Developers and funders are frequently involved in the purchase of contaminated sites and the location and potential value of these sites often makes them attractive targets for such investment.
A recent case highlights the pivotal importance of fully understanding the site you are buying and the package of potential liabilities that comes with it. Undertaking a full assessment of such risks means that even an experienced buyer of brownfield sites needs a well-coordinated and effective team, including those who understand both the technical and the legal implications of the site.
The Lambson -v- Merlion case (Lambson Fine Chemicals -v- Merlion Capital Housing Limited [2008] EWHC 168 (TCC), 7 February 2008) highlights a number of pitfalls when environmental due diligence fails to identify clearly and communicate the key environmental issues on the purchase of a development site. It underlines the importance of gathering sufficient environmental information - both from the seller, from third party sources and by commissioning appropriate reports – and properly assessing and understanding the implications of the information. The case involved the purchase of a former chemicals manufacturing site for redevelopment as housing and the dispute arose from an area of "Blue Billy" contamination on the site. "Blue Billy", which contains high levels of cyanide, was a feed chemical for the manufacture of sulphuric acid which was historically produced on the site, prior to the seller's ownership. Knowing the history of the site, the buyer required an environmental survey before the purchase. The buyer's consultant's report included a review of the environmental information provided by the seller and the results of further intrusive investigations by the buyer's consultant. Whilst a central area of contamination was noted in the environmental information disclosed by the seller, this was not specifically highlighted by the buyer's consultant in its report on the site. This focused instead on stockpiles of contaminated material which had been removed from the central area of the site during previous development works. Under the contract, the seller's director represented that he was not aware of any contamination other than that highlighted in the environmental consultant's report. Consequently (because the consultant did not specifically highlight all of the contamination present) the buyer claimed that the seller had misrepresented the position and accordingly the buyer had not accepted this risk under the purchase contract. The judge did not agree with the buyer's construction.
The judge held that the seller had disclosed to the buyer all information necessary to assess the implications of the contamination and had given the buyer adequate opportunity to investigate the extent of contamination on the property.
In considering the potential grounds for a claim by the buyer, the judgement is a strong reminder that the courts will take a strict view when looking for recoverable losses.
There had been "full disclosure" by the seller of the contamination at the property. Coupled with some fairly standard contract wording relating to risk transfer, this was enough to effect a full transfer of environmental risk to the buyer.
Using Environmental Information Effectively
Before considering risk allocation, it is imperative that as much technical environmental information as possible is obtained. Whilst various legal mechanisms can be used to allocate the risk, these are no substitute for having a full understanding of the site. Any amount of boilerplate drafting cannot provide for the situation when the indemnifying parties are no longer around, and in any case any indemnity depends upon the covenant strength of the party providing it. There is little case law on environment risk transfer mechanisms although the judge in this case commented that the contract wording had passed liability across to the buyer. Environmental insurance and other security mechanisms can be used, but these are limited by their terms and in general are relatively short-lived compared with the potential environmental liabilities. Legal get-outs and contractual drafting, whilst important, should be seen as a secondary line of defence.
Recovering Monies For Misrepresentation Of Environmental Information
The judge's view of the evidence in this case seems to be that the buyer's team failed to investigate the site properly through the due diligence process and when (after the purchase) they realised the true cost implications of what they had purchased, tried to find loopholes in the contract which could allow them to reduce this loss. In considering the potential grounds for a claim by the buyer, the judgement is a strong reminder that the courts will take a strict view when looking for recoverable losses. In this case, it was found that the seller had not misrepresented the site condition. However the judge stressed that even if there had been a misrepresentation, the proper measure of the recoverable loss is not necessarily the additional remediation cost for the undisclosed contamination but the difference that the information about the additional contamination would have made in the negotiations.
In this case, the judge noted that the purchase price was agreed well before the buyer's consultants had investigated the extent of the contamination and that the price remained unchanged even after both their report and the valuer's report had been issued. The only negotiated price reduction reflected the amendment to payment terms so that the price was to be paid in one go rather than by instalments. The judge speculated that even if the information about the further area of contamination had been expressly disclosed, this would not have changed the negotiations and there would have been no reduction in the purchase price and thus no recoverable loss. Equally, since it is rare that a buyer would achieve a 'pound for pound' reduction in the purchase price for estimated future remediation works, this would be a bar to full cost recovery.
This case also emphasises the need for effective communication between those undertaking technical and legal due diligence. The judge noted that there was a failure to make the further proper enquiries that would usually be expected in a transaction of this type.
Claims Against Consultants
Was there scope for a claim against the consultants on the basis that they had not identified the potential cost of remediating the property for the planned redevelopment? Should the consultants have carried out more investigations in the central area of the site (where the in-situ Blue Billy contamination was present) rather than focussing on known stockpiles of contaminated materials that had been removed from the central area of the site during previous development works? A lot will turn on the terms of the appointment and the scope of work which the consultants were appointed to do. Careful consideration of the consultants' terms of appointment at the start of the project is therefore important to give the buyer the maximum value from their work. This would usually mean not appointing on the consultants' standard terms. You should consider factors such as any caps on the consultant's liability, appropriate levels of professional insurance cover for various types of work and your ability to call for collateral warranties from the consultant (and the form of these), so that future lenders, tenants or purchasers can rely on the work. It is also important to discuss with the consultants at an early stage likely timescales for their investigations, so the deal timetable takes account of these – a heavily caveated report from consultants stating that they were not able to make the enquiries they wanted to due to time constraints is of little value and does not allow proper consideration of site risks.
Communications Within A DD Team
This case also emphasises the need for effective communication between those undertaking technical and legal due diligence. The judge noted that there was a failure to make the further proper enquiries that would usually be expected in a transaction of this type. Since the property was sold subject to such information as would be revealed by enquiries that a prudent buyer would make, the buyer took on the risk for all the Blue Billy contamination. This highlights the importance that those undertaking the legal due dilgence are appraised of the findings of the technical due diligence and raise further enquiries as appropriate – a matter which is often overlooked.
Unlocking The Value In Contaminated Land
In summary, contaminated land offers real potential for investors because of the complexity of the risks and opportunities it presents. The key to unlocking this potential must be maximising the value of the environmental information available for the site and ensuring that the identified issues are communicated throughout the team so that all the aspects of the deal – commercial, legal and technical – can be tailored accordingly.
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.