The Environmental Act 1995 introduced a new statutory regime (the "Part IIA Regime") for the inspection, identification and remediation of contaminated land. Although the Part IIA Regime has yet to be implemented, subject to Parliamentary time constraints, implementation is likely in the first 6 months of the year 2000.
Although there has been considerable debate as to the Part IIA Regime for lenders it has tended to concentrate on whether lenders could be liable for clean up costs on premises they had security over. What has not been much debated is the priority position a lender’s security may have if the local authority incurs clean up costs.
The Part IIA Regime (section 78N) sets out when a local authority or other enforcement authority may enter premises or land to carry out remediation works, however, the likely situation is where the authority has issued a remediation notice which the owner of the property has failed to comply with and immediate action is necessary.
If an enforcing authority does take remediation action it can recover its reasonable costs from the owner/occupier of the relevant land by serving a charging notice which, under section 78P takes effect as a "charge on the premises".
The critical question is which has priority, a statutory charging notice or a pre-existing mortgage or charge granted to a lender. Unfortunately for lenders because the statute uses the phrase a "charge on the premises" any charging notice will have priority over all other interests, including pre-existing mortgages. Lenders when dealing with environmentally damaged land should take this into account when assessing the value of their security. Also if that land constitutes the business premises of the borrower lenders should be aware of the danger that the premises may be sold (through enforcement of the charging notice) by the enforcing authority with the result that the borrower can no longer operate its business and therefore that any other security of the lender would be enforced in a "fire sale" position.
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
For further information please contact Gwen Griffiths, Banking, Hammond Suddards.