Environmental Issues in Property Transactions

On 20 February 2019, Howard Kennedy's Environment team hosted the second event in our Environmental Law Series. 

3/14/2019 12:00:00 AM

The discussion was chaired by our Head of Planning and Environment, Anita Kasseean, and our guest speaker was Anne Johnstone, Partner and Head of Environment, Energy & Sustainability Services at Malcolm Hollis. They explained key practical environmental issues that should be taken into account in all property transactions. Here is a brief summary of the discussion.

Environmental issues can arise:

  1. From historical activity on the site;
  2. Due to the present use of the site; or
  3. As a result of proposed development introducing a receptor or a new use that is more sensitive to contaminants than the site's existing industrial use, for example.

It is not just liability for contamination that you need to be aware of in property transactions, Environmental law is made up of many different regimes each with their own penalties. Other relevant liabilities include those relating to water, waste, habitats and wildlife, asbestos, flooding, air, planning and third party civil claims. There can be significant criminal as well as civil liability for breaches of Environmental law that can affect use and operations also.

Why is it important to identify environmental issues in a property transaction?

  1. They can affect the value of the property and the ability to sell on or lease.
  2. Remediation can be costly and quotes may not even cover the cost of the whole exercise.
  3. It can be difficult to source insurance that covers all of the risks, there are often very high premiums and policies usually include extensive exclusions that may not be fit for purpose.
  4. Future buyers may be more sensitive to environmental risk than you.
  5. Funders are often particularly sensitive to environmental risks because of their corporate social responsibility statements.
  6. Environmental issues carry a reputational risk and the energy efficiency of buildings as well as the health and wellbeing of occupiers are increasingly high on institutional investors' agendas.
  7. Don't just focus on contaminated land – environmental legal liabilities involve other regimes such as waste, asbestos and water.

What is the best way to protect against environmental risks?

  1. Engage environmental consultants and legal advisers early on in transactions.
  2. Carry out the appropriate level of environmental due diligence:
    1. Desktop searches focus mainly on contaminated land and it is easy to assume that just because they say "Passed" there are no other problems. This is not the case and it is important to seek specialist legal advice on such reports and other liabilities.
    2. Phase I Environmental Assessments set out the environmental consultant's opinion regarding the level of contamination risk associated with a particular site, involve a site visit and identify other potential environmental liabilities that may need further investigation.
    3. Phase II Environmental Assessments involve gathering samples, getting a laboratory to process the data and some form of site monitoring.

Advice should be sought from specialist lawyers and consultants as to the appropriate level of due diligence because this will depend on many factors such as the location of the site, the nature of the pollutant, the value of the transaction and how much time you have to carry out investigations.

What can parties do to deal with environmental issues?

Just because environmental issues are discovered, this does not mean that a transaction is dead. The following practical solutions can be considered:

  1. Reaching an agreement on liabilities. For example, tenants will want to ensure that they are not liable for pre-existing environmental issues and landlords will want to make sure that tenants are not discharged from liability for what the tenant has caused or for third party civil claims after the lease has expired.
  2. Obtaining insurance quotes.
  3. Using indemnities to protect yourself if you are buying a site that carries environmental risk.
  4. Negotiating a price chip, which is common on time sensitive transactions where relatively little is known about the environmental risks.
  5. Carving out the land so that you only purchase or take a tenancy of the uncontaminated part of the land.
  6. Delaying completion until further Phase I/Phase II investigation is carried out and making completion conditional on this.
  7. If you are a business, seek specialist advice on obtaining corporation tax relief for up to 150% of the cost of remediation works.

Summary

Key practical ways that you can prevent environmental issues from holding up your transactions:

  1. Engage specialist consultants and lawyers at an early stage;
  2. Carry out the appropriate level of due diligence and ask for specialist advice on this;
  3. Identify all potential environmental issues (beyond just contamination) as early as you can;
  4. Negotiate adequate protection in your agreements and leases;
  5. Consider appropriate insurance; and
  6. Remember to claim tax relief if you are a business paying corporation tax.

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