Down to earth

Environmental issues can affect real estate transactions in many ways. It is therefore useful for property lawyers to understand the current environmental law regime, as this provides a framework for identifying and mitigating the risks associated with key environmental issues in commercial real estate transactions.

Why is it important to consider environmental issues?

Latent contamination may lay dormant for many years, and only arise as part of environmental investigations associated with proposed development works. The cost of remediating contamination or other environmental issues can be significant (and prohibitive in terms of a commercial deal) and, in certain instances, liability may transfer from the original polluter to the current occupier / owner, irrespective of fault (on the basis of strict liability). Failure to comply with the relevant statutory provisions can lead to both civil and criminal sanctions, including unlimited fines, and even, in extreme circumstances, imprisonment. The reputational risk to a business can often be costly and long lasting, and can also lead to director disqualification.

It is therefore imperative for property lawyers to ascertain the previous  and current uses of the property, the nature of the intended operations, and the proposed use of the property, in order to advise on the possible environmental risks and liabilities.

In the rest of this article, we highlight some of the key environmental laws affecting real estate transactions, together with suggestions of how risks can be mitigated.

Contaminated land

Contaminated land issues can be complex and costly, and require significant time to resolve.

Part 2A of the Environmental Protection Act 1990 (EPA 1990) sets out the legal framework for dealing with contaminated land and is supported by the Department for Environment, Food & Rural Affairs’ (Defra) contaminated land statutory guidance, dated April 2012. Together, these form the contaminated land regime. The Law Society has also published a practice note on contaminated land.

When part 2A applies

Under part 2A, contaminated land includes any land where, because of substances in, on or under the land, (a) significant harm is being caused or there is a significant possibility of such harm being caused, or (b) significant pollution of controlled waters is being caused or there is a significant possibility of such pollution being caused.

For land to be considered contaminated, a significant pollution linkage must be identified, consisting of a source, pathway and receptor. (These are not mutually exclusive – for example, groundwater can be both a pathway and a receptor.)

Regulators’ powers

In the first instance, the relevant local authority is the regulator and is responsible for identifying contaminated land. This is based on the presumption that local authorities have knowledge of the sites in their area.

However, where significant contamination is identified (these are classified as “special sites”), the Environment Agency (EA) will assume this responsibility from the local authority.

Where contaminated land exists, the regulator may issue a remediation notice requiring the contaminated land to be remedied. A regulator may decide not to issue a remediation notice where remediation is being carried out voluntarily to the satisfaction of the regulator, or where the terms of a draft remediation notice can be agreed between the regulator and the relevant person on a voluntary basis. According to the statutory guidance, the regulator should only require remediation that is reasonable and takes into account the cost and seriousness of the contamination. Even so, remediation can involve significant costs and can take a long time.

Who is liable for contaminated land?

Generally, the persons who cause the land to be contaminated will be liable to remediate the contamination. This is the “polluter pays” principle. The statutory guidance identifies the process the regulator must follow when determining who is liable for contaminated land, and this can be a complex process.

The contaminated land regime identifies two classes of persons that may be liable for contaminated land: class A and class B.

Class A persons are those who have “caused” or “knowingly permitted” the contamination. A person is considered to have “caused” or “knowingly permitted” contamination where they have knowledge of the contamination and are in a position to prevent or reasonably remove the contamination (with a reasonable opportunity to do so). Class A persons may therefore include owners, occupiers, landlords, tenants and potential purchasers.

Where no class A persons can be found, liability will transfer to class B persons, irrespective of fault. Class B persons are the owners or occupiers of the land, and may include a mortgagee in possession, tenant or landlord.

Exclusions

The contaminated land regime provides a complex framework for establishing and apportioning liability in relation to contaminated land. Statutory and non-statutory exclusions may be relevant, and should be considered in further detail. For the purposes of determining liability in a commercial sale of property, it is useful to note the exclusions. These relate to “payments for remediation” and “sold with information”.

