January 1, 1900

by Nielsen V. Lewis

For redevelopment, you are consider­ing the purchase of property once contaminated with hazardous substances. You want to avoid or minimize potential liability for cleanup. The property owner furnishes a no further action (NFA) letter previously issued by the New Jersey Department of Environmental Protection. The NFA letter states that no further action is necessary to remediate the property. Are you protected from any further cleanup liability?

Not necessarily. The protection afforded by the NFA letter depends on the applicability of innocent purchaser defenses against cleanup liability in the New Jersey Spill Act and other considerations.

Innocent Purchaser Defenses and the NFA Letter

The Spill Act provides innocent pur­chaser defenses against cleanup liability to persons who meet the following criteria:

• The person acquired the property after the discharge of the hazardous substance;
• At the time of the property acquisition, the person “did not know or have reason to know” of the discharge, or the person acquired the property by devise or succession (subject to limitations);
• 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 such persons; and
• The person gave notice of the discharge to NJDEP upon discovery of the discharge.

The Due Diligence Requirement

To demonstrate it had “no reason to know” of the pre-existing contamination, the purchaser must have exercised “all appropriate inquiry” into previous owner­ship and uses of the property (the “due diligence” requirement). In most cases (properties acquired after September 14, 1993), all appropriate inquiry means a preliminary assessment and, if needed, a site investigation, performed in accordance with NJDEP’s rules and regulations. The liability protection of this Spill Act defense is broad. The qualifying purchaser “shall not be liable for cleanup and removal costs or for any other damages to the State or to any other person for the discharged hazardous substances pursuant to [the Spill Act] or pursuant to civil common law.”

It is far more likely, however, that the purchaser will learn of pre-existing discharges through its due diligence investigation. In that case, the cleanup liability protection of the Spill Act is more limited. It protects purchasers who:

• Performed a remediation of the site or discharge consistent with N.J.S.A. 58:10B-12; or
• Relied upon a valid NFA letter issued by NJDEP for remediation performed prior to acquisition; or
• Obtained approval of a remedial action work plan by NJDEP, and continued to comply with the conditions of that work plan; and
• Established and maintained all engineering and institutional controls required by NJDEP.

The person performing the remediation receives an NFA letter from NJDEP. A person receiving the NFA letter or relying on a prior NFA letter “shall not be liable for any further remediation including any changes in a remedia­tion standard or for the subsequent discovery of a hazardous substance, at the site, or emanating from the site, if the remediation was for the entire site. In addition, NJDEP issues to the person performing the cleanup a Covenant Not to Sue. It releases that person and all successors in ownership, lessees and operators on the property from all civil liability to the State to perform further remediation.

Caution in Reliance on Prior NFA Letters

The Buyer must be cautious about relying on a prior NFA letter. The Spill Act specifies that the NFA letter does not relieve the purchaser of liability for:

• A discharge occurring between the date of a prior NFA letter and the time of the property acquisition in the case of a purchaser relying on a previous NFA letter;
• A discharge off the site covered by the NFA letter;
• A discharge occurring after the person acquires the property;
• Negligent actions by the purchaser aggravating or contributing to the discharge;
• Failure to comply in the future with laws and regulations; and
• Failure to maintain approved institu­tional or engineering controls on the property or to comply with other conditions of the NFA letter.

Exception to Innocent Purchaser Defenses

The Buyer should also consider the applicability of the “in any way responsible” exception to the innocent purchaser defenses afforded by the Spill Act. This issue is very significant. A responsible person who cleans up and receives an NFA letter is afforded far less protection against further cleanup obligations than the protection given persons qualifying for the Spill Act’s innocent purchaser defenses. The NFA letter issued to a responsible person is subject to the following broad “reopeners”:

• A discharge that occurred prior to issuance of the NFA letter discovered after issuance of the NFA letter;
• A new cleanup standard adopted after issuance of the NFA letter that differs from the old cleanup standard by an order of magnitude;
• A contaminant exposure pathway pre­dating the NFA letter that is discovered after its issuance;
• The approved engineering or institu­tional controls are no longer protective of public health, safety and the environment.

Should any of these events occur, NJDEP may revoke the NFA letter and require additional remediation. Furthermore, the responsible person does not benefit from the Covenant Not to Sue accom­panying the NFA letter.

“In any way responsible” is not defined by the Spill Act. Evaluation of this liability exposure must take into account New Jersey case law over three decades inter­preting the Spill Act’s imposition of strict liability on “responsible persons.”

If the Seller is a “responsible person,” does the Buyer stand in the shoes of the Seller receiving the NFA letter, making the Buyer vulnerable to further cleanup liability? Or does the Buyer receive the Spill Act’s innocent purchaser protections against further cleanup liability, notwith­standing the responsible party status of the Seller? The Spill Act does not clearly address this question.

Other potential limitations on the Buyer’s ability to rely on the NFA letter must be considered. The NFA letter is based on information about site conditions available to NJDEP at that time. Should that information be incomplete or incorrect, NJDEP reserves the right to revoke its NFA letter.

Categories of NFA Letters

NFA letters come in different sizes. Is the prior NFA letter of adequate scope to protect the Buyer against more cleanup requirements? Does it cover the entire property and contaminants migrating off­site? Or is it limited to specific areas of concern on the property? Only an NFA letter covering the entire property protects the Buyer from further liability for the cleanup of contaminants migrating off the property. Does the NFA letter cover groundwater remediation? Or is it limited to soil remediation? Groundwater remediation can be very expensive.

Natural Resource Damages

The Buyer should also investigate its liability exposure for natural resource damages (NRDs). It must be stressed that NRDs are not cleanup costs. Has NJDEP issued a Covenant Not to Sue protecting the Seller and subsequent owners of the property, lessees and operators from NRDs? If NRDs are unsettled, does the Buyer qualify for a release from liability for NRDs provided by a 2005 amendment of the Spill Act?

Conclusion

For these and other reasons, the NFA letter may or may not provide the cleanup liability protection the redeveloper seeks to close on property impacted by pre-existing contamination. Its property acquisition team must carefully assess its potential cleanup and NRD liability under the Spill Act, and the protections provided by its innocent purchaser defenses and the NFA letter.

A longer version of this article appeared in the February 12, 2007, issue of the New Jersey Law Journal and is reprinted with permission. © 2007 ALM Properties Inc. Further duplication without permission is prohibited. All rights reserved.