NJDEP Approves The Use Of Risk Transfer Tools To Facilitate Brownfield Transactions
New Jersey Lawyer Magazine
Dennis M. Toft is a member of Wolff & Samson PC, in West Orange, and is chair of the firm's environmental practice group. He also chairs the New Jersey Brownfields Taskforce. Todd W. Terhune is an associate with Wolff & Samson PC, and practices in the environmental practice group.
Since the passage of the Brownfield and Contaminated Site Remediation Act, 1 New Jersey has been the focus of an active brownfield market. The liability protection and financial tools created by the act have facilitated a number of significant transactions leading to the remediation and redevelopment of sites that otherwise may have continued to lay fallow.
However, as a number of commentators have noted, the deals to date generally have involved the less complex brownfield sites, where the cleanup and other issues were manageable. Many sites currently on the market have owners who are unwilling or unable to sell because of concerns about environmental risk and other liability exposures. The private sector has responded to these challenges through the creation of risk transfer mechanisms that provide for a shifting of risks to a new owner, or to an entity willing to remediate the site and absolve the seller of the environmental liability. Recently, the New Jersey Department of Environmental Protection (NJDEP) has recognized the value of risk transfer deals, and has exercised flexibility in its usual practices to enable a number of such deals to proceed.
This article will describe the basic elements of a risk transfer transaction. It will describe some of the recent transactions involving NJDEP, and explain how NJDEP's support has facilitated these deals. Lastly, it will identify some of the issues remaining to be addressed to encourage additional parties to bring brownfield properties to market.
Elements of a Risk Transfer Transaction
Owners of contaminated properties are at times reluctant to offer them for sale and redevelopment. The reasons for such reluctance vary from owner to owner, but the National Brownfields Association has identified a number of them in a recent white paper titled "Bringing Corporate Brownfield Properties to Market." 2 Among the reasons given for property owners keeping properties off the market were:
Actual and perceived regulatory certainty and finality regarding end points for environmental cleanup
Risk of exposure to third-party lawsuits and toxic tort actions
Discomfort with current liability release mechanisms and reopeners or comeback sites
Fear on the part of the owner that pre-sale due diligence will create potential regulatory action
Risk transfer deals are designed to address these types of concerns through a number of mechanisms.
As a starting point, a risk transfer deal requires a party that owns or is responsible for the cleanup of a contaminated property, and a party that is willing and able to assume the risk associated with cleaning up the site. Not every risk transfer transaction necessarily involves the sale of the contaminated site. Rather, the key to the transaction is a party that is willing to take over the remediation and related risks from the responsible party. This could be a purchaser or a remediation company. The party proposing to take over the remediation risk must address the concerns of the owner or responsible party as outlined above.
A number of tools are used to ensure that the concerns of the owner are met. First, the contract between the risk transferor and risk transferee must spell out in detail the risks being transferred. 3 Typically, this will include an express requirement that the transferee perform a remediation and obtain a no further action letter from NJDEP. 4 To the extent the remediation will involve use of engineering controls (such as a cap over contamination) or institutional controls (in the form of a deed notice) the contract should provide that the transferee is obligated to maintain them in perpetuity. The contract may allocate all of the environmental risk or only parts of it. Depending upon the transaction, contractual language may be included in a purchase and sale agreement, or in a separate liability transfer agreement.
As noted above, one of the sticking points in having brown field sites brought to market is the fear that due diligence activities will create reporting or other obligations on the part of the current property owner. In order to obtain innocent purchaser status under both federal and state laws, a purchaser must conduct diligent inquiry into the history of a property and the nature of any contamination on it, and agree to remediate the site under regulatory oversight. 5 In addition, transferors of the risk must make sure that the transfer will survive detailed scrutiny by making sure that the transferee has performed adequate due diligence to determine the risk.