“Payments for remediation” may apply where payments for the cost of remediation are provided for under the contract at completion. Such payments must comply with the conditions set out under the statutory guidance, in order to qualify as exclusions.

Under the “sold with information” exclusion, a seller may transfer liability for contaminated land to a buyer where the following conditions (as set out under the statutory guidance) are met:

• the seller and buyer are in the same liability group (either A to A, or B to B)
• the sale is at arm’s length
• prior to the sale becoming binding, the buyer had information that would reasonably allow them to become aware of the contaminants and the seller did not misrepresent the presence of the contaminants
• the seller did not retain any interest or rights in the property following the sale.

Where this exclusion applies, the parties should adopt contract wording to reflect the requirements under the statutory guidance.

Where class A persons expressly agree on the allocation of liability between them (either in the sale contract or in a lease longer than 21 years), the regulator should give effect to such agreement in accordance with the contaminated land regime requirements.

Offences

It is a criminal offence not to comply with a remediation notice issued by a regulator.

Practical tips for property lawyers

Given the risks associated with contaminated land, appropriate steps should be taken to ensure a buyer’s risk is minimised as much as possible and that a seller can limit their liability as at completion.

If you are acting for the buyer, raise enquiries with the seller to determine the extent of any historic or pre-existing contamination of the property, and existing and current uses of the property. Also consider whether to seek disclosure of any investigations or audits that may have been undertaken in respect of the property recently – say, in the three to five years preceding the transaction.

Local authorities are required to keep public registers of land identified as contaminated under part 2A. However, such registers may be incomplete because not all contaminated land in the area may be known, and contaminated land is only registered where a remediation notice has been issued. Commissioning an independent environmental report is therefore prudent to assist in determining the likelihood and extent of contamination.

There are three types of environmental reports:

• desktop survey – a cost-effective report based on information from public registers and maps, which generally does not involve a site inspection, but which should include information regarding the site history and previous activities conducted on the property and surrounding areas
• phase I report – includes the information provided in a desktop survey, but also involves a site inspection, and interviews may also be conducted with current and existing owners, occupiers or operators, and enquiries made of relevant regulators
• phase II report – involves intrusive site investigations and testing, and is usually undertaken where a phase I report reveals potentially contaminated land.

In terms of drafting, where historic contamination is identified, it may be useful to distinguish between liability for pre-existing contaminated land and contaminated land arising post-completion. A line needs to be drawn in the sand at completion, identifying the environmental condition of the property at that date.

It is up to the parties to determine how to apportion liability between themselves as at the date of the sale.

We do not have space here to discuss remediation of contaminated land where associated with change of use or redevelopment of land. This would generally be dealt with under the planning regime, and any necessary remediation scheme implemented through appropriate planning conditions.

Groundwater

Contaminated groundwater is also a likely pathway and/or receptor in a pollution linkage, and can be difficult to remediate. In addition to the contaminated land regime and the environmental permitting regime (as set out below), remediation of groundwater can also be dealt with under the Water Resources Act 1991. Under the act, the regulator, the EA, can issue a notice requiring works be carried out to remedy harm caused to groundwater. It is a criminal offence under the act not to comply with a notice issued by the EA.

Environmental permitting

Certain processes which involve emissions to air, land and water may require an environmental permit.

The environmental permitting regime is established under the Environmental Permitting (England and Wales) Regulations 2016 (EPR 2016) and is supported by Defra’s Environmental Permitting Guidance. Together, these form the environmental permitting regime.

Where contamination arises through an activity or operation regulated under the environmental permitting regime, enforcement action will be taken under the EPR 2016, not the contaminated land regime.

When is an environmental permit required?

An environmental permit is required to operate certain types of facilities (referred to as a “regulated facility”), or where a person intends to “cause” or “knowingly permit” a waste discharge or groundwater activity. The types of activities considered to be regulated activities include (but are not limited to) operations and activities dealing with waste, water discharge, groundwater and flood, and industrial installations and plants (regulation 8 of the EPR 2016). Some regulated facilities may not require an environmental permit where they are considered to be low risk (these being “exempt facilities”). However, exemptions are generally required to be registered with the EA.

