In brief - A few things developers, public authorities and others should know about buying and transferring biodiversity credits in NSW
Engaging in development that will impact the natural environment (in particular biodiversity) may necessitate the purchase, transfer and retirement of biodiversity credits. Negotiating the purchase directly with the owner of those credits can lead to significant costs savings.
This article gives some practical tips for things you should look out for in NSW when negotiating the purchase and transfer of biodiversity credits. Like any market, players need to consider and guard against potential distortions.
Landowners in NSW can generate credits by establishing biodiversity stewardship sites. They do this through setting aside and managing tracts of their land in return for classes of credits, which can be publicly traded. There is a statutory process to register these sites. Credit holders (usually landowners) then seek to sell the credits to developers at a price negotiated privately between the parties.
We have written in detail about how the NSW Biodiversity Offsets Scheme works and what it means for developers in our recent article Biodiversity Offsets Scheme for developers in NSW.
We have been involved in a number of transactions in this emerging market involving the sale and transfer and retirement of credits. This space is still relatively new and untested and there are a number of potential pitfalls to be wary of.
Identify the owner of the credits
The "owner" of the credits will ordinarily be the landowner but not always so. Though less frequent, there is scope under the scheme for the vendor of the biodiversity credits to be someone other than the owner of the biodiversity stewardship site.
Adequate due diligence should be undertaken to ensure the vendor has the right to transfer the biodiversity credits.
Outstanding breaches of the Biodiversity Conservation Act
There is provision under the Biodiversity Conservation Act 2016 (NSW) for the Department to cancel or suspend biodiversity credits where, for example, the landowner has failed to carry out management actions or is in breach of their biodiversity stewardship agreement (see sections 6.23-6.25).
Appropriate checks should be undertaken (and warranties included in the transfer agreement) to ensure that the landowner is not currently in breach of their obligations or the Department has not indicated an intention to suspend or cancel the biodiversity credits.
Ensure the number and type of credits being traded are available
We have seen instances where the owner of a stewardship site has lost track of the number of credits previously traded and offered to sell more credits than what was remaining. This only became apparent after a check of the register.
It is important to ensure that the number and type of credits the vendor is purporting to sell are still available for transfer.
Payment of the Total Fund Deposit
The owner of the credits is obliged to pay a portion of the funds they receive from the sale into the Biodiversity Stewardship Payments Fund. The obligation to pay into the Biodiversity Stewardship Payments Fund arises on the first transfer of the biodiversity credits and the amount is calculated based on the ratio of credits transferred (see section 6.21).
The rules as to how this amount is calculated and when it is paid vary under the old Biobanking Scheme and the new Biodiversity Offsets Scheme but from a purchaser's perspective the risk is the same. If the Fund deposit is not made, the Department will refuse to register the retirement of the biodiversity credits. The risk for a purchaser is that payment is made to the vendor, the vendor does not make the required Fund deposit and, some time later when the purchaser seeks to retire the purchased credits the Department refuses to register the retirement of the credits.
Owners of credits will understandably be reluctant to disclose the amount of the Fund deposit required and there is currently no mechanism to check whether this amount has been paid other than seeking confirmation directly from the Department.
Careful drafting of the sale agreement and adequate due diligence and understanding of the NSW Biodiversity Offsets Scheme is required to ensure this risk is dealt with and the purchaser obtains what they are paying for to satisfy their obligations under the scheme.
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.