Parties that are fearful of due diligence results cannot successfully enter into a risk transfer transaction. However, parties have dealt with the risk of discovering unknown conditions through a variety of contractual provisions, including no tell language, where the results of the due diligence are not disclosed to the transferor. Whether a prospective transferee or other entity that is conducting due diligence has an independent obligation *52 to report contamination is the subject of a separate article.
The contractual risk allocation process may also deal with the risk that there will be a claim for natural resource damages in connection with contamination at a particular site. Under a recent amendment to New Jersey law, a transferee of contaminated property does not become liable for natural resource damages unless the contract of sale expressly includes the term "natural resource damages" in the liability transfer provisions. 6 Parties working on risk transfer transactions must be clear on the allocation of this risk.
Another common contractual provision in a risk transfer transaction involving the sale of property is a requirement that the liability releases and environmental indemnity run with the land. Frequently, sellers of contaminated property will require such language in a deed or other title instrument. This is done to obtain some greater degree of finality by documenting the risk transfer in the public record. However, parties to these transactions need to be careful about how such documents are used. In many cases sites will become subject to an NJDEP form of deed notice at some point in the remediation process. 7 NJDEP does not usually permit the recording of a NJDEP form deed notice without its prior approval. Deed language that could ultimately conflict with a deed notice should be avoided.
Once the contractual language is agreed to, and the due diligence provided for, the next key element in the deal is the security for performance by the transferee. Usually this is done through use of a combination of cash or credit instruments and appropriate environmental insurance policies. Many liability transferors have come to expect that an environmental insurance policy will be included in a risk transfer transaction. There are different forms of environmental insurance policies that can be used to facilitate a transaction, including cost cap or stop loss insurance, pollution legal liability insurance and finite risk coverage. Parties to a risk transfer transaction need to understand the elements of these different types of policies.
Cost cap insurance is designed to protect the insured from cost overruns associated with the remediation of known pollution conditions. Pollution legal liability policies are intended to protect the insured from remediation expenses arising from unknown conditions, and from claims by third parties. Finite risk policies are all-encompassing policies, which allow a party to fund a remediation through a flat payment to the carrier that covers the anticipated cost of the cleanup as well as the premiums for both cost cap and pollution legal liability coverage.
The insurance policies are typically negotiated to fit the specifics of the particular risk transfer transaction. It is important to understand the policy provisions in detail. The language of the policy and the type of coverage can vary greatly. Moreover, if environmental insurance is to be a part of a risk transfer transaction, the insurance broker and carrier should be involved early in the negotiation process to make sure both the contractual language and the scope of the due diligence will be acceptable to the insurance carriers and lenders.
Although one would think that strong contractual commitments, coupled with insurance protection, would be enough to satisfy most sellers of property, this is not always the case. In order to obtain a greater degree of finality, and mitigate regulatory risk, liability transferors have asked for assurances from NJDEP that they will be protected in the future, prior to completion of remediation, from claims by NJDEP that would obviate the very purpose of the risk transfer agreement. Until recently, NJDEP had not been willing to provide such assurances. However, in a number of recent transactions, NJDEP has acknowledged that risk transfer agreements do provide a valuable tool to encourage remediation and brownfield redevelopment.
Some Recent Transactions
On April 21, 2005, NJDEP announced its approval of an agreement among Hatco Corporation, W.R. Grace & Co, Weston Solutions, Inc. and ACE USA to provide for the remediation of a 34-acre site in Woodbridge. Under the terms of this agreement, Weston and ACE assumed the obligations to remediate the site. Weston also assumed the obligation to maintain any engineering controls related to the remediation in perpetuity. The remediation is being accomplished under a finite risk-type insurance policy issued by ACE. The cost of the cleanup is being funded up front by Grace, former owner of the site, and Hatco, the current owner.
To accomplish this transaction, the parties entered into a number of agreements. The most significant of these are an administrative consent order signed by Weston, and for a limited purpose ACE; and a settlement agreement among NJDEP, Grace, Hatco and Weston. Pursuant to these agreements, NJDEP has acknowledged that Weston is the transferee of the remediation risk and has agreed that future liability for the remediation lies with Weston. The agreements effectively protect Grace and Hatco from this risk.
