What happens when a property owner refuses to consent to a deed notice to address historic fill on its property?

Engineering and institutional controls, often a cap and deed notice, can greatly reduce the cost of environmental remediation.  Where appropriate, engineering and institutional controls can allow remediating parties to avoid costly excavation or treatment of contaminated soil, instead allowing these materials to remain underneath improvements such as parking lots, building foundations, or landscaped areas.  The ability to use controls, however, becomes complicated if the party conducting the remediation does not own the property.  Legally, the property owner’s consent is required to record a deed notice, and, absent a contractual obligation, there is no legal mechanism to require a property owner to accept a deed notice.  If the property owner will not agree to controls, the remediating party must implement a remedial action that meets the residential soil remediation standards, which could require a significant amount of additional remedial work (e.g., excavation or treatment) to eliminate soil impacts.  N.J.S.A. 58:10B-13(a)(2) and (b).

This situation is further complicated when the contamination at issue is “historic fill.” Historic fill is contaminated material that was deposited to raise the topographic elevation of a given site; it was common practice for decades before modern environmental laws to use as fill readily available materials, including construction/demolition debris, ash, cinders, and other materials we now know to be contaminated.  Historic fill, which NJDEP considers an area of concern that needs to be addressed, typically contains relatively low levels of contaminants that nonetheless exceed NJDEP’s residential soil remediation standards.  Because of the ubiquitous nature of historic fill and commensurate with the risk it poses to human health and the environment, the Legislature created a rebuttable presumption that the appropriate remedial action for soil contamination associated with historic fill is the establishment of engineering and institutional controls.   N.J.S.A. 58:10B-12(h)(1).

That brings us back to the question, what happens when a property owner refuses to consent to a deed notice to address historic fill on its property?  This situation was recently considered by the Appellate Division in Cozzoli Machine Company v. Crown Real Estate Holdings, Inc., Docket No. A-1733-19 (App. Div., Dec. 7, 2021).

In 2003, Cozzoli ceased operations and sold its property to RTN, LLC which triggered the requirements of the New Jersey Industrial Site Recovery Act (“ISRA”). After concern about the progress of Cozzoli’s cleanup, RTN and NJDEP agreed that engineering and institutional controls could be used as part of the remedial strategy to address historic fill and RTN consented to executing and recording a deed notice.  Before the Response Action Outcome was issued, RTN defaulted on its mortgage with Crown Bank, which as a result of foreclosure took title to the property and then ultimately conveyed the property to Sumo Property Management, LLC.  Sumo intended to construct a large residential project; however, planning board approval was conditioned on remediating to residential standards.  As a result, Sumo was unwilling to execute a deed notice and sought to have Cozzoli remediate to residential standards. In its lawsuit, Cozzoli sought access to the property to complete its remediation by installing engineering controls and injunctive relief compelling Sumo to execute a deed notice.

Sumo argued that it was not obligated to execute a deed notice even though RTN, a prior owner, had provided consent.  The court disagreed initially, stating that to find for Sumo would “hold a good-faith remediator” subject to the demands and whims of the property’s successors-in-interest.  The court also noted the rebuttable presumption applicable to historic fill and found that neither Crown nor Sumo timely challenged NJDEP’s determination that the impacts being addressed were caused by historic fill, but only belatedly disputed the determination during the litigation.  Moreover, the court found that Sumo had inquiry notice of and thus was bound by RTN’s consent because Crown as mortgagee would have known of NJDEP’s involvement and Cozzoli’s remediation plan before it foreclosed on the property.  Crown’s knowledge was imputed to Sumo because of overlapping ownership between the two companies; the chairman and CEO of Crown was the managing member of Sumo.  Finally, the court also found Sumo played “fast and loose” because while Crown was still the owner it unsuccessfully sought to dismiss the litigation, arguing that there was only historic fill on the property and that historic fill is not a contaminant and thus engineering and institutional controls, including a deed notice, were not required.  Sumo, however, changed course and attempted to argue the impacts were not caused by historic fill and thus, controls as a remedy were inadequate.  Given the overlapping management and transfer of the property from Crown to Sumo mid-litigation, the court found Sumo was estopped from arguing the source of the contamination was from something other than historic fill.  Accordingly, the Appellate Division affirmed, requiring Sumo to permit Cozzoli access to complete the engineering controls and to execute a deed notice.

As is evident from the decision, the court viewed the current property owner, Sumo, as a bad actor.  Had the current owner been a “good faith purchaser” with no connection to the mortgagee it may still have been charged with inquiry notice because presumably it should have performed an NJDEP file review as part of its due diligence; however, that result is not as clear.  Also, if the contamination at issue was not the result of historic fill, the court may have viewed the use of engineering and institutional controls differently because the considerations that led the legislature to adopt the rebuttable presumption in favor of controls are absent.  Thus, while this is an interesting case that may indicate a remediating party can compel a property owner to accept a deed notice, it appears to be somewhat limited to its facts.

The issue of needing a property owner’s consent to employ controls arises often.  Accordingly, the need for consent should be considered whenever there is an agreement involving interests in the property (e.g., purchase and sale agreements and leases).  In addition, there are some principles that, with the assistance of experienced counsel, may have applicability to other situations where a remediating party is trying to compel a property owner to accept a deed notice.

For more information, please contact the author Alexa Richman-La Londe at alalonde@riker.com or any attorney in our Environmental Practice Group.