23 Aug Due Diligence and the Innocent Purchaser Defense
Reading Time: 4 minutesChris Venezia, ESA’s Director of LSRP Services, explains the Innocent Purchaser Defense as it pertains to the environmental aspects of purchasing real property in New Jersey.
Typically, real property investments with the potential to yield the greatest return come with the greatest risk. And there are many types of risk to consider, environmental liability being one of the most difficult to quantify from a scope, schedule, and cost perspective. While your real estate broker and attorney can provide a wealth of guidance during a real estate transaction, when dealing with potential environmental impacts, you’ll also want specialized environmental advice from a trusted environmental firm.
I’m Chris Venezia, Director of LSRP Services here at ESA Environmental Consultants. It’s our ongoing mission at ESA to help educate property owners and investors on topics relating to environmental compliance. Today, I’d like to share some important information with you about the Innocent Purchaser Defense as it relates to the environmental aspects of purchasing real property in New Jersey.
What is the Innocent Purchaser Defense?
Anyone considering the purchase of property in New Jersey — whether industrial, commercial, or even residential — should be aware of both Federal and State laws regarding the Innocent Purchaser Defense. Under the Federal Law, CERCLA holds current property owners liable for environmental contamination in all but limited circumstances even if the contamination occurred prior to their ownership. New Jersey’s Spill Act holds owners liable for contamination in all but limited circumstances as well. HOWEVER, both CERCLA and the New Jersey Spill Act provide recourse through the Innocent Purchaser Defense IF the buyer does due diligence PRIOR to purchasing the property. An ASTM Phase I Environmental Site Assessment is the mechanism through which a buyer is afforded Federal protection. If the property is located in New Jersey, the buyer will also need to conduct a Preliminary Assessment (PA) and, if warranted, a Site Investigation, in order to claim protection under the state’s Innocent Purchaser Defense. While similar, the Phase 1 and the Preliminary Assessment are not the same, and each confer certain protections not provided by the other. Whether or not both a Phase I or a PA are necessary is a topic of discussion to be had between the potential buyer and their environmental consultant. For more information on the differences between Phase Ones and Preliminary Assessments, see our video on the topic.
Why You Need an Environmental Consultant on Your Advisory Team
An experienced environmental consultant will be instrumental in preventing costly and time-wasting mistakes that are all too common in real property transactions. To avoid liability and to tip a real property transaction to your advantage, make sure you avoid the following mistakes:
First, don’t take the seller’s word that they will assume responsibility for environmental issues on the property. Even if it’s in writing, once the contracts are signed, you will automatically enter the liability chain as far as state and federal regulatory agencies are concerned.
Second, do not assume that previous agency letters, Phase Ones, Preliminary Assessments, No Further Action letters, or LSRP RAOs are still valid. All have inherent limitations and a time-sensitive “shelf life.” Any number of situations could trigger a re-opening of a previous case, and only a qualified attorney and an experienced environmental consultant can determine the best strategy to protect you from liability.
And while it may be tempting to try to save money by accepting a Phase I or PA conducted by the seller or another party, keep in mind that these third-party reports will likely provide very limited or no protection under the law for you, the purchaser.
Yet another common mistake made in real estate transactions is negotiating a purchase price without the benefit of knowing at least the ballpark scope, schedule, and cost for environmental compliance. This information will be critical in procuring an equitable purchase price.
And finally, remember that, in order to be used as a valid defense, Phase Ones and Preliminary Assessments MUST be performed PRIOR to assuming ownership of the property.
What if environmental issues are found?
If a Phase I or PA uncovers an environmental issue on the property, your environmental consultant will suggest strategies to reduce or eliminate your environmental liability. There will be questions such as who will be responsible for funding the environmental work? Are there grants, loans, or public funds available to offset the cost of compliance? Will an escrow account or other financial mechanism be established to ensure availability of funds? What are the terms of the funding agreement? And are there other liability protections available? Of course, the overarching question is always, “will the return on my investment outweigh the risk and cost?” No one knows with 100% certainty what impacts might lie beneath the ground from historic operations — nor the level of remediation that may be required to bring the property into environmental compliance — without the benefit of remedial investigation. A comprehensive investigation performed by an experienced and knowledgeable environmental consultant will help the buyer to determine whether they should work with their consultant to develop a strategy to manage their risk and optimize the return on their investment, or whether it would be advisable to simply walk away from the deal.
Post-sale environmental remediation
To expedite a sale that involves an environmentally impacted property, the buyer may elect to complete the sales transaction prior to the site being remediated. In this instance, the buyer must tread with extreme caution. An experienced attorney will be instrumental in ensuring that the proper documentation and agreements are in place to protect the buyer from liability once the sale is complete. In New Jersey, for example, the buyer will need to execute a Remediation Certification with the NJDEP. The point is, just because the contract is signed, it doesn’t mean the work is done. Coordination of remedial activities and site development will be critical to optimizing profit and reducing risk.
In conclusion
In New Jersey, a Preliminary Assessment is required in addition to a Phase One in order to claim a future Innocent Purchaser Defense. And even if environmental issues are uncovered during the investigative phase, the information obtained will serve as a baseline for the buyer to assess their risk and make a sound purchasing decision. ESA helps clients navigate the murky waters of due diligence on a daily basis. It’s not only important to know what the real and potential risks are but, more importantly, it is understanding the options available that will enable the buyer to successfully manage those risks.