UK: Paying The Price Of Contaminated Land

Last Updated: 15 October 2001
Article by Victoria Joy

Victoria Joy, an environmental consultant at Addleshaw Booth & Co, looks at how tenants can reduce the various risks when acquiring a potentially contaminated site under the new contaminated land liability regime. Addleshaw Booth & Co is almost unique amongst law firms by being able to offer the services of an environmental specialist.

Tenants are often under the misapprehension that they are not liable for contamination unless they have caused it. After all, the polluter pays, doesn't he? Unfortunately, it is seldom that simple.

The 'polluter pays' principle is a useful starting point and, in general, a tenant will be legally responsible for any pollution that it has caused. So, if the tenant's oil tank has leaked and contaminated a watercourse, it is the tenant who will face enforcement action by the Environment Agency. This could means prosecution, a fine, having to clean up the contamination or even imprisonment. Moreover, if the contamination has infringed someone else's rights, perhaps by damaging a neighbour's land or killing fish which were the legitimate sport of the local angling club, then these parties will have the right to sue the polluter. So far so good. It seems only fair that a polluter should bear the consequences of his actions.

Things become less straightforward when the tenant has not actually caused pollution, but occupies a property which has been polluted by the landlord or a previous owner or occupier. If the tenant knows about the pollution but does nothing to remedy it, it could become liable in addition to the original polluter through "knowingly permitting" land or water pollution. This phrase occurs both in the relevant water pollution legislation, the Water Resources Act 1991, and in the new contaminated land legislation which came into force in England and Scotland last year and has only just come into force in Wales.

The most likely situation in which this would occur is where contamination on the property, perhaps from a chemical spill many years ago, is gradually escaping into the aquifer beneath or a surface watercourse. A tenant who is aware of this, but does not take effective steps to prevent it, could be prosecuted and/or made to clean up the contamination.

Under the new contaminated land liability regime referred to above, a clean-up liability attaches to both "causers" and "knowing perimeters" of land contamination, but sites which are not harming the environment and are suitable for their current use are unaffected. Where these original polluters no longer exist, because the individuals have died or companies have been dissolved, the liability passes to the current owner or occupier of the land. Here again, a tenant can find itself responsible for cleaning up someone else's pollution, but usually not if it is paying a rack rent. The intention behind the legislation is that the "owner" clean-up liability should attach to the party that has an interest in the capital value of the land.

The above describes, in very general terms, the situation that will apply in the absence of any contractual agreements to the contrary. Although it is not possible to contract out of criminal liabilities such as the offence of causing or knowingly permitting water pollution, it is possible to enter into an agreement with another party which determines how civil or statutory clean-up liabilities should be apportioned.

Most commercial leases will fulfil this function, to a greater or lesser extent. For example, it is common for there to be a clause which provides that any statutory notices served on the landlord, or in relation to the premises, must be dealt with by the tenant. This would mean that, if the landlord (whether or not it is the original polluter of the property) is served with a notice under the Water Resources Act 1991 or the new contaminated land liability regime, requiring that the contamination is cleaned up, it can pass the notice on to the tenant and the tenant will be in breach of the lease if it does not comply.

Moreover, the environmental regulators are required, when determining who is to bear the cost of clean-ups under the contaminated land legislation, to have regard to any relevant agreements between the parties, so it may be that the landlord will bring any relevant lease provisions to the attention of the regulator at an early stage in order that the notice is served on the tenant.

Other common lease clauses which could impose liability for pre-existing contamination on the tenant include repairing obligations and service charge provisions. Whether or not the typical repairing obligation (which would include a requirement to keep the premises in good condition) could be construed as an obligation to remediate contamination caused by others will be a matter of debate depending on the particular wording and other circumstances, but this is clearly a risk area for a tenant. Similarly, it is possible that the landlord could legitimately pass on clean-up costs to the tenant under the service charge provisions.

Commercial property lawyers have found a number of ways to minimise these risks when acting for a tenant acquiring a site that could already be contaminated. The most effective solution, time and money permitting, is to have an intrusive environmental audit carried out to establish whether there is any significant contamination and, if so, whether it presents an actual or potential liability. The tenant can then consider its options from a position of knowledge and his lawyer can ensure that the lease unambiguously apportions any historic contamination risk to the landlord, perhaps including a indemnity from the landlord as a "belt and braces" measure.

The environmental audit report can be used to establish a baseline at the start of the tenant's occupation, in the event that there is any subsequent argument as to when contamination occurred. This is particularly important where a tenant is carrying on the same business as a previous occupier, or making use of existing plant and equipment such as oil storage tanks.

There are more innovative means of reducing the risk for the tenant, such as taking a "pie crust" lease of the buildings and the surface of the land only. Such a lease will inevitably be more complicated (and so costly) than usual, as provision will need to be made for such things as a right of support for the "pie crust" and easements to permit services to pass through the ground beneath it. If the landlord is unwilling to accept liability for historic contamination, by whatever means, then the tenant and its advisors could investigate other means of minimising the risk, such as contaminated land insurance for the term of the lease.

In conclusion, it would be unwise to assume that liability for pre-lease contamination cannot attach to a tenant. If there is any possibility that a property could be contaminated, consideration must be given to potential liabilities and where they will lie once the lease is in place. Before that, an environmental data search (at the least) or a desk study environmental assessment will usually be needed in order to establish whether or not contamination could be an issue on the site in question.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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