An operator is the person who has (or will have) control over the operation of the regulated facility, and must demonstrate they have the necessary technical competence, as well as holding an environmental permit.

Regulator’s powers

The EA is the regulator under the environmental permitting regime. The EA can issue either a standard environmental permit or a bespoke environmental permit. Standard permits are generally issued where the proposed activity is considered to be low risk. Bespoke permits generally relate to higher-risk activities and therefore require site-specific assessments and conditions.

Offences

It is an offence to operate a regulated facility without an environmental permit, to not comply with permit conditions, or to “cause” or “knowingly permit” a water discharge activity or groundwater activity without an environmental permit (regulation 38 of the EPR 2016). It is also an offence not to comply with a notice issued by the EA. The EA has the power to issue a notice requiring a breach of the EPR 2016 to be rectified, to suspend or revoke an environmental permit, or to prosecute a person for failing to comply with relevant provisions of the EPR 2016.

In addition, the EA has the power to remove serious pollution or carry out remediation on a site, and recover the cost from an operator. It is important to note that liability under an environmental permit relates to the operations and activities carried out on the property, rather than the property itself.

Practical tips for property lawyers

If you are acting for a buyer, raise enquiries with the seller to confirm that environmental permits or exemptions (where required) are current and have been complied with, and whether any action has been taken by the EA in respect of the property. Environmental permits will need to be transferred from the existing operator to the new operator, and this should be provided for in the contract. Generally, a joint application should be made to the EA and, as part of this process, the EA must be satisfied that the new operator is competent to operate the facility.

The contract should also include appropriate warranties to confirm the seller’s compliance with the environmental permitting regime. Transfers of environmental permits may take several months, so this needs to be factored into the transaction timetable.

The buyer should review environmental permits to identify any onerous conditions such as ongoing testing, payment of fees or requirements regarding the transfer of the environmental permit, or any significant capital expenditure necessary to ensure compliance.

Asbestos

There are various occupational health issues, such as asbestos, legionella, radon gas and sick building syndrome, that may affect premises and negatively impact a sale. We will examine the issue of asbestos in more detail, as it has a bespoke regulatory framework and occurs commonly on redevelopment or regeneration sites.

Asbestos was widely used in building materials throughout England until the late 1990s. Although it is no longer used, it may remain in existing building materials, thereby posing a health risk to individuals who come into contact with it. However, it should be noted that health risks only arise where asbestos fibres become “friable” – that is, are released into the air. Where asbestos is safely concealed, for example in insulating tiles, it does not present a risk unless disturbed. The greatest risk of exposure occurs during development / demolition works.

Asbestos is regulated under the Control of Asbestos Regulations 2012 (CAR 2012), which are supported by the Health and Safety Executive’s (HSE) Approved Code of Practice and guidance. The CAR 2012 are made under the Health and Safety at Work etc Act 1974.

Asbestos is mainly regulated by the HSE.

Dutyholders

The obligation to comply with the requirements of the CAR 2012 is imposed on the dutyholder, which is defined broadly (under regulation 4) to include:

1. “every person who has, by virtue of a contract or tenancy, an obligation of any extent in relation to the maintenance or repair of non-domestic premises or any means of access or egress to or from those premises; or
2. “in relation to any part of non-domestic premises where there is no such contract or tenancy, every person who has, to any extent, control of that part of those non-domestic premises or any means of access or egress to or from those premises… ”.

Dutyholders will therefore include owners, occupiers, tenants and buyers of non-domestic property (including vacant property), and the obligations can be shared between more than one dutyholder.

Prior to commencing any work, dutyholders must carry out a suitable and sufficient assessment of the premises, to determine whether asbestos is (or is likely to be) present in the premises (regulation 4 of the CAR 2012). Assessments must be undertaken by competent persons and be specific for the type of premises. The assessment will involve inspecting the premises and ensuring that reasonable steps in the circumstances have been taken.

