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The Housing Authority of the City of New Brunswick v. Suydam Investors, L.L.C.

355 N.J. Super. 530, 810 A.2d 1137 (App. Div. 2002)

EMINENT DOMAIN— Where a condemning authority makes a price offer, but reserves the right to adjust it based upon possible environmental contamination, its offer constitutes a bona fide offer, rejection of which permits the condemning authority to file suit, and the condemning authority still has the option of filing a separate clean-up action.

The primary issue presented by this appeal was “whether a condemnor may consider the presence of environmental contamination in valuing the subject property or must [it] value the property as if it were uncontaminated and bring a separate action for costs of cleanup under applicable environmental statutes.” The action involved three parcels of land located in a municipality’s downtown area. The municipality’s housing authority sought to acquire the properties for a redevelopment project. Before filing an eminent domain action, it made an offer based upon its expert’s appraisal. The offer was “contingent on the satisfactory environmental status of the property, as the appraisal does not take into account any environmental problems that could affect value.” The property owner made a counterdemand nearly two and one-half times the authority’s offer. A condemnation action was filed with the Court and the property owner did not oppose the taking. In fact, it withdrew the amount that the authority had deposited with the court. Then, the authority sought to amend its complaint for the purpose of “alleging the presence of environmental contamination as a factor affecting the value of the property and reserving its right to recover environmental cleanup costs” from the property owner. The property owner opposed the motion on the ground that the authority had “unfairly withheld information concerning the alleged environmental contamination on its property.” The Court granted the authority relief to file an amended complaint and “also granted a six-month stay of the commissioner’s hearing to enable the Authority to ‘attempt to complete its environmental investigations and commence any action that it deemed necessary and appropriate to resolve all issues relating to environmental liability and for remediation costs associated with the development of the subject property.’”

On appeal, the Court agreed that the authority could file an amended complaint. It also agreed that the authority’s “valuation expert [could] take that alleged contamination into consideration when valuing the property even if the Authority file[d] a separate environmental action against [the property owner].” On the other hand, it reversed the part of the lower court’s order that required that any “commissioners’ award in excess of the sum the Authority deposited into the court [] be kept on deposit pending the conclusion of any environment[al] action the Authority may bring against [the property owner].”

One argument made by the property owner was that the authority violated its statutory obligation to engage in bona fide negotiations for a voluntary acquisition of the property when it failed to disclose the alleged contamination in its original complaint. It contended that the authority waived any right it may have had to assert that the property was contaminated “by not making this allegation until after entry of the judgment appointing condemnation commissioners.” Its arguments rested primarily on a statute “that imposes an obligation upon a condemnor to engage in bona fide negotiations for voluntary acquisition of a property before filing a complaint.” The statute provides that a condemning authority, in its pre-suit offer, must provide “a reasonable disclosure of the manner in which the amount of such offered compensation has been calculated, and such other matters as may be required by the rules.” A particular Court Rule requires, among other things, that a condemning authority disclose “any unusual factors known to the condemnor which may affect value.” If the condemnor fails to disclose the information required by the relevant statute and the Court Rule, “the condemnee is entitled to dismissal of the complaint.” Here, the property owner contended that the “alleged environmental contamination on its property constituted an ‘unusual factor[] known to the condemnor which may affect value’ within the intendment of [the Court Rule] and therefore the Authority’s failure to disclose that contamination in either pre-complaint negotiations or the complaint constituted a breach of the Authority’s duty to engage in good faith negotiations… .” The Court rejected that argument for two reasons. First, “the presence of possible environmental contamination was not one of the factors the authority’s appraiser considered in determining” the fair value of the property. In fact, the authority’s appraiser’s report explicitly stated that it had not considered the possible presence of toxic waste. Further, the report also assumed that the property was “free of negative impact” with respect to environmental conditions. Therefore, the authority’s obligation to make “a reasonable disclosure of the manner in which the amount of ... offered compensation [was] calculated, ..., did not include possible environmental contamination.” Second, “even if the Authority violated its ‘reasonable disclosure’ obligation, [the property owner’s] only remedy would be a dismissal of the complaint.” Here, the owner was not seeking such relief. Instead, it was seeking to bar the authority from introducing evidence that the value of its property was reduced by the presence of environmental contamination.

The Court refused to bar the authority from alleging that the value of the property was adversely affected by environmental contamination on the basis of a waiver or judicial estoppel. Even though the original complaint did not allege contamination, “the possible presence of contamination was disclosed during pre-complaint negotiations.” The authority had sent the property owner excerpts from its Phase I environmental assessment and asked for access to conduct a Phase II environmental assessment. Consequently, it was clear that the authority did not withhold evidence of possible contamination. Moreover, the Court believed that the property owner was aware of visible conditions that indicated the possible presence of a contamination.

The Court then reviewed the property owner’s argument that any environmental claim must be asserted in a separate action under the environmental statute and “thus a condemnor may not rely upon environmental contamination as the basis for reducing the award to a condemnee.” In assessing this argument, the Court looked to the definition of “fair market value,” which the New Jersey Supreme Court has described as “the value that would be assigned to the acquired property by knowledgeable parties freely negotiating for its sale under normal market conditions based on all surrounding circumstances at the time of the taking.” According to the Court, based upon its reading of prior case law, the possibility or actual presence of environmental contamination is one of the considerations that “would influence a willing buyer and a willing seller in coming to terms as to price… .” According to the Court, “[e]xcluding contamination evidence ... is likely to result in a fictional property value – a result that is inconsistent with the principles by which just compensation is calculated. It blinks at reality to say that a willing buyer would simply ignore the fact of contamination, and its attendant economic consequences… .” Consequently, the property’s fair market value was not dependent on whether the authority files a separate action against the property owner under environmental statutes.

Lastly, the Court held that there was no authority in the Eminent Domain Act “for an order requiring a condemnation award to be held on deposit in court based on the pendency of another claim against the condemnee. Such an order would be a form of prejudgment attachment, which is authorized only under the limited circumstances set forth in [New Jersey’s] attachment statute.”

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