UK: Brownfield Land In The UK: Environmental Indemnities

In this second in our series of briefings on topics relevant to those involved in brownfield land, we focus on environmental indemnities.

These are perhaps most commonly encountered in an M&A context, but environmental indemnities are also frequently found in leases, storage agreements, service contracts and all manner of other contractual contexts where the nature of the relevant land, or past, present or future activities in question, carry environmental (particularly clean-up) risk.

Indemnities are obviously a standard mechanism for allocating risk in many areas of legal practice. However, there are various specific legal and practical issues that always need to be – but too often are not – borne in mind when drafting and negotiating any form of indemnity covering environmental risks. In this article we highlight just a few examples of issues to watch for.

Getting the basics right

There really is no such thing as a "standard environmental indemnity" (although it is a common enough request!).

Every site and every deal is different and, in our experience, significant time and cost is likely to be wasted if the parties do not take the trouble to work out the key "heads of terms" of an environmental indemnity before detailed drafting commences.

The commercial team might tell you that the other side has agreed to give an indemnity for historic environmental risks, "so please draft something up"; but what have the other side really agreed to cover?

  • All historic contamination at or under the site(s)?
  • "Known" and/or "unknown" contamination (of any type)?
  • Perhaps just contamination caused during the seller's period of occupation, or just particular "hot spots"?
  • What about contamination that has already migrated off-site onto third-party land prior to completion or vice versa: is that risk covered?
  • Does it apply to all sites in the deal or just some of them? In a share deal, what about former sites (see further below)?
  • What risks are covered: mandated clean-up, clean-up that a reasonable and prudent operator would perform even if not mandated, voluntary clean-up, clean-up necessitated by the buyer's future redevelopment of the site (see below), etc.?
  • Should contamination and associated obligations be determined under the law as it stands now, or as it stands when a compliance obligation is triggered? Does this include laws relating to human health and safety or town and country planning?
  • What about capital expenditure costs to bring plant and equipment into compliance with environmental law?
  • How long will the indemnity last?
  • What will the financial limits of cover be, the level of excess (and when reached, are claims paid from the ground up?) and other financial limits, and how do these interact with other warranty and indemnity cover in the SPA (if applicable)?

Environmental law is one of the most rapidly developing areas of legal practice today, and therefore one where the danger of over-reliance on previous "precedent" wording is particularly acute. Keeping up to date is therefore crucial.

For example, an indemnity precedent dating from before 2009 (and certainly before 2007) is very likely to take no account of the potentially significant changes to domestic legislation brought about by the EU Environmental Liability Directive: e.g., in terms of how the "Environment" is defined, the types of physical remedial works that can now be required, and the situations in which those works may have to be performed proactively without waiting for regulatory order.

Taking a holistic approach is also vital. All too often we see wording that focusses exclusively on regulatory requirements, but ignores the possibility that pollution liabilities can also arise at common law (e.g., claims in tort by neighbouring landowners) and in contract (relevant in share deals where the buyer acquires the corporate entity that owns the land in question, and not just the land itself).

If the buyer's intention is, or might be, to sell on the land again in the short term (i.e., before the term of the indemnity expires), or use it as security for financing, does the indemnity contain adequate assignment rights or, alternatively, rights to provide back-to-back indemnities and, if so, do such rights "work" from a drafting perspective alongside any change-in-control provisions, the definitions of the indemnified party, and so on.

These are just some of the basic questions that need to be addressed at the outset.

Former sites

Given that much of environmental law works on the "polluter pays" principle, former sites are a vitally important issue in transactions involving the buying or selling of a company's shares (as opposed to purely its assets).

There is a natural tendency to focus in due diligence on the existing real estate and other assets of a target company. However, the case may well be that greater actual or potential environmental liabilities lurk within the target's portfolio of formerly owned, leased or used land (about which, of course, much less is likely to be known).

This is particularly so given that modern levels of environmental stewardship are a comparatively recent (particularly post-1990) phenomenon. Land that a target company owned or used many decades ago may well have been subject to extensive contamination simply as a result of the then-prevailing industry standards (or lack thereof).

If the company you are acquiring has a long history, it is conceivable that in the process of acquiring what now appears to be a well-run and environmentally benign business, you are stepping into a raft of historic environmental problems.