Where an assessment determines that asbestos exists, or is likely to exist, in the premises, the dutyholder must prepare and comply with a plan which identifies those parts of the premises containing asbestos, and the appropriate actions that must be taken.

Offences

Failure to comply with the requirements under the CAR 2012 can result in civil fines or criminal sanctions by the regulator. Importantly, enforcement action is routinely taken by the HSE and can result in significant penalties. Further, civil action – such as for personal injury and/or in nuisance – may also be taken by individuals affected by exposure to asbestos.

However, asbestos-related diseases may not develop for some time – up to 40-50 years – after exposure to asbestos, and there will therefore be a delay in any civil claim made. These are usually dealt with under employers or public liability insurance policies, and have long limitation periods.

Practical tips for property lawyers

If you are acting for the buyer, make enquiries of the seller during the due diligence stage, in order to properly assess the risk of asbestos. Ask whether the seller is aware of any asbestos being present at the premises and whether any risk assessments have been undertaken. Enquiries should also be raised to determine whether appropriate asbestos registers are maintained, and, if asbestos is present or assumed to be present, if appropriate precautions are in place to allow it to be managed safely.

It is also prudent to include warranties in the contract confirming the seller’s compliance with their asbestos obligations and any action taken by the HSE.

Flooding

Flooding can present a significant risk to a property in terms of structural damage, reduction in value and the ability to obtain appropriate insurance. The risk of flooding is only expected to increase due to climate change, through rising sea levels and increases in extreme weather events. Development on flood plains can also pose significant risks.

Practical tips for property lawyers

If you are acting for the buyer, advise them to obtain a flood risk assessment during the due diligence process. A flood risk assessment will generally be included in a desktop survey, and will reveal the overall flood risk from rivers, coastal, groundwater and other sources. Further specialist technical advice should be sought if risks are identified.

Energy performance

An energy performance certificate (EPC) is prepared by an assessor and details the energy performance of a building.

The Energy Performance of Buildings (England and Wales) Regulations 2012 (EPBR 2012) impose requirements on sellers or landlords to obtain an EPC in relation to a building which is to be sold. An EPC should be obtained prior to placing any property on the market, and must be made available free of charge to prospective buyers.

A seller or landlord is not required to make an EPC available:

• where they believe, on reasonable grounds, that the buyer is not genuinely interested in the property or does not have the necessary funds to purchase (regulation 6 of the EPBR 2012), or
• for particular types of buildings, such as industrial sites with low energy demand, protected buildings, and temporary buildings (regulation 5 of the EPBR 2012).

Where a seller or landlord is required to provide an EPC in relation to a non-domestic, privately let building and the EPC rating is considered sub-standard (that is, lower than E), an owner is required to improve the energy rating of the building. This obligation is subject to a number of exceptions as set out under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (EER 2015) and the EPBR 2012. There are certain exceptions to this requirement – for example, the provisions do not apply in relation to a tenancy granted for less than six months (subject to certain further requirements) or more than 99 years.

A seller or landlord cannot grant a new tenancy (including as a result of an extension or renewal) on or after 1 April 2018 where the EPC rating is sub-standard. A seller or landlord also cannot continue a tenancy on or after 1 April 2023 where the EPC rating is sub-standard (regulation 27 of the EER 2015).

It is therefore important to determine whether a property requires an EPC and, if so, whether its energy rating complies with the relevant requirements.

Protected and invasive species

Protected and invasive species are regulated under the Wildlife and Countryside Act 1981 (WCA 1981). The WCA 1981 also regulates protected habitats through sites of special scientific interest. Protected habitats and species are also protected at an EU level through Special Protected Areas and Special Areas of Conservation.

Investigation and prosecution of offences under the WCA 1981 are generally undertaken by Natural England and the police, with the assistance of the National Wildlife Crime Unit.

