Peter Polden, a partner in the Litigation Department of A & L Goodbody and is head of the firm's Environmental Law Unit, takes a look at the practical application of the law to what is commonly known now as an "environmental due diligence" exercise.
1. When a client - usually a prospective purchaser, tenant, or lender - takes your advice on a target property it is likely that the twin concerns will be valuation and liability. Liability, of course, can affect valuation. Environmental liability can be significant. In extreme cases an environmental problem can give a negative valuation to a property. Philip has dealt with the valuation issue and I want to add a few comments with regard to the liability issue.
2. In practical terms, liability for a contaminated site means a potential for payment of money. In other words, it means a potential liability for payment of damages, payment of clean up costs, and/or payment of fines to the regulatory authority.
3. Who is liable for this payment? The principle behind European and Irish law is that the polluter pays.
4. A key question in identifying whether your client has exposure to liability if he acquires, leases, or lends on the property is whether he can thereby take on the mantle of "polluter" in succession, perhaps, to the previous owner of the property.
5. The normal answer to the question of who pays for environmental damage is that it is the person who is "in control" of the property, i.e., the occupier.
6. This is common sense on the premise that it is normally the occupier, at least in the first instance, who causes the environmental pollution.
7. Broadly speaking, this common sense position is reflected in both the common law and in the more recent raft of statutory laws enacted by successive governments in this country.
8. However, there are a number of points that deserve comment and the question of who pays has a number of interesting twists.
9. In the first instance, if the polluter is a body corporate - a company - surveyors and their clients should be aware that while normally the law will place legal liability solely on the company, specific provisions of statute law provide that officers of a company, such as directors and line management personnel, and indeed members of a company, i.e. shareholders, can have a personal liability.
10. This exposure to personal liability on the part of officers and members of your corporate client is specifically written into, among others, the Local Government (Water Pollution) Act, 1990, the Air Pollution Act, 1987, the Environmental Protection Agency Act, 1992 ("the EPA Act"), and the Waste Management Act, 1996.
11. While lenders have, to date, escaped specific liability in Irish and European statute law, your banking client should be made aware that the possibility of lender liability exists. This is despite the fact that we have no specific lender liability legislation yet - unlike in the UK where a Receivers potential liability has at least been clarified. The application of common law principles do not rule out the possibility of lender liability for environmental damage. That possibility probably only exists where the lender exerts sufficient authority in the management of the site to be said to have been in control of it. One can certainly envisage in an insolvency situation that a lending bank going into possession as mortgagee could attract liability for environmental damage in an extreme case. Certainly a receiver put in to manage the property in an insolvency could himself attract liability by exercising control in a way that led to environmental damage to the property itself or to neighbouring properties.
12. In a landlord and tenant situation, it would normally be the occupying tenant who would have the liability for environmental damage. Modern FRI leases would usually specifically provide a covenant or covenants placing the onus fairly and squarely on the tenant. Even if the word "environmental" is not mentioned in a covenant, one can normally find that such liability is amply covered by the general terms of the covenant against committing nuisance and the covenant to comply with statutory and regulatory requirements. You might like to reflect on whether a landlord could have any liability for an environmental accident or for environmental impairment caused by a tenant on the subject property. Quite apart from a situation where a landlord is exposed because a tenant, through insolvency or otherwise, is no longer a mark for the regulatory authorities or for the third party plaintiff, a landlord can have liability in multi-let and/or service charge properties where property management obligations rest on the landlord.
13. For what damage can the occupier of property - the polluter - be liable? By buying a polluted property can your client take on such legal liability? Can the current occupier be liable for the polluting behaviour (through activity or inactivity) of a previous occupier?
14. In the majority of cases, environmental damage is being caused by some on-going problem, e.g. contaminated soil leading to pollution of aquifers. Such contamination or pollution is usually seen in law as a continuing offence and therefore the moment your client buys the property the possibility of action against your client exists. In practical terms, either the regulatory agency or the third party plaintiff will tend to pursue the current occupier who is there and available to be sued or prosecuted and leave it to that person to claim indemnity or partial indemnity from his predecessor. Thus, in general, your client purchaser "inherits" the legal liability.
