et seq.

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While not technically required under ISRA, LNAs have come to bea familiar and much relied-on punch list item in most transactionsinvolving commercial and industrial real estate in New Jersey.Purchasers, landlords and lenders have come to rely heavily on themas a way of obtaining assurances, backed by the NJDEP's officialimprimatur and the certification of LNA applicants (made underpenalty of perjury), that a given purchase transaction or tenant'scessation of operations will not trigger ISRA's requirements.

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But with the NJDEP's recent announcement that as of May 1, 2008,it will no longer issue Letters of Non-Applicability ("LNAs") as itseeks to cut costs in the midst of a statewide budget crisis,parties to thousands of transactions across the state arescrambling to find acceptable substitutes for the heretoforeubiquitous LNA. The NJDEP announced it was taking the actionbecause LNAs are not required under ISRA for transactions that donot trigger the requirements of the statute, and the Departmentprefers instead to focus its scarce financial resources on programsthat involve mandatory compliance obligations.

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[IMGCAP(2)]Unfortunately, that will come as little consolationto parties seeking to confirm that their transaction will nottrigger the statute's requirements, which can be onerous. (ISRArequires parties who transfer ownership or cease operations --including vacating tenants -- at qualifying "industrialestablishments" to perform environmental investigations of realproperty associated with the establishment and, if necessary, toremediate them.)

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Without the availability of LNAs, parties to transactions thatpotentially may trigger ISRA will now have to rely on their ownenvironmental consultants and legal counsel to advise them as tothe applicability of ISRA to a given transaction. Consequently,greater vigilance will be required on the part of purchasers,landlords and lenders in performing environmental due diligence andin negotiating appropriate contractual protections, since these nowwill be the only avenues available to ensure that ISRA is fullycomplied with and/or does not apply.

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While the obligation to comply with ISRA rests with the seller,purchasers who do not take adequate steps to confirm that thestatute is not applicable potentially could find themselves eitherbecoming directly liable for environmental contamination pursuantto other statutes like the New Jersey Spill Compensation andControl Act or, as a practical matter, unable to sell the propertywithout performing remediation. Additionally, in leasetransactions, since the obligation to comply with ISRA restsjointly with tenants and landlords, ensuring proper compliance withISRA when triggered is an imperative for both owners of propertyand the ultimate end user.

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In most cases, it will not be sufficient to rely on a simplerepresentation by the seller or tenant that a purchase transactionor cessation of operations will not be subject to ISRA, as thepurchaser or landlord will have no way of satisfying itself thatthe seller or tenant performed the proper analysis to make thisdetermination. In the case of sales transactions involvingcommercial or industrial property, where the seller is often asingle-purpose limited liability company that existed only for thepurpose of holding the property, the breach of such arepresentation may be of little value to a purchaser if the entityceases to exist after the transaction is completed.

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It is also of little comfort that the seller may be subject toenforcement action by the NJDEP for failure to comply with ISRA,since the NJDEP's enforcement of the violation may fall prey tooverriding enforcement priorities. Likewise, a tenant's leaseobligation to comply with ISRA may be of little value if a landlordrelies on a tenant's simple representation that its cessation ofoperations will not trigger ISRA, if it is determined years downthe road that ISRA was in fact triggered. In such a case, if thetenant is no longer a viable entity, cannot afford to perform therequired investigation/remediation work, or is not susceptible toservice of process, the landlord could be the party left "holdingthe bag" for the ISRA obligation as a jointly and severally liableparty.

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Making a determination that ISRA does not apply to a giventransaction or cessation of operations can be a complicatedprocess, as it requires the person making the determination to siftthrough information about a property's history of operations inorder to determine whether they fall within ISRA's intricatedefinition of an "industrial establishment." So, what's a purchaseror lender to do?

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For one thing, purchasers of commercial or industrial realestate in New Jersey having any potential for contamination frompast operations should work closely with legal counsel andenvironmental consultants to conduct rigorous due diligence intothe history of operations conducted at properties being purchased.Lenders who take a mortgage interest in commercial or industrialproperties or in leaseholds involving such property, as well aslandlords intending to lease out commercial or industrial space,should do the same.

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Based on a careful review of the relevant circumstances, legalcounsel can then advise purchasers and lenders as to whether aparticular transaction will trigger ISRA. In addition, legalcounsel with an understanding of and experience with ISRA should beengaged to negotiate appropriate contractual protections withsellers', tenants' and borrowers' counsel, such as representationsand warranties, which will help smoke out information pertinent tothe ISRA applicability determination process. In this way,landlords, purchasers and lenders should be able to achieve anequivalent level of assurance of ISRA non-applicability as anLNA.

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The views expressed here are those of the authors and not ofReal Estate Media or its publications.

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Edward J. Hunter is a partner and Steven L.Humphreys is special counsel at the law firm of Kelley, Drye& Warren LLP in Parsippany, NJ. They can be reached at [email protected] and[email protected]respectively.

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