Drafting In The Face Of Uncertainty: Making Your Documents Count

Thursday, June 19, 2014 - 14:54

Imagine that you are the owner of a fifteen-year-old suburban corporate park with a 150-car asphalt parking lot. Occasionally, the parking lot needs maintenance – repaving, new parking lines painted, some curb repair, but nothing too onerous. Then, one day, the New Jersey Department of Environmental Protection notifies you that what you thought was just a parking lot is an “engineering control” that was installed to prevent human exposure to contamination on the site and that you will need to hire a Licensed Site Remediation Professional (“LSRP”), obtain a permit, put up financial assurance, and file biennial certifications. How did this happen?

Fifteen years ago when you purchased this former industrial facility from a seller who was in the midst of a cleanup, you agreed that the seller could clean up to non-residential standards and use engineering and institutional controls. Furthermore, you agreed to assume responsibility for maintaining the controls. At the time, when maintaining the engineering control meant keeping the parking lot in good shape, this did not seem like an unduly burdensome obligation. Now, however, after adoption in 2009 of the Site Remediation and Reform Act, N.J.S.A. 58:10C-1 et seq., it is a different story.

Similar problems face a seller that has retained responsibility for engineering and institutional controls after the transfer of the property. While the seller no longer owns the property, it may need access. Even if the transfer documents contained language providing for access in provisions that survived closing, getting access from the current owner may not be as simple as asking for it. The problem is exacerbated if the original purchaser has resold the property to a third party who professes ignorance of the access obligation. While the responsible party always has the option of seeking the assistance of the courts on an expedited basis, this route is seldom cost-effective or fast enough in the face of mandatory compliance deadlines.

The recent changes in the remediation process in New Jersey from agency oversight to the use of LSRPs to supervise remediation, together with the imposition of a permit requirement for engineering and institutional controls, have brought to light problems that could have been addressed in the original transfer documents. The regulatory changes in New Jersey were significant, and although the details are specific to New Jersey, the fallout provides a cautionary tale for transactions in other states.

Regulatory Requirements Can Change Over Time

It seems to be one of those immutable laws of nature that responsibility for contaminated property never goes away. Years after the cleanup and transfer of the property, an environmental agency may come knocking at the door demanding more work, or permits, or both. Technological advances in detection limits and better knowledge of the hazards of contaminants and exposure pathways have spawned changes in the environmental laws governing cleanups on both state and federal levels. The risk of changes in the law that require re-evaluation (and perhaps resumption) of old cleanups years later makes it imperative that the documents governing the transfer of the property clearly provide for such contingencies.

In addition to changes in the requirements, changes in terminology are likely to occur. Tying the language of documents too closely to regulatory terminology without flexibility can present problems. One area where this is obvious is in escrowed funds tied to ongoing remediation. When there is ongoing remediation at the time of the closing, it is common for the purchaser to demand that a portion of the purchase price be escrowed during the remedial work, either to act as a type of insurance that the work will actually be performed, or in some cases to fund the work. Problems can arise when the parties have agreed on what triggers release of the funds, such as receipt of a particular “approval” document from the regulatory agency, but a change in the law makes receipt of such a document impossible. For example, in New Jersey, it was common to make the receipt of a “no further action” letter from NJDEP a triggering event. Once New Jersey changed over to the LSRP system, NJDEP no longer issued “no further action” letters. Most parties would concede that a Remedial Action Outcome issued by an LSRP serves the same purpose – indeed, the law now refers to both as “final remediation documents” – but where relations have soured and the buyer wants to hold the escrowed funds hostage, it is not inconceivable that the buyer would try to demand adherence to the literal terms of the agreement.

It is also not unusual in an ongoing remediation for buyer and seller to share facilities temporarily, such as a wastewater treatment plant that handles both remediation wastewater and the facility’s sanitary discharge. During the period of joint use, there is likely to be only one permit for the treatment plant. The seller should have a clear way to exit the permit (with its many requirements) once the remediation use of the plant is completed, even if the property as a whole is still undergoing remediation. Requiring the buyer to seek a transfer of the permit at the appropriate time seems logical and straightforward, providing the “appropriate time” is clearly defined and not subject to discretionary agency action. Seller would be better served by tying the transfer obligation to a measurable event, such as cessation of the remediation wastewater discharge.

Clarity In Indemnification Provisions Is Critical

Years after a transaction, disputes can arise over indemnification provisions. The buyer wants indemnification in perpetuity from the seller for any contamination on the property regardless of any ongoing cleanups, whereas the seller wants to limit the time frame for such indemnification. Once the cleanup is completed, the seller wants to cut its ties to the property and walk away. One way sellers limit indemnification obligations is through a contractual limitations period, such as five years. While this might be an adequate time frame for on-site contamination, it is less useful for off-site claims such as those for natural resource damages or contaminated sediments, which might not surface for decades. Moreover, the seller typically wants indemnification from the buyer for any contamination caused by the purchaser post-sale. The indemnification provisions should address all these issues in clear, unambiguous language. In addition to issues relating to residual contamination at the site itself, the parties should contemplate and determine who will step up if there are unanticipated future claims for off-site impacts such as natural resource damages.

Planning For Problems

One way to address potential future disputes is to provide for dispute resolution in the agreement. Such a provision avoids the monetary and time costs of litigation. In New Jersey, some agreements provide that disputes will be presented to a pre-selected third-party LSRP. While use of an LSRP to resolve disputes relating to an on-site cleanup makes sense, an LSRP might be less useful for contract interpretation issues.

In addition to including these various provisions in the transfer documents, the parties must be able to locate those documents in the future in the event environmental problems arise much later. Given the longevity of environmental issues, such documents should not be discarded or simply filed away or sent to storage. For sellers who may be called upon to re-enter the property to resume monitoring natural attenuation in groundwater years in the future, the continued right of access is essential. Furthermore, in situations where the remedial work continues over decades, it is important that any subsequent owners are aware of and bound by the original agreement. If the original buyer and seller agreed to non-residential cleanup standards, a subsequent purchaser cannot plan to build residential condos on the site. Although many agreements include the obligation on the buyer to impose these obligations on future buyers, there is often little a seller can do to assure buyer’s compliance.

For all these reasons, the parties’ agreements on the environmental aspects of the transaction that survive the closing, such as responsibility for the engineering and institutional controls, right of access and dispute resolution provisions should be contained in a separate recordable document and filed with the deed. Where there is a remedial action permit, it would be prudent to attach an access agreement to it so that this agreement is further disseminated. You do not want to be fighting with a condo board for access to groundwater-monitoring wells on formerly industrial property.

Making Your Documents Truly Useful

Every lawyer knows that language matters, but it is easy to fall into traps by relying on familiar but outdated terms. The “long tail” of environmental issues, as well as the likelihood of statutory and regulatory changes, should remind the good practitioner to be thoughtful and, if necessary, creative in the drafting of environmental provisions. “We’ve always done it this way” is not a prudent rule.

Similarly, documents are useful only when those who need to see them have access to them and notice of their existence. Simple steps like adjusting document retention policies and attaching documents to recorded instruments can be powerful headache-prevention measures.

Susanne Peticolas is a Director in the Real Property & Environmental Department at Gibbons P.C. in Newark, NJ.

Please email the author at speticolas@gibbonslaw.com with questions about this article.