15. Leaving aside the issue of prosecution by the regulatory authority for the moment, your client's purchaser's legal liability is two fold. Firstly, the polluter has a legal liability for damage to property which is affected by the environmental damage. Thus, in the well known Cambridge Water Company case, the issue was liability for damage caused by pollution of underground water aquifers over a long period of years (traced back to a particular property) causing the water supply of the Cambridge Water Company to be polluted. In the case of Graham - V - ReChem - a Scottish case - the issue, as in the Irish case of Hanrahan - V - Merck Sharpe and Dohme, was the alleged pollution of pasture on a nearby (not necessarily adjoining) farm causing death and ill health of the farmer's stock. In the Hanrahan case the plaintiff was successful. In the Scottish case, the plaintiff was not successful. It all turned on the facts and the Court's view on whether the alleged pollution was the causative factor.
16. The polluter also has a legal liability for damage to the health of persons. This was certainly argued in the Hanrahan case but it is not only farming cases in which this sort of liability can arise. Industrial, manufacturing and business properties, particularly if they are being bought as going concerns, can carry with them the potential for personal injury claims and safety and health claims which arise from environmental features in the workplace. Surveyors should be aware particularly if a property is being taken over as a going concern, that there is a specific need for environmental due diligence in the context of liability for health claims from employees, neighbours or others.
17. On the regulatory side, a purchaser who steps into the polluter's shoes will be aware of the distinct possibility - our next speaker may say probability - of prosecution. It is a normal legal due diligence exercise to examine the licence and permit position of the target property - particularly, again, where it is being taken on as a going concern - and to ask for the prosecution history of the target operation. The enquiry should also extend to correspondence with the regulatory authority to see if warning notices or the like have been given.
18. The bodies that were primarily charged with environmental protection were historically the local authorities. The leading role in environmental protection is now taken by the Environmental Protection Agency. The environmental controls exercised by the Agency are going to be the subject for the next speaker so I will not dwell on them. Suffice to say that while the Agency is in the forefront of environmental protection, the local authorities still have a role for properties and operations which are not subject to integrated pollution licensing and have a role under the Waste Management Act. Other regulatory authorities of relevance include the Regional Fisheries Boards, the National Radiological Institute, etc..
19. What the prosecuting authorities can do for your purchaser client who "inherits" or commits the sins of pollution is fairly formidable. First and foremost, the authorities can levy the cost of clean-up on the polluter. The polluter may be required to carry out the clean-up itself. If it fails to do so, or if it fails to do so satisfactorily, the regulatory authority can do the job itself and levy the cost against the polluter. The modern legislation also provides for much more meaningful fines than historically would have been the case. Under the EPA Act, the Agency can seek fines from the Court of up to IR£10,000,000 as well as terms of imprisonment in appropriate cases. I am not sure that the authorities have taken any steps in this country yet to imprison anyone, but there have been a number of cases in England where prison sentences have been meted out to individuals and, in some cases, to officers of corporate offenders.
20. Perhaps the ultimate authority of the authorities is the ability to effectively close down operations if they cannot be operated, or are deliberately not being operated, in a manner that is compliant with environmental law. Again, this country has seen at least one operation closing down as a direct result of prosecution. Your purchaser client may be acquiring the property as a going concern or he may be acquiring the property with a view to setting up a business on it. In either event, your due diligence exercise should consider any obstacles that there might be to your client achieving his desired use of the target property.
