State Appeals Court Affirms Damage Award Against Bank for Sale of Contaminated Property

A New Jersey Appeals Court refused to disturb a $248,928 damage award against a bank involving a sale of contaminated property. The plaintiff had argued that the trial court had erred in calculating the damages flowing from the bank’s breach of contract.

In Ritschel v. Spencer Savings Bank,SLA, 2011 N.J. Super. Unpub. LEXIS 1257 (May 16, 2011), Spencer Savings Bank had acquired a 2.78 acre vacant lot in 1990 inFairfieldTownship. The parcel had been previously used by a general contractor and the bank had planned to construct a new corporate headquarters at the site. When the economy stalled, the bank decided not to develop the site. It is unclear what level of environmental due diligence the bank performed prior to acquiring the site.

In January 2001, the plaintiff signed a contract to buy the land for $1.22MM. The plaintiff intended to erect a 32,000 sf commercial building that was projected to cost $3.6 million. During its due diligence, the plaintiff learned several diesel had been removed in the mid-1980s but no documentation was available. As a result,  the plaintiff performed a phase 2 which revealed elevated levels of VOCs. The phase 2 estimated that 60-90 tons of soil would have to be excavated at a cost of approximately $33K.

The plaintiff advised the bank of the contamination who initially offered to give the plaintiff a $33k credit against the purchase price in exchange for an indemnity in favor of the bank. The plaintiff rejected this proposal and after a period of negotiation, the parties executed an amendment to the contract that was drafted by special environmental counsel retained by the bank. The amendment provided that the bank would undertake and complete the remediation of the Property at its sole cost and expense in accordance with a remedial action plan approved by the New Jersey Department at Environmental Protection (“NJDEP”) and would obtain an NFA Letter from NJDEP.  In exchange for the bank’s promise to assume responsibility for the remediation, plaintiff agreed to waive his right to terminate the Agreement.

While these negotiations were taking place, the plaintiff entered into three leases with prospective commercial tenants including a day care. While the leases were executed, they did not have a commencement date since it was unknown when the remediation would be completed, the site sold and construction completed.

Following the contract amendment, the bank retained an environmental consultant to implement the remediation.. During the pre-remedial sampling, the bank’s consultant discovered the extent of the soil contamination significantly exceeded the original estimate. The remediation cost was estimated to approach $600,000. The bank believed it was only obligated to implement the limited remediation to address the contamination originally identified by Plaintiff’s environmental consultant. However, Plaintiff believed that Defendant agreed to remediate the entire property no matter what the cost and rejected the offer to perform a limited remediation because of the proposed daycare lease.

After the plaintiff rejected the bank’s offer to complete the limited remediation, the bank’s counsel notified plaintiff it was terminating the agreement pursuant to the section of the agreement requiring the bank to deliver good and marketable title despite the fact that Plaintiff’s counsel had performed a title search and no objections.

Plaintiff filed its lawsuit, alleging the bank had breached the contract when it failed to complete the remediation.  After an eight day trial, the court ruled defendant had breached the contract and initially awarded plaintiff damages of $484,671, consisting of $98,000.00 in lost profits and $386,671.00 in out-of-pocket expenses for the cost of extra rent, architects’ fees, permit fees, site plans and attorneys fees.