Former sites also carry more risk in the sense that there will typically be less information available (or at least less up-to-date information) about current ground conditions and, in addition, the acquiring company will not gain control of the site at closing, and therefore generally will not be able to mitigate future risk (by cleaning it up, putting in place boundary protection measures, instituting a monitoring regime or the like).

Specific provisions – including but not limited to longer time periods and higher financial limits – may need to be included in any environmental indemnity to cover liabilities associated with former sites.

Trigger conditions

Obviously the ideal indemnity from the point of view of the indemnified party will be very simple, responding to any and all losses sustained under environmental law and/or in connection with environmental matters.

However, well-advised indemnifying parties will not agree to this and will instead seek to agree a regime whereby, rather than simply writing the proverbial "blank cheque", the indemnity will only kick in if defined "trigger" events occur (for example, if liability is established by a court, or if a regulator imposes a clean-up obligation).

If unexpected surprises in the cover given or received are to be avoided, agreeing triggers requires a clear understanding of not just prevailing environmental laws, but also how they are enforced in practice and how that might change in the reasonably foreseeable future.

For example, we see far too much drafting circulating in the market that only looks at risk through a "Part IIA" (contaminated land regime) lens. This ignores (or has not caught up with) the changes to English environmental law brought about by implementation of the EU Environmental Liability Directive 2004, which in certain cases has introduced duties (so-called "self-executing provisions") to carry out extensive remediation without any clean-up notice being served or other regulatory action taken.

Whose contamination?

This is a particular issue in the context of property that has been used for the same purpose (for example, a petrol filling station) for many years despite periodic changes of the occupier and/or where the new owner will continue the same use.

If gradual pollution occurs year on year by the same type of pollutants (for example, hydrocarbons), how do you prove who caused what? Depending on who bears the burden of proof and what evidence exists, this practical issue can be a major problem in environmental indemnity claims, so it is an issue that is best addressed upfront to the extent possible.

One approach is to expressly allocate the burden of proof and the risk of uncertainty in the legal drafting, but this is not straightforward and is likely to be controversial (the sort of issue parties tend to prefer to "kick down the road"). Another option is to conduct a baseline survey (whether on an agreed basis or independently of the other side), but there are important legal and practical downsides and complex tactical considerations in doing so. A future article in this series will look at baseline surveys in more detail.

Post-completion conduct limitations

From the perspective of the party receiving the indemnity, there would ideally be no conduct limitations at all. A one-paragraph indemnity may well be ideal for the indemnitee. In practice, the vast bulk of the drafting in a specialist environmental indemnity is there to protect the paying party and spell out what is not covered. A key part of this is post-completion conduct limitations.

There is no "one size fits all" solution. Negotiating the right conduct limitations (whether you are acting for the party giving or receiving the indemnity) requires a successful marriage of specialist knowledge of environmental law and practice, with a clear understanding of both existing and potential site conditions, and the activities to be undertaken there.

For example, it is common to include a carve-out for losses triggered or exacerbated by the buyer's voluntary post-completion drilling/digging. However, certain environmental laws will require intrusive surveys of ground conditions to be carried out (and require discovered contamination to be cleaned up) as a condition of obtaining or surrendering key environmental permits, without which the client's business cannot be operated. The same is true for works required (e.g., under planning laws) as part of future site redevelopment/extension.

Unless future site plans are thought about, and specialist advice taken on associated future regulatory requirements, standard/innocuous limitations in indemnity cover could produce unexpected results.

Other potential traps (for either side) include whether disclosure of information to regulators post-completion is permitted (the risk of "tipping off" versus the need to comply with mandatory "whistle-blowing" duties, or to protect corporate reputation), and how the indemnity responds to clean-up or other loss triggered by closure or decommissioning of sites, or parts of sites, variations of permits, sales or changes of occupier. Additionally, to what standard of remedial works shall the indemnity apply (is there a risk of goldplating the works?).

These are all examples of the need for the lawyer and client to focus as much on the future of a contaminated site as its past when negotiating contractual allocations of risk. Generally speaking, of course, the client will have a clear idea of its future plans, but it may be less aware of how forthcoming developments in the constantly evolving area of environmental law might impact those plans. A proper two-way dialogue, preferably done at the outset of negotiations, can avoid unnecessary pitfalls.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.