March 5, 2020

CSG Law Alert: 89 Water Street Associates, LLC v. Reilly

An unpublished Superior Court Appellate Division opinion (89 Water Street Associates, LLC v. Reilly, Docket No. A-3366-17T1, October 1, 2019), despite being non-precedential, will be instructive to lawyers handling commercial real estate transactions, land use issues, or environmental litigation arising from environmentally contaminated sites. The opinion reversed the trial court’s order interpreting environmental terms in a contract for the sale of a parcel of land.  It required the buyer to obtain a Response Action Outcome (RAO) from a Licensed Site Remediation Professional (LSRP), in part because the cost of obtaining the RAO exceeded the parties’ expectations as, in the court’s view, evidenced by extrinsic documents.  The appellate court found that the trial court erred in shifting that burden from the sellers to the buyer.  The appellate court reviewed the contractual terms and surrounding circumstances to conclude that by its terms, the contract imposed the obligation to secure an RAO on the sellers irrespective of the cost and time burdens of doing so.

On its face, the Appellate Division’s opinion appears a straight-forward application of long-established contract-interpretation principles, adhering to the age-old adage that a court will not make a better deal for a party than the party made for itself.  Nevertheless, there are lessons to be gleaned from the court’s analysis.

Sale Agreement

The matter involved a contract for the sale of industrial land in New Jersey.  Defendants (Sellers) acquired the land in the 1980s.  At the time of acquisition, the New Jersey Department of Environmental Protection (DEP) issued a No Further Action Letter (NFA) to the Sellers pursuant to the Industrial Site Recovery Act (ISRA).  Sellers then leased the property to National Refrigerants, Inc. (Tenant), in which one of the Sellers was the sole shareholder.  In October 2004, plaintiff (Buyer) and Sellers entered into a contract for the sale of the property.  The sale price was $475,000.  The contract provided for a closing on August 15, 2005 if all conditions to closing were met, otherwise the closing could be extended as far as February 15, 2006.

Section 18 of the contract provided several terms that were central to the dispute.

• Section 18(a) provided that the parties acknowledged that there was a pre-existing environmental condition at the property.

• Section 18(b) memorialized the parties’ acknowledgment that ISRA applied to the transaction and that Sellers had the obligation to “receive[] from the Industrial Site Evaluation Element [(ISEE)] or its successor . . . a Clearance Document by the Closing Date.” (alterations in original).  A Clearance Document was defined as “‘(i) a non-applicability letter; (ii) a de minimis quantity exemption; (iii) an unconditional approval of [Sellers’] negative declaration from the’ ISEE or its successor; ‘or (iv) some other document from the [NJ]DEP indication that no further action is required with respect to any environmental remediation of conditions on the Property.’”  (alterations in original).

• Section 18(c) provided a right for Buyer to terminate the contract in the event Sellers failed to obtain a Clearance Document by the closing date, except to the extent that Section 18(d) provided that so long as Sellers exercised good faith efforts to obtain such a document, no party could void the contract.

Trial Court Findings

From 2005 through 2010, the Tenant – not the Sellers – attempted to obtain a Clearance Document from DEP.  Tenant was obligated under its lease to perform and finance the remedial action.  In December 2012, Sellers notified Buyer of their intent to void the contract and return Buyer’s deposit, noting that neither party had defaulted.  Buyer responded that it wished to proceed under the contract.  Buyer thereafter filed suit for declaratory judgment that the contract had not been voided.

Subsequent to a bench trial, the trial court found that the contract had not been voided.  According to the trial court, the parties did not expect that obtaining a Clearance Document would require substantial cost or effort, and they viewed it as an administrative formality in light of the prior NFA.  Nevertheless, Sellers’ 2012 attempt to void the contract was not effective, as once the specified closing dates passed, good faith efforts on part of Sellers to obtain the Clearance Document tolled all parties’ ability to void the contract.  With the enactment of the Site Remediation Reform Act (SRRA), which in most cases replaced the DEP’s issuance of an NFA with a Response Action Outcome (RAO) issued by a Licensed Site Remediation Professional (LSRP), the court found the Sellers would not be able to fulfill the agreement, because an RAO is not a Clearance Document as that term was defined in the contract.

