Buyers Beware: Failure to Conduct a Preliminary Assessment Prior to Purchase May Be a Costly Omission
In the murky waters of determining liability under the New Jersey Spill Act, New Jersey courts are finding one thing clear - buyers who do not perform adequate pre-acquisition due diligence will not qualify as “innocent purchasers” and, thus, will be responsible for remediating contamination that pre-existed their ownership. The Appellate Division recently held that a party buying property in New Jersey must perform a preliminary assessment in accordance with the New Jersey Department of Environmental Protection (“NJDEP”) rules in order to even be considered for innocent purchaser protection. DEP v. Navillus Group, Docket. No. A-4726-13T3 (App. Div. Jan. 14, 2016). The obligation extends to the purchase of property intended for residential use because a recent trial court opinion held that a purchaser’s visual inspection of a property to be converted into three apartments was insufficient to satisfy the due diligence required of an innocent purchaser. Casino Reinvestment Development Authority (CRDA) v. Ping Lin, Docket No. ATL-L-338-12 (Law Div. Dec. 9, 2015).
There are very few defenses to the broad liability for cleanup costs that arises under the Spill Act. One of those defenses, known as the “innocent purchaser” defense, requires a property owner to demonstrate that it did not know and had no reason to know of discharges of hazardous substances at the property by performing “all appropriate inquiry” prior to purchase. The standard of what constitutes “all appropriate inquiry” differs depending upon whether the purchase occurred before or after 1993. Post-1993 purchasers must perform a preliminary assessment and, if necessary, a site investigation under NJDEP regulations, whereas the appropriate due diligence for pre-1993 purchasers is determined by generally accepted good and customary standards at the time of purchase. The purchasers in both the Navillus and CRDA cases were post-1993 purchasers. As such, these cases do not provide guidance on what was considered good and customary practice prior to 1993, a subject that has yet to be decided by a court and will likely largely depend upon the facts and circumstances of the property purchase at issue.
For post-1993 purchasers, the standard, as confirmed recently by the Appellate Division, is clear – sufficient due diligence must, at a minimum, consist of a preliminary assessment. The Appellate Division’s decision in Navillus is part of the ongoing saga over environmental contamination at the Accutherm mercury thermometer manufacturing property in Salem County that later became a Kiddie Kollege daycare center. After discovering that groundwater was contaminated, in 1988 the NJDEP conducted a site investigation that revealed Accutherm discharged industrial pollutants into its septic system. Without having addressed environmental concerns raised by the NJDEP, Accutherm declared bankruptcy in 1994. In 1996, the United States Environmental Protection Agency (“EPA”) issued a “Mini Pollution Report” for the site documenting that sources of mercury existed but the report did not find an imminent threat of human exposure. In 2001, Navillus Group acquired title to the property via tax foreclosure and then two months later transferred the property to James Sullivan, Inc.
Defendants Navillus and James Sullivan Inc. asserted that they were innocent purchasers and not responsible for the contamination caused by Accutherm because their principal, James Sullivan, III had obtained a copy of the EPA Mini Pollution Report and interpreted it to mean there was no environmental problem at the property. Further, the defendants argued that their inquiry of local officials and the NJDEP satisfied the “preliminary assessment” element of the innocent purchaser defense. The Appellate Division strongly disagreed. First, finding that requirements for a preliminary assessment are set forth in regulation, which entails significantly more than the inquiry the defendants performed, the Court unequivocally stated that defendants’ failure to undertake a preliminary assessment meant the innocent purchaser defense is unavailable to them. Further, the Court was not persuaded that the property owner’s subjective and incorrect conclusion after reviewing the EPA Mini Report that there was no environmental issue at the property would qualify a purchaser as innocent so as to avoid Spill Act responsibility.
The application of the innocent purchaser defense to residential property has also recently been at issue. The CRDA case involved the 2004 purchase of property in Atlantic City that the defendant planned to renovate into a three-unit apartment building. It was later discovered when CRDA condemned the property that it had contamination from an old heating oil underground storage tank. There was no dispute that the defendant did not conduct a preliminary assessment prior to purchase. Rather, the defendant argued that she met her burden of due diligence because prior to purchase she performed a visual inspection of the property, that at the time was heated with natural gas, and saw nothing apparent that would have led her to believe that further investigation into possible contamination was necessary. The Court stated that even though it “appreciated” her argument, the Spill Act is clear that to satisfy the innocent purchaser defense a preliminary assessment must be conducted and because defendant did not conduct one, she does not qualify for the innocent purchaser defense.
The defendant argued that as a purchaser of residential property a lesser due diligence standard should apply to her. The Court noted that the Spill Act does not differentiate between residential and commercial properties. The Court went on to state that as a purchaser who plans to occupy one unit and rent the other two, the defendant was not a residential purchaser, but rather was purchasing property for investment with the intent of deriving income. As such, the Court held that the defendant’s failure to conduct a preliminary assessment was fatal to her assertion of the innocent purchaser defense.
These decisions leave little doubt that meeting the explicit requirements of the statute and rules in performing a preliminary assessment is essential to the successful assertion of the innocent purchaser defense under the Spill Act. Given the CRDA Court’s efforts to distinguish the defendant, because of her intent to derive income from the property, from a residential purchaser, single-family residential purchasers may be able to argue in the appropriate case that something less than a preliminary assessment constitutes sufficient due diligence to qualify as an innocent purchaser, but to accept that argument a court would have to ignore the express language of the Spill Act. Both of these decisions make clear that all purchasers of real estate in New Jersey should be aware that performance of a preliminary assessment is critical to establishing the innocent purchaser defense and that failure to do so may be very costly. These decisions should also be considered by residential purchasers because failure to conduct a thorough environmental investigation or an oil tank sweep prior to purchase may be at their own risk.