRA seems to indicate that a consultant who is an LSRP, but who is not acting as the LSRP with respect to the site, is not required to report the discharge.  In public presentations relating to the implementation of SRRA, however, representatives of NJDEP have pointed to the future LSRP professional code of conduct (to be developed by the newly created LSRP Board) as potentially imposing on LSRPs a broad obligation to report a discharge.  The LSRP Board’s development of an LSRP code of conduct will be vital to understanding the full impact of SRRA.

Under the LSRP code of conduct, an LSRP’s highest priority is to protect public health and the environment. NJDEP has begun to characterize the LSRP’s license as a “license to protect.” It is a theme of both SRRA and NJDEP’s public relations campaign to emphasize the LSRP’s obligation to exercise independent professional judgment, uphold the standards embodied in NJDEP regulations and guidance, and generally to act at all times to protect public health and the environment.  NJDEP has implied that upholding these values may require reporting of any discharge discovered during due diligence.  With a license at stake, LSRPs may feel pressure to err on the side of NJDEP’s interpretation.  Whether the LSRP reporting obligation will be fleshed out in NJDEP regulations or the rules adopted by the LSRP licensing board remains to be seen.

A seller may wish to preclude an LSRP from examining property in which neither the LSRP nor its client has a pecuniary interest or a remediation obligation. In order to avoid acquiring an unexpected remediation obligation, a seller might require that a buyer use a non-LSRP environmental consultant to conduct due diligence, thereby preserving the option to employ a “don’t ask, don’t tell” arrangement.  A non-LSRP environmental consultant would not be subject to the LSRP professional standards and therefore would be able to render a report on the environmental condition of a property solely to a buyer without violating a reporting obligation.

Whether environmental consulting firms will be able to maintain stables of both LSRP and non-LSRP employees so as to be able to serve both the prospective buyer market and the person responsible for conducting the remediation market also remains to be seen.  In other licensed professions, procedures for preventing the dissemination of proscribed information within firms, so-called “firewalls,” have been employed in order to allow the firm to service multiple aspects of a market.  It will be up to the LSRP Board to provide guidance on the degree to which a non-LSRP employee’s knowledge will be imputed to other LSRPs in the firm.

How Does SRRA Impact Access to Hazardous Discharge Site Remediation Fund Monies?

In many Brownfields transactions, buyers willingly acquire contaminated property, assume the remediation obligation and provide a release to the seller in exchange for some concession, such as a reduced purchase price.  SRRA provides that receipt of financial assistance from the Hazardous Discharge Site Remediation Fund (HDSRF), a popular source of Brownfields remediation funding, is conditioned on subrogation to NJDEP of all rights of the recipient to recover remediation costs from an insurance carrier, discharger or person in any way responsible under the Spill Act.  The New Jersey Economic Development Authority may not award financial assistance from the HDSRF if the applicant has relinquished, impaired or waived those rights to recover costs.  In fact, such claims must be expressly subrogated to NJDEP and NJDEP is entitled to enforce any right or defense available to a recipient of financial assistance from the HDSRF.

Few sellers would be willing to sell known contaminated property, especially at a discount, only to have the purchaser who took with knowledge of the contamination, or its subrogee, come back to recover the cost of remediation.  This puts a buyer of a Brownfield between a rock and a hard place.  Many sellers insist on the buyer’s relinquishing, impairing and waiving rights to recover costs of remediation.  In such cases, the buyer will have to forgo funding from the HDSRF.

The language of SRRA does not expressly preclude a buyer from indemnifying a seller for any subrogation claim brought by NJDEP.  Sellers might become comfortable with a new practice under which, rather than requiring a buyer to release or waive claims, the buyer agrees to indemnify and hold the seller harmless from any claim by NJDEP in lieu of a release.  A seller would have to carefully evaluate a buyer’s capacity to make good on such an indemnity.  Before agreeing to indemnify, a buyer would need to carefully examine the risk of NJDEP’s making a claim against the seller.  In cases where the HDSRF funding is in the form of a loan, the buyer is responsible for paying the loan and, by avoiding default, should be able to control whether there will be any reason for NJDEP to seek recovery from the seller.

Indemnification would have an adverse affect on a buyer’s protection from liability. Under the Spill Act, a purchaser of property after January 6, 1998, who did not discharge the hazardous substance that caused natural resource damages, and has no relationship to a person responsible for the discharge, is not liable for the payment of compensation for natural resource damages or for the restoration of natural resources unless the buyer expressly assumed the liability for natural resource damages by a contract using the term of art “natural resource damages.” [N.J.S.A. 58:10-23.11f22.a.]  The same section of the Spill Act also provides that a purchaser of real property loses a particular limited immunity from certain liability for remediation of contamination that has migrated offsite if the purchaser, by contract, voluntarily assumed the liability from the person liable for remediation costs. [N.J.S.A. 58:10-23.11f22.b.]

Undoubtedly, additional impacts of SRRA on transactional practice will come to light as NJDEP issues regulations and guidance over the coming months and as future transactions close.  Already, contract provisions that have been in use for many years are being revised to reflect the new terminology introduced by SRRA, as well as to anticipate future requirements as SRRA is implemented.

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