Protected species

The presence of protected species can have an impact on the value of a property and redevelopment opportunities. Under the WCA 1981, an owner of land is under an obligation to notify Natural England where protected species are identified and may be affected by development. Breeding cycles of protected species may also impact development programmes if protected species cannot be disturbed or their habitat removed. Having a protected species and destroying their habitat is a criminal offence which can result in a fine or imprisonment. Compensatory habitat may also need to be provided or species translocated in the event of unavoidable disruption.

Invasive species

The presence of Japanese Knotweed on a property can present a significant risk to a property transaction. Japanese Knotweed is particularly invasive given its ability to spread quickly and cause substantial damage to buildings, such as by growing through foundations or floor plates. Its removal and destruction can also be costly. It is particularly prevalent in properties adjoining railway sidings, where its growth is often unrestricted.

Japanese Knotweed is identified as an invasive species under part 2 of schedule 9 to the WCA 1981.

It is an offence under section 14(2) of the WCA 1981 to plant, or otherwise cause to grow in the wild, Japanese Knotweed. Non-compliance can result in criminal penalties. It may be a defence where the accused can prove that all reasonable steps were taken and due diligence was exercised to avoid non-compliance. For example, in the recent case of Network Rail Infrastructure Ltd v Williams and another [2018] EWCA Civ 1514, the respondents were successful in their claim in private nuisance in relation to damage caused to their properties as a result of Japanese Knotweed on the appellant’s property.

Practical tips for property lawyers

The presence of Japanese Knotweed will generally only be revealed where site investigations have been undertaken by specialist consultants. If you are acting for a buyer, make enquiries of the seller regarding the presence of Japanese Knotweed on the property, and/or investigations undertaken where the property is believed to be high risk, such as property abutting railway corridors or similar areas. Any Japanese Knotweed found should be removed, and the roots specifically treated by properly authorised specialist consultants.

Summary

It is important that property lawyers understand the key environmental issues likely to arise in commercial property transactions, given the significant risks which may materialise where appropriate protections are not in place. Failure to comply with environmental requirements or to properly assess the inherent risks can lead to significant costs; project and transaction delays, with attendant negative impacts on a business’ reputation; and potential civil and criminal law risks.

Below is a checklist designed to help commercial property lawyers to assess key environmental issues in transactions. If you have specialist environmental lawyers in your practice, always refer environmental issues to them.

Environmental issues for commercial property lawyers: Checklist

• What was the historical use of the property? Was it used for industrial purposes? What type of operations / activities were previously conducted at the property?
• What is the current use of the property? What type of operations / activities are currently conducted on the property? What is the buyer’s proposed use?
• If the property was / is used for industrial purposes, consider the following.
  • Have any hazardous substances been used or stored at the property?
  • Are any underground or above storage ground tanks located at the property?
  • Have any environmental incidents involving the release of polluting substances occurred at the property? If so, is the regulator aware? Have any remediation works been undertaken?
  • Has an independent environmental report been obtained? Have any risks been identified? Is the buyer getting reliance on any such reports?
• In relation to asbestos (and other occupational health issues such as legionella), consider the following.
  • Is any asbestos present on the premises?
  • Have any asbestos risk assessments been undertaken?
  • Have any asbestos registers been prepared and maintained?
• Are any protected species / habitats or invasive species on or near the property?
• If acting for a buyer, request from the seller complete copies of all of the following:
  • environmental permits, licences, approvals, exemptions etc
  • environmental audits, surveys or investigations (including asbestos risk assessment) undertaken with the last three to five years
  • environmental policies and environmental management systems
  • EPCs
  • details of any non-compliances with environmental (including asbestos) laws or complaints, including any correspondence (including notices) received from a regulator or third party.
• If acting for the seller, ensure that they have complied with relevant disclosure of any environmental issues. Ensure appropriate liability transfer wording included under part 2A of the Environmental Protection Act 1990.