State Appellate Court Approves Use of Environmental Reservation Clauses that Leave Condemnees Potentially Liable for Future Cleanup Costs



October 31, 2002

The New Jersey Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 et seq., commonly known as the Spill Act, imposes strict, joint and several liability for cleanup costs upon parties that discharge hazardous substances or are in any way responsible for the hazardous substances. In addition to the dischargers themselves, and to current landowners, former landowners may be held liable under the Spill Act. But what happens when a landowner becomes a former landowner not because of a sale of the property, but because a public entity takes the property for a public purpose via its eminent domain powers? Does the condemnation judgment act as a procedural bar against future claims against the condemnee for cleanup costs, or can the public entity explicitly reserve the right to bring such claims if contamination is discovered and requires a cleanup? The Appellate Division of the New Jersey Superior Court recently had occasion to address this question for the first time.

In New Jersey Transit Corporation v. Cat in the Hat, LLC, Nos. A-0974-00T3, A-1656-00T3, A-5496-00T3 (App. Div. July 22, 2002), the court reviewed the use of so-called “environmental reservation clauses” in condemnation judgments. The case involved three separate condemnation actions, two brought by New Jersey Transit to acquire parking lots near the Trenton train station for a light rail line to Camden, and the other brought by the Department of Transportation to acquire land in Hudson County. Although the legal issues were the same for all three appeals, for procedural reasons the court considered only those facts relating to the Trenton sites.

Environmental assessments of both Trenton sites had revealed the presence of soil contamination. Instead of soil remediation, however, the contamination would likely require only the placement of a deed notice (to warn future owners of the contamination) and the maintenance of an impervious asphalt cap (to prevent human exposure to the contaminants). The estimated cost of these measures at each site, including the cost of testing and delineation, was $25,000. By comparison, New Jersey Transit later obtained orders allowing it to deposit into court $500,000 for one of the parcels and $985,000 for the other. It would withhold $25,000 from each landowner to cover the costs of addressing the known contamination.

In its complaints, as a way of guarding against the possibility that additional contamination would be discovered (or additional measures would be required to address the known contamination), New Jersey Transit sought a final order that included various standard “environmental reservation clauses,” which expressly reserved to the condemnor the right to recover any present or future costs of remediation. The defendants argued that the clauses improperly barred them from raising the preclusionary defenses of res judicata, collateral estoppel and the entire controversy doctrine in any subsequent proceeding to recover cleanup costs. The judge in the Trenton cases refused to incorporate the requested clauses into its final order, finding them “fundamentally unfair to the defendants.” On the other hand, the judge in the Hudson County proceeding held that the clauses were appropriate.

The Appellate Division affirmed in part and reversed in part, holding the use of environmental reservation clauses is consistent with the policies underlying the Spill Act and does not impose any special burden on condemnees. In addition to its scheme of strict, joint and several liability, the Spill Act provides very limited defenses to liability. “Innocent landowners” who acquired property on or after September 14, 1993, for example, can escape liability, but only if the property was acquired after any discharge took place and they can show that they did not know and had no reason to know that discharge had taken place, and that they did not discharge the hazardous substance and are not in any way responsible for it. N.J.S.A. 58:10-23.11g-d(1) and (2).

By contrast, public entities that acquire property enjoy broad immunity from Spill Act liability. Amendments enacted in 1993 and in 1997 (the latter as part of the Brownfields and Contaminated Site Remediation Act) confer immunity on public entities that acquire property by virtue of its function as a sovereign, including property acquired for redevelopment, except where the public entity itself is responsible for the contamination. N.J.S.A. 58:10-23.11g-d(4).

In light of these statutory policies, the court found the use of environmental reservation clauses entirely appropriate. Noting the State’s practice of appraising property as if any contamination has already been remediated, the court found that even with the environmental reservation clauses, the condemnees were no worse off than they would be if they had sold the property. Characterizing the defendants’ arguments as “a thinly veiled attempt to enhance their position over other owners of contaminated property solely due to the fact that their property was taken by a public entity,” the court held that the Legislature did not intend to confer immunity on a landowner solely because a public entity has taken its property by way of an eminent domain proceeding. On the contrary, the court held, the use of environmental reservation clauses enhances both the statute’s policy of imposing liability on those responsible for contamination, and its policy of immunity for public entities that acquire property.

According to the Appellate Division, then, condemnees enjoy no special protection from Spill Act liability related to their old property. Just like any other former landowner, then, they are well advised to consider the possibility of such liability when allocating resources to cover future environmental risks.