By being part of this transaction, NJDEP has implicitly recognized the value of risk transfer mechanisms in furthering site remediation. In this instance, part of the NJDEP's willingness to enter into the transaction was driven by the fact that Grace was operating under the protection of the bankruptcy court. Moreover, NJDEP used the transaction as the impetus to settle natural resource damages liability at the site. However, even with these specific issues in this transaction, NJDEP for the fIrst time was willing to alter its standard form of administrative consent order (ACO) to facilitate the transaction. 8
More recently, NJDEP has allowed the parties to a brownfield transaction to use a similar approach. On August 26, 2005, NJDEP signed a new ACO for the former Hercules Incorporated facility in Burlington Township. The parties to the transaction were Burlington Neck, LLC (an affiliate of Viridian Partners) and Hercules. Notably, the ACO specifically recognized that Burlington Neck and Hercules had entered into a risk transfer agreement for the site pursuant to which Burlington Neck assumed liability for the remediation of the property. It further terminated Hercules' existing ACO at the site, acknowledging that "Burlington Neck will be responsible for remediation of the Site."
As with the Hatco site ACO, the Hercules ACO also dealt with natural resource damages. The document reflected that Hercules was separately settling its liability for natural resource damages associated with groundwater contamination, and that Burlington Neck would be addressing other elements of natural resource damages at the site.
Also, the parties to the Hercules transaction provided for environmental insurance as part of the deal. The insurance in the Hercules transaction involved stop loss and pollution liability coverage, not the finite risk-type approach used in the Hatco matter. The use of the insurance, however, clearly helped NJDEP obtain a comfort level about the transaction.
Both of these recent deals demonstrate NJDEP's willingness and support for the use of risk transfer mechanisms to facilitate swifter cleanups and brownfield redevelopment. In addition to these two transactions, there is at least one other transaction pending that is awaiting bankruptcy court approval before it will be final. These type of transactions presently require discussion with NJDEP about the specifics of the matter; not every risk transfer deal may be acceptable to the agency. Parties to future potential deals must be sensitive to the issues that will be of concern to NJDEP, particularly the adequacy of the risk transfer package and the resolution of natural resource damages liability.
Although the above-referenced deals show that a number of the issues of concern to owners of potentially contaminated sites can be met, further challenges remain. Additional means to provide for the long-term care of remediated sites may require new legislation or additional regulatory means to engender liability transfer. In addition, parties to these deals and insurance companies will need to become more creative to address potential environmental risks after the insurance policies expire. Future developments in these areas are likely as the brownfield market matures and available land becomes more scarce.
1. NJ.S.A. 58: 1O8-1.1 et seq.
2. Bringing Corporate Brownfield Properties to Market, National Brownfields Association, December, 2004.
3. Environmental case law makes it clear that transfer of remediation risk must be clearly stated. "As is" clauses, or similar terms do not transfer environmental liability. See, e.g. New West Urban Renewal v. Westinghouse Electric Corp., 909 F. Supp. 219 (D.NJ. 1995).
4. NJDEP will issue a no further action letter and covenant not to sue once a remediation is complete in accordance with the Technical Requirements For Site Remediation. N.J.A.C. 7:26E-l.l et seq.
5. See, e.g. N.J.S.A. 58: 1O-23.11g.
6. Natural resource damages arise from a loss to a natural resource through contamination at a particular site. Under New Jersey law, these include impacts to groundwater that is considered a natural resource of the state. Allocation for these damages was addressed by the Legislature recently in P.L. 2005 C. 4, approved 1/19/2005.
7. See N.J.A.C. 7:26E, Appendix E.
8. See N.J.A.C. 7:26C-5.2.
This article was previously published in New Jersey Lawyer Magazine, a publication of the New Jersey State Bar Association, and is reprinted here with permission.