Commercial property owners and asset multi-family buildings usually retain property managers firms to handle the daily operations of properties ranging from leasing, record-keeping, routine maintenance and emergency repairs. We previously discussed on how the importance of property managers understanding environmental issues, particularly the nuances of the requirements heating oil tanks for multi-family buildings. A recent New Jersey case involving a leaking heating oil UST at a shopping center reinforces this point.
In Morristown Assocs. v. Grant Oil Co., 2013 N.J. Super. LEXIS 130 (App. Div. 8/23/13), a New Jersey appeals court held that an owner of a shopping center waited too long to bring claims against several heating oil companies and the prior owners of a dry cleaning business for remediation costs and for other damages caused by a leaking fuel line.
In this case, the plaintiff acquired the shopping center in 1979 where Plaza Cleaner was a tenant. Before plaintiff purchased the property, Plaza Cleaner had installed a heating oil underground storage tank (UST) to feed the steam boiler used in the dry cleaning process. The UST was located under a concrete slab floor. A number of heating oil companies delivered oil to Plaza Cleaners until 2003 when the tenant converted to natural gas in. The heating oil was pumped from a delivery vehicle through an external fill pipe protruded from an exterior wall. The fuel traveled through an internal feed line to the UST that was located under the basement. Sometime during this period, the fuel line developed holes which allowed the oil to seep into the soil and groundwater.
As is frequently the case, the plaintiff learned of the contamination when oil was observed in a groundwater monitoring well installed on an adjoining property owner in 2003 as part of a due diligence. The adjacent property owner contacted the plaintiff’s property manager to advise them that the investigation identified Plaza Cleaners as the source of the oil contamination.
When the UST and pipes associated with Plaza Cleaners were removed in 2004, the UST was found to be intact but the fuel line had holes as big as two inches in diameter. At the trial, plaintiff’s expert testified that the corrosion occurred because of improper design of air conditioning venting directly above the fill pipes, which caused rainwater and acidic water to accumulate around the pipes. Since 1988, it was estimated that between 9,400 and 14,670 gallons of heating oil leaked into the environment from the corroded fuel line
The plaintiff filed a lawsuit in July 2006 against the prior owner as well as the fuel oil companies under the Spill Act, the New Jersey Environmental Rights Act, and common law negligence. The plaintiff asserted that the oil companies failed to inspect the pipes and the UST to ensure they were not leaking. The defendant oil companies filed motions for summary judgment on several grounds, including that the plaintiff’s claims were barred by statute of limitations (SOL). Plaintiff opposed the motions, arguing that the Spill Act did not contain an SOL for private contribution actions.
The first issue the trial court had to resolve was if the Spill Act had a statute of limitations and if so, what was the applicable period. The court ruled that the six-year SOL applied to plaintiff’s claims.
Then the court turned to when the SOL commenced. Plaintiff sought to invoke the discovery rule which New Jersey courts have applied to avoid the harsh effects that might result from a mechanical application of SOL. Under the discovery rule, the “clock” for filing a claim may be tolled or not begin ticking until a party discovers or should have discovered by an exercise of reasonable diligence and intelligence that they may have a basis for an actionable claim. Based on the discovery rule, plaintiff argued the SOL began to run in 2003 when the property manager learned of possible contamination caused by the dry cleaner. However, the oil companies asserted that the plaintiff’s should have discovered potential contamination from the Plaza Cleaner UST in 1999 when the supermarket UST was removed and because of the staining on the exterior wall of the dry cleaner.
The plaintiff testified he was unaware of the UST at the dry cleaner and also first became aware of the contamination in August 2003 The plaintiff’s president testified that 1993 environmental audit performed in 1993 as part of refinancing a mortgage did not identify USTs and that he first learned of the UST at the dry cleaner in August 2003 when the property manager was informed of the sampling results from the adjacent monitoring well.
The plaintiff had retained two management companies to supervise the operation of the shopping center. The president of the management company that operated the shopping center from 1988 to 1995 and again beginning in 2002 testified that he never saw anything to indicate there was a UST or any environmental problems at Plaza Cleaners. He also said did not remember seeing the extensive staining on the alleyway wall beneath the fill line. He said that he first became aware of an environmental problem when he was informed about the advised by the adjacent The second management company that operated the property from 1999 to 2002 had hired a consultant to remediate a leaking UST at the supermarket tenant. The owner of that management company testified in deposition that he was aware of the UST tank at Plaza Cleaners and that he had discussed the 1999 tank removal from the shopping center with the plaintiff.