Importantly, the court thereafter effectively shifted the burden to the Buyer to obtain the Clearance Document or to void the contract of sale.  The court relied on Dixon Venture v. Joseph Dixon Crucible Co., 122 N.J. 228 (1991) and Feighner v. Sauter, 259 N.J. Super. 583 (1992), to determine that because the large expense of obtaining the Clearance Document was not contemplated by the parties disproportionate to the sale price, Buyer’s equitable ownership of the property subsequent to the execution of the contract permitted the court to place that cost burden on Buyer.  That said, because, according to the court, the enactment of SRRA made it impossible for Sellers to continue to exercise good faith efforts to obtain a Clearance Document, Buyer could elect instead to cancel the transaction.  The court conditioned the newly imposed cost burden on a commensurate adjustment in sale price if Buyer chose to close the sale instead of voiding the contract.

Appellate Division Holding

The Appellate Division reversed and remanded the matter.  Analyzing the language of the contract, the court found that Section 18(b) plainly contemplates SRRA, as it acknowledges the applicability of ISRA and any amending or successor legislation or regulations.  Moreover, the contract’s definition of Clearance Document, which includes “some other document from the [NJ]DEP indicating that no further action is required,” is broad enough to encompass an RAO.  The appellate court noted that an RAO serves a similar purpose to the NFA, even though an RAO is prepared by an LSRP and not DEP.  Thus, the court’s conclusion that Sellers could no longer work in good faith to secure a Clearance Document was in error.

Moreover, the contract did not contain any limitation on the costs of obtaining such a document.  The court noted that had the parties wished to impose any such limitation, they would have done so by express terms, as they had elsewhere in the contract.  Taking it a step further, the appellate panel noted that it would be “an abuse of the corporate form” to permit Sellers to elude its obligations under the contract because of cleanup costs incurred by its Tenant which costs were imposed by a separate contract, the lease.

Finally, the court distinguished Dixon and Feighner.  According to the panel, both of those cases involved contracts that did not contemplate the applicability of remediation statutes and regulations and, accordingly, did not contemplate the allocation of liabilities for remediation.  By contrast, the parties here clearly contemplated those liabilities.  The contract specifically acknowledged the environmental conditions present at the property and delineated responsibility for acquiring a Clearance Document to Sellers.  Under those circumstances, the contract reflected an understanding between the parties that Sellers assumed all of the economic risks of bringing the property within applicable remediation standards, and the contract, according to the Appellate Division, should be enforced as such.

Because the court found that the 2012 revocation was ineffective and that the Buyer was entitled to declaratory judgment stating as such, the court remanded the matter and ordered that Buyer be awarded attorney’s fees.

Takeaways

This case affirms the proposition that an RAO issued by an LSRP is contractually the equivalent to an NFA formerly issued by DEP. For attorneys whose practice involves the transfer of contaminated land or litigation involving contaminated land, this case illustrates that well-drafted contracts can protect both parties by including language expressly providing for subsequent changes in law, just as the contract in this case did.  Furthermore, parties can protect their intentions by allocating risks in their contracts by, for example, capping remediation obligations in terms of time (duration in years) and money (future remediation costs), which the parties in this case failed to do, which proved fatal to Sellers’ attempt to cancel the contract here. Indeed, the Appellate Division’s holding on that issue reaffirms the traditional notion that courts will not read terms into contracts in order to craft a better deal for parties than the parties crafted for themselves.  Finally, the case demonstrates the Court’s deference to the corporate form in not allowing the Sellers to elude their contract obligations where the cleanup was being performed by Tenant rather than the Sellers.