Got Tanks? Don’t let them “Tank” your deal: Tips to consider during Environmental Due Diligence
Over the past several years government regulations regarding remediation of contaminated properties has become increasingly problematic to the closing of Real Property Transactions. May 2019 marks the 10th Anniversary of the Site Remediation Reform Act (SRRA) and the Licensed Site Remediation Professionals (LSRP) program. Created to help the New Jersey Department of Environmental Protection (NJDEP) expedite the remediation process, the program has resulted in the submission of over 56,000 key documents and has successfully moved over 15,000 cases to closure since its inception. Of those 15,000, cases, a majority of them involved removal of regulated Underground Storage Tanks (USTs). Conducting thorough Environmental Due Diligence is critical to protecting your clients, but there has been some confusion as to the role of an LSRP in the due diligence process.This article highlights the importance of retaining a team of experts experienced with UST closures.
Why Should you conduct thorough Environmental Due Diligence?
There are many reasons to condut thorough Environmental Due Diligence, especially when there is a possibility of USTs on the property. The NJDEP data base contains thousands of UST listings. These are the KNOWN USTs. It is the USTs that are not listed in the data base, however, that can haunt a transaction long after closing or destroy the transaction altogether. USTS were historically used to store heating oil, in addition to other commercial and industrial uses. With this prevalence, the possibility of an UNKOWN UST being present on any real property must be eliminated, or at least narrowed prior to closing a property sale.
Recently, one of our clients with a light manufacturing property, involved in an Industrial Site Recovery Act (ISRA) case, discovered an unknown UST that was not found prior to the purchase of the property. This late stage discovery killed the entire deal. The business and property owner was planning to fund his retirement with the sale of this property and is now involved with over $100,000 of unexpected remediation costs due to this unknown tank.
Even during current gas station renovations, we continue to find orphaned or unknown tanks. These are gas stations that have changed hands several times over the past thirty years. Yet, we are finding tanks that are over 50 years old. Is due diligence being ignored, or being performed by those unfamiliar with USTs? Perhaps it is the fear of involving a UST certified contractor or an LSRP who may spoil a nascent transaction due to NJDEP reporting obligations. It is of course better to find the USTs at the beginning of a transaction, otherwise, your clients will be left with the responsibility to clean up those historic USTs with no recourse. We both recommend using electromagnetic / ground penetrating radar surveys to identify potential USTs and other subsurface structures as part of due diligence; this is now readily available technology and can be considered as the standard of care even if it is not a regulatory requirement.
Build a Strategic Team of Experts
In a recent Continuing Education program offered by the LSRP Association, environmental attorneys and LSRPs presented case studies and offered advice on how to ensure thorough Environmental Due Diligence to protect your clients. The class, offered twice a year by the LSRPA, includes a through discussion of the significant differences between a Phase I Environmental Site Assessment (Phase I) recognized by lenders, and the Preliminary Assessment required by NJDEP. While both provide protection to the prospective purchaser, e.g., the innocent landowner defense under the federal Comprehensive Environmental Response, Compensation, and Liability Act, and the innocent purchaser defense under the Spill Compensation and Control Act, respectively. One will not suffice for the other: NJDEP’s regulations will not recognize the submission of a Phase I to satisfy their regulatory requirements. Of the many differences between the two forms of due diligence, the most significant include the varying flavors of a Recognized Environmental Concern (REC) versus an Area of Concern (AOC) as defined by NJDEP as well as that there are no data gaps permitted in a Prelimianry Assessment.
A well-experienced team of attorneys, LSRPs, and engineers – among other specialists – is the key to any smooth transaction. It is critical to engage an experienced real estate and/or environmental attorney who is fluent with site remediation on your project. Second, hire an LSRP at the outset if you are a buyer. The seller already has to have one if the site requires environmental remediation.
The LSRP’s work during due diligence can be relied upon by the prospective purchaser following the closing on the property, eliminating the need to repeat work or undertake new work that was not budgeted. It is common for low cost due diligence to gloss over potentially contaminated areas of concern that an LSRP will need to address because the file review was not completed or because of a lack of understanding of the NJDEP’s process. This often results in an overly optimistic expectation by the buyer and/or the seller regarding the condition of the site and can result in contentious negotiations over the environmental costs. We have often heard “How can there be three Recognized Environmental Conditions but twenty-five Areas of Concern?”
It is important to understand that during due diligence for a prospective purchaser, an LSRP is not required to report discharges to NJDEP. A seller’s reluctance to the disclosure of the remedial needs concerning a property is understandable. Such revelations can adversely affect the real or perceived salability of the site or the possible sale price. Regardless, contracts can be prepared to acknowledge the LSRP’s role on behalf of the purchaser, i.e., that a suspected discharge does not need to be reported to NJDEP or even to the property owner, without exposing the seller to additional risk.
What steps can you take?
- Partner with Environmental Experts, i.e., counsel and an LSRP, who are familiar with USTs and the applicable statutes, regulations, and guidance.
- Conduct a thorough site inspection and make all appropriate inquiries (AAI) as required under both the federal and NJDEP requirements into previous ownership and uses of the property
- Conduct an Electromagnetic / Ground Penetrating Radar survey on entire property whenever USTs are suspected
While the environmental due diligence process may seem overly exhaustive, there are steps that can be taken to minimize risk . Hiring the right team of trusted advisors can mean the difference between deal or no deal, or a good deal or a very bad deal.
Hank Lutz, Esq., is president of Herbert Lutz & Company, HL Petroleum, and Lutz Environmental
Rodger Ferguson, LSRP, is the president of PennJersey Environmental Consulting, and past-president of New Jersey Licensed Site Remediation Professionals Association.