The trial court said the discovery rule was an equitable remedy that courts applied when a party through no fault of its own is unable to take reasonable actions promptly to bring appropriate litigation and that the circumstances in this case did justify such relief. The court found that the plaintiff should reasonably have discovered the contamination at Plaza Cleaners no later than 1999. Any lack of knowledge by the plaintiff or its property manager by that date, the court went on, suggested a lack of diligence in attending to the property. The trial court estimated that there had been hundreds of oil deliveries to Plaza Cleaners between 1979 and 2003 and that plaintiff should have become cognizant of them at some point. In so holding, the court said
“A landowner has a fundamental duty historically and settled in our law to make reasonable observations of the conditions on its property and to take reason-able care to insure that dangers do not exist on that property.. . . Anyone with any degree of reasonable knowledge must have known that there was an oil tank in the vicinity of Plaza Cleaners. There was an exterior fill pipe on the wall which was readily visible. There was a vent pipe in the same vicinity which was reasonably visible.”
On appeal, plaintiff argued the trial court erred because the Spill Act statutory defenses did not include contain a statute of limitations and prior caselaw had rejected application of general SOLs to Spill Act contribution actions.
In support, plaintiff cited to Pitney Bowes v. Baker Industries, Inc., 277 N.J. Super. 484 (App. Div. 1994) where the court rule that strict application of the New Jersey statute of repose would defeat the legislative intent of the Spill Act to impose strict liability on those responsible for contamination. A statute of repose sets an absolute time period for filing claims regardless of when a plaintiff discovered or should have discovered it has been damaged. In contrast, an SOL establishes the time period when a particular action may be brought. The appellate court in Morristown Associates said that unlike the statute of repose, an SOL is not “patently repugnant or inconsistent” with the purposes of the Spill Act. Because the Pitney decision involved the application of a statute of response and not an SOL, the appeals court declined to follow Pitney.
The plaintiffs also relied on the unpublished opinion in Mason v. Mobil Oil Corp., 1999 N.J. Super. Unpub. LEXIS 7(App.Div. 6/8/99) that did involve application of the SOL to a Spill Act contribution claim. In that case, there the plaintiffs purchased two adjacent lots there had been formerly used a gasoline station and a contiguous third lot. After demolishing the structures on their property, plaintiffs contracted to sell the property to Summit Bank. However, the bank walked away from the sale after its environmental consultant found significant levels of gasoline contamination. The plaintiffs had filed a lawsuit against their seller and ten fictitious defendants (“John Does”). The plaintiff later amended their complaint to substitute Mobil Oil for one of the John Doe defendants. Mobil sought to dismiss the amended complaint because it was filed more than six years after the filing of the original complaint. While the court felt that the plaintiffs had not been diligence since Mobil Oil’s involvement could readily have been determined by a title search during ensuing six years, the court ruled that the six-year SOL did not apply to a Spill Act claim.
The appeals court in the Morristown Associates case declined to follow Mason, finding more persuasive the reasoning followed by a New Jersey federal district court in Reichhold, Inc. v. United States Metals Refining Co., 655 F. Supp. 2d 400, 446-47 (D.N.J. 2009). In Reichhold, the district court ruled that the Spill Act did not contain an SOL for private contribution claims and said courts should use the SOL applicable to actions seeking similar relief under common law. The appellate court in Morristown Associates then ruled that the applicable statute of limitations for Spill Act contribution actions was the six-year limitations period for trespass or injury to real property.
Turning to the discovery rule, the court affirmed the lower court’s ruling that the plaintiff should have reasonably discovered the contamination by 1999. In so doing, the Appellate Court seemed to set a rather high bar for property owners seeking to invoke the discovery rule. The court held that that the discovery rule “does not depend on whether actual sampling results have been taken, but on whether enough indications of environmental contamination were present to put the plaintiff on reasonable notice to investigate further.”
The court went on to note that plaintiff was put on notice when the UST was removed from the supermarket that the 1993 environmental report was inaccurate. Therefore, the court said, the plaintiff should have exercised due diligence and supervision over its property to investigate if any other UST’s existed on its property. Having been put on notice of potential contamination at the property, plaintiff should have investigated whether the Plaza Cleaners’ system was functioning properly. Indeed, the court found that because the fill and vent pipes were clearly visible and there was evidence of staining on the external wall of Plaza Cleaners, the property manager should have made inquiry about the use of the fill pipes and their condition.
This ruling appears to impose an affirmative obligation on property managers and owners to periodically inspect each tenant space for evidence of spills or mismanagement of hazardous substances. Property management agreements often require the property managers to perform their duties using “due diligence” or “reasonable care”. The agreements also tend to contain “hold harmless” provisions where the owner agrees property manager will not liable for damages even those by third parties except where the property manager has engaged in willful misconduct or gross negligence. Some agreements require property managers to be responsible for compliance with laws but often these agreements contain a hold harmless clause for environmental conditions. As a result of the Morristown Associates decision, property owners and asset managers may want to review their property management agreements to determine if responsibilities for environmental compliance or environmental issues need to be revised.