Ten Year Battle Over Dry Cleaner Contamination Ends with Court Ordering Specific Performance

The saga over the aptly named Battle Ground Plaza shopping mall finally came to a resolution when a Washington state the appeals court upheld an order for specific performance but remanded the matter to the trial court to fine-tune the components of the remedy.

In Battle Ground Plaza, LLC v Douglas M. Ray et al, 2010 Wash. App. LEXIS 2190 (Ct.App. 9/27/10), the plaintiff agreed to purchase the Battle Ground Shopping Center from the defendant for $3.29 million in December 2000. Paragraph 21(n) of the purchase and sale agreement (PSA) which was drafted by the manager of Battle Ground Plaza LLC (BCP), granted BGP a 90-day due diligence period. The seller also warranted in paragraph 30(N) that property did not contain any "hazardous material or conditions."

After a phase 1 recommended additional investigation in the vicinity of a dry cleaner and the mini-mart gas station, BGP waived its due diligence contingency in exchange for a reduction in the purchase price to $3MM. The closing date was also extended provided the sellers were not in default or breach of the PSA.

In May 2001, BCP was notified by its lender that its loan application could not be accepted until a number of business issues were clarified and the receipt of the phase 2 investigation. In June 2001, the phase 2 requested by the bank revealed contamination at the dry cleaner and the mini-mart gas station. The bank notified BCP that it would reconsider the loan application when the business and environmental issues are resolved. After the closing was again extended, the seller implemented remedial measures and obtained a no further action letter from the Washington Department of Ecology (Ecology).

However, the contamination from the dry cleaner turned out to be more extensive than originally thought. Contaminated vapors were detected in two of the tenant spaces and the plume of contaminated groundwater appeared to have migrated at least 700 feet within proximity of the municipal drinking water wells. As a result, Ecology withdrew its NFA letter.

BGP filed suit for breach of contract, specific performance, and damages. The defendant argued that BGP waived the environmental warranty of paragraph 30(N) when it waived the due diligence contingency of paragraph 21(n) and tendered additional earnest money to extend closing to August 1 with knowledge of the environmental conditions. However, the trial court ruled that BCP had not waived the provisions of the environmental warranty. Since the defendant had been in breach of this warranty, the court ruled that BCP had not been obligated to close. The trial court then issued an order of specific performance whereby BGP would tender the purchase price less $510K in stigma damages and the defendant would be required to complete remediation of the property to the court's satisfaction. The order also provided that the closing would take place no later than 60 days after the court determined the remediation had been completed.

On appeal, the court agreed that the language of the addendum unambiguously indicates that the August 1, 2002 closing date was contingent on lack of default or breach. Because Sellers were in breach of the environmental warranty in paragraph 30(N), the agreement specifies no definite closing date and the court said a reasonable closing date could be implied. Moreover, the court found that the correspondence did not reveal an intent to waive the warranty, pointing to a February 26, 2001 waiver letter where BGP expressly stated it did not waive any other provisions of the PSA, including paragraph 30(N). The court also said that paragraph 19 of the PSA stated that Purchaser would accept the premises `as is' subject to the representations and warranties of the Seller as contained in Section 30" of the PSA.

Turning to paragraph 30(N), the court said by defining "hazardous material or conditions" as "any condition that requires remedial work of the property owner under either Federal or Washington law", the PSA contemplated remediation to the satisfaction of the relevant regulatory agencies.

However, the appeals court remanded the case to the trial court for a reconsideration of the remedy. The appeals court said requiring remediation to the satisfaction of the court and BGP instead of Ecology, effectively re-wrote the clause. Moreover, because only BGP could ask the court to certify that remediation was complete under the order, the appeals court said this created a mechanism to allow BGP to avoid its obligations since it would not have to tender funds and make no commitments. The appeals court suggested it was unfair to grant an award of specific performance where the party seeking the relief is not required perform after contract conditions are satisfied was unfair.

Finally, the appeals court found the trial court erred when it reduced the purchase price by $510K for stigma damages. The court noted that the valuation expert testified at trial that the rate of diminution in value decreases as remediation goes forward, and that cleaning up the property tends to eliminate any stigma. By awarding the full stigma value, the appeals court said the lower trial not only treated stigma as a permanent diminution in which was inconsistent with the evidence in record. By requiring that defendant remediate the property while also reducing the purchase price based on pre-cleanup stigma amounted to a double recovery for BGP, the appeals court concluded.