26 Sep Beyond the Sale: 5 Keys to Managing Post-Transaction Environmental Compliance
Reading Time: 4 minutesThere are several key components to the environmental remediation process that are critical to the success of every project. Many of these components are performed after a sales transaction and require ongoing monitoring, reporting, and communication with numerous entities, including the owner. ESA is often asked to take over the ongoing remediation of a property from a prior consultant because one or more of the components of the process has broken down. The following guide is intended to explain some of the key components of ongoing remediation to help property owners understand their consultant’s responsibilities in managing the site. In many cases, responsibility for environmental compliance does not rest with just one entity. If the remediating party is not the property owner, then coordination of activities will be key to both parties achieving their goals.
Components of Ongoing Remediation
1. Environmental Escrow Agreements
During the transaction period when environmental issues requiring remediation are discovered, a common tool used to fund the remediation and to transfer property ownership while the remediation is still in progress is an Environmental Escrow Agreement and Account. Typically, the parties will request a remediation cost estimate through the issuance of a Response Action Outcome (RAO) from their consultant and Licensed Site Remediation Professional (LSRP). The real estate and legal teams will guide their respective parties through the process of the terms of the agreement, determine which party will post the funds, and determine the final fund allocation. The buyer should be aware of how the funds are released and what documentation the consultant must provide to validate the use of those funds to remediate the site.
2. Tenant Lease Terms & Environmental Clauses
If a property owner intends to lease portions of the site, it is imperative that the lease agreement include protective clauses that will release the owner from liability stemming from tenant-related environmental issues. Not only is it important to include language in the lease agreement about storing hazardous materials on the property, but if the tenant intends to operate a manufacturing facility, it is equally important for the tenant to disclose their NAICS code so it can be determined if the operation is subject to the Industrial Site Recovery Act (ISRA). If so, ESA recommends the division of responsibility be very clearly indicated in the lease. Actions that may prompt an ISRA trigger can include the sale of the property, a tenant vacating the premises, or a tenant closing their operation. (For more on how to minimize the cost and aggravation of ISRA compliance, see this article. Even if the tenant is not subject to ISRA, there needs to be a clear division of responsibilities with respect to environmental issues.
3. NJDEP Fees
On an annual basis, the NJDEP will send a bill to the party responsible for conducting remediation based on the type of media that is contaminated (i.e., soil or groundwater) and the extent of the areas affected. Annual remediation fees are reported by the LSRP following NJDEP’s fee schedule and should be updated initially, as conditions change, and annually at a minimum. Removing the number of AOCs and/or media that are no longer contaminated is the best way to reduce fees. Annual permit fees are set by NJDEP and typically increase annually.
4. Regulatory and Mandatory Timeframes
The timeframe to remediate a site is governed by the NJDEP SRRA Timeframe protocols. There are both regulatory and mandatory timeframes. Coming close to missing — or completely passing — timeframes of either category has implications, including fines or impacted property values. Missing mandatory deadlines will push sites into direct oversight by the NJDEP. In direct oversight, you still need an LSRP, but NJDEP will also review documents and provide comments and approvals. The public is also provided more opportunity to comment on the remedy. Additionally, NJDEP retains the right to select the remedy. This is significant, because most responsible parties will select the least costly remediation option to maintain compliance, while the NJDEP will often opt for more costly remediation if the public demands it.
5. Ongoing Remediation, Permitting, and the RAO
It is not always possible to reach a final environmental remedy from a technological and/or cost perspective in the desired timeframe. In these cases, NJDEP has established a remedial action permit program to monitor the ongoing portion of the remedial process. A Response Action Outcome (RAO) — which can be obtained prior to completion — signifies the end of the active case and provides for the longer-term operation, maintenance, and monitoring phase compliance. The LSRP will initiate a permit application process that the DEP approves, if acceptable. Once the permit is approved and all outstanding NJDEP fees are paid, the LSRP can issue the RAO.
The NJDEP permit review and approval process has been notoriously slow and may take many months to complete. The property owner and consultant must be aware of the contractual and escrow agreement terms of having the RAO in hand before releasing escrow funds. Additionally, the NJDEP has a three-year audit period where they may question LSRP decisions and, if differences in professional opinion occur, the NJDEP has the final say and may elect to invalidate or withdraw the RAO. Adding additional language in the Environmental Escrow Agreement (see above) to designate who will be responsible for additional services if Remedial Action Permits are denied or if an RAO is withdrawn or invalidated is recommended.
A Final Word
All of the components outlined above are critical to the owner of a property undergoing environmental remediation. Mismanagement of even one of these components could result in costly delays and out-of-pocket expense. For more information on operating a site undergoing site remediation, see our prior article, The Need for Speed: Hastening Project Closure. If you have a specific question about managing the remediation of your site, Ask ESA.