21. Your due diligence questionnaire - mental or otherwise - should avoid the "planning permission" syndrome. Planning permission, for all its complexities, is relatively static. Either a property has a planning permission or it does not. With environmental liability in mind, the target is a moving one. This is so in two senses. Firstly, environmental compliance is a matter for on-going compliance and liability, as already noted, can arise on a day to day basis. Each new day can see the committal of a new offence. Secondly, and much more so than in planning permission, environmental legal compliance requirements seem to be changing all the time. By and large, the standards applied by environmental regulation are being developed to a higher level virtually every year. You should therefore advise your client to look at the target property and its ability not only to comply with environmental regulation as it stands in 1998 but also with what environmental compliance is likely to mean in the years to come. The legal requirements with regard to on site waste disposal have been a case in point. I believe it is true to say that the Agency, wearing its licensing hat, and through the issue of guidance notes on the application of BATNEEC, has applied the standards of draft European legislation which anticipates future European standards when it draws up licence conditions, rather than simply applying existing, but lower, current Irish legal standards. Another example of looking to the future would be the proposed acquisition of a property the operation of which does not currently require an IPC licence but which is known to be targeted for IPC licensing as the IPC licensing net is widened to include all of the activities listed in the First Schedule to the EPA Act.
22. Looking to the future in another sense, I might highlight the basis of common law liability for the damage caused by environmental wrong-doing. The key test for legal liability in this category is the ability to look into the future in another way. In other words, the foreseeability of the damage caused by the environmental wrong-doing. Broadly speaking, for legal liability to a third party to exist, the impact of the environmental wrong-doing must have been something that could reasonably have been contemplated by the wrong-doer. Thus, whether the damage was foreseeable is a question that would be likely to be answered in the affirmative by a Court in the case of untreated effluent from a production facility being habitually allowed to overflow from a containment tank into a local watercourse providing the human drinking water supply to the nearby town. It is also reasonably foreseeable that the air-borne pollutant coming from a factory facility in the middle of a residential area is likely to cause offence and perhaps illness to nearby residents. In the Cambridge Water case the foreseeability of a "drip drip" of pollution getting into an underground aquifer and causing deterioration of a potable underground water source several miles away was ultimately found by the House of Lords not to have been reasonably foreseeable and thus the Court held that there was no liability for the cost of the damage caused by this pollution flowing from one property to another.
23. You should be aware, however, that there are some situations where there is virtually "strict liability", where no negligence is necessary for legal liability to exist. The allowing of deleterious matter to get into a watercourse is a situation where there is virtually a situation of "strict liability". The breach of a pipeline, even if there is no negligence involved, and which causes, for instance, oil to get into a watercourse will give rise to a prosecution pursuant to the water pollution legislation at the prosecution of the Local Authority or the local Regional Fisheries Board.
24. Your environmental due diligence for a client in assessing a property or the business carried out thereon should include some assessment of the more positive aspects. While your client's vendor may have a property that is used for a potentially contaminating purpose, has he actually occupied and used it in a way that has preserved the property itself from contamination and has limited his and its exposure to third party claims or prosecution by the regulatory authorities?
25. There is a whole range of considerations here which may involve you sending your client to take advice from another expert.
26. Perhaps you should send him to an insurance broker to see whether any of the assessed environmental risks are capable of being covered by insurance.
27. Perhaps you should ask if the operation is run in accordance with a recognised environmental management system. There are a number of such systems available although recently these have in practise been netted down to two in particular, the EU EMAS scheme and ISO14001. A property that has been governed by the operation of a recognised environmental management system is less likely to have created contamination than an operation which is ignorant of the appropriate criteria.
28. If there is or is suspected to be an environmental problem, you might suggest to your client that he take advice from a knowledgeable lawyer who will be able to put some contractual terms into the purchase contract to give some measure of protection for any contamination that may subsequently rear its ugly head.
29. The ultimate objective of your environmental due diligence should be the achievement of knowledge of the full range of the environmental facts of the target property so that your client, with a full range of advice, can make the best assessment of the risk of liability for environmental liability. If you do not help him to do this, he may pay a cheap price for the property at the risk of considerable cost afterwards.
This article was intended to provide general guidelines. Specialist advice should be sought about specific facts.
