A Property Investor’s Need-To-Know Guide for Environmental Risk

Commercial property investors need confidence that property valuations are robust. Unforeseen environmental risks can be substantial and there are many examples of buyers or lenders being hit with significant and unexpected costs to address environmental issues.

The concept of land contamination liability first became a real business issue in the US. The most far-reaching statute regulating land contamination in the US is generally considered to be the Comprehensive Environmental Response Compensation and Liability Act (‘CERCLA’ or ‘Superfund’) of 1980. The Superfund is based on a “polluter pays” principle. In theory, clean-up costs are met initially from the Superfund, with the Environmental Protection Agency seeking reimbursement from one or more ‘potentially responsible parties’. The liability net cast by this process can draw in not only those businesses that caused pollution historically but also covers present and former landowners or operators.

However, since 2002 landowners who complete “all appropriate inquiries” can meet the criteria of a bona fide prospective purchaser, innocent landowner, or contiguous property owner and be protected from Superfund liability.

The polluter pays principle is also a cornerstone of EU environmental policy, although the way in which this is transposed into statute in each member state varies considerably. In the UK for example, where the person who caused or knowingly permitted the contamination cannot be found, the present owner or occupier can be held liable (under Part 2A Environmental Protection Act 1990). Whilst the completion of appropriate environmental due diligence does not give a landowner protection from liability, it does allow a prospective purchaser to establish the condition of the land.

In the UK the onus is typically on the buyer or lender to establish this condition (caveat emptor). Liabilities can be transferred by contract under private law in ways that are recognised under statutory provisions. The transfer of contaminated property can also take place with some kind of indemnity provided from the seller to the buyer, in case of future claims and perhaps backed up with an environmental insurance policy.

Land contamination is not the only environmental risk having an impact on UK property values. As part of the due diligence process, it’s also worth considering risks from radon, mining, sustainable obsolescence from for example low energy ratings, the presence of invasive weeds such as Japanese Knotweed, impending / changing permitting requirements for facilities regulated by Environmental Permitting Regulations such as a high-street dry cleaner or a petrol filling station and the recently well-publicised risks from flooding. Whilst there is a clear downside in neglecting to consider environmental risk, there is also the possibility that risks may have been overstated by others, resulting in valuable investment opportunities being missed unless independent advice is obtained on behalf of those investing.

This article was first published on CBRE UK’s Building Consultancy blog, Build Insight. Click here to view the original article.