Contaminated land offers excellent opportunities for development. But make sure you are properly covered.

Despite the liabilities for developers and their financial backers, there are certain advantages in developing contaminated land. Apart from the cheapness of the sites, bringing this land back into productive use, provided the costs of remediation are economical, is a considerable planning benefit. Planning consents for uses at a higher value or density than would otherwise have been the case are often granted. Stockley Park and Bedfont Lakes, both of which have been built on contaminated Green Belt land near Heathrow Airport, are excellent examples of high class developments on contaminated land in the Green Belt.

The true extent of the amount of contaminated land in the UK is unknown. On the one hand, vast tracts of industrial land have been contaminated in the past; on the other, there is great pressure to redevelop such sites, as obtaining the release of Green Belt land is becoming harder and harder.

Owners of land should make sure that contaminated substances do not cause damage to adjoining land or underlying water courses. Environmental audits are a growth industry and in view of the potentially large damages, awareness of any risks is a necessity today. Difficulties arise when owners and occupiers are unaware of the land being contaminated and therefore do not consider the need to take any steps.

The "Edam" principle of "environmental legislation does not apply to me" is potentially a very expensive principle to apply. The Environmental Protection Act 1990 and the Water Resources Act 1991 both contain large penalties for civil and criminal liability for causing pollution on land and water. Certain parts of the legislation entitle the authorities to recover costs from the person who is for the time being the owner of the land, irrespective of whether he caused the damage, whereas other parts make the person who caused the damage liable. The "owner" is not defined in the legislation but seems wide enough to cover owner/ developers, lenders exercising the right as mortgagee in possession, and receivers. As a result of the problems associated with contamination, site surveys, warranties, express reference in valuations, indemnities and retentions are all becoming more familiar when dealing with such land. The basic maxim of "let the buyer beware" still underlies property transactions. However, as in all commercial matters, reliance should only be made on warranties and indemnities if the party giving them has substance. The increasing sophistication of scientific analysis means that more and more contaminators are likely to be traced, sued and prosecuted.

Can insurance protect a developer and his financiers in relation to contaminated land? Most developers are likely to have public liability insurance. Many of these policies now either exclude any cover relating to pollution whatsoever or limit it to pollution caused by "sudden and accidental" events. "Gradual" pollution relevant to land already contaminated is not therefore covered.

A form of environmental insurance which is slowly beginning to emerge in the UK will provide cover for third party pollution liability, including third party clean-up and, in some cases, own site clean-up cover. However, there is a very limited amount of capacity available in the UK market for Environmental Impairment Liability (EIL) insurance and the qualifications for cover are strict. Policies are written on a site-specific basis and the insurer will provide cover only once a satisfactory full environmental survey of the site has been completed. Cover for a site will only be provided if the site in question is environmentally satisfactory. If clean-up is required, this will be an essential pre-condition to cover. Even then the policy may exclude risks associated with any recurrence of the particular clean-up problem.

Whilst the EIL concept gives an opportunity for developers to work alongside the insurance industry in risk management, risk financing and risk transfer there is a severe lack of cover for their financial backers. The main insurance policies likely to be held by financial institutions will include professional indemnity, directors and officers and bankers' blanket bond. All of these are likely to exclude any form of pollution liability. This major potential exposure for the financiers means they should lobby the insurance industry to provide a tailor-made product.

Alternatively, banks should lobby the government, alongside the insurance industry, to ensure that owners "in control" of properties excludes providers of finance.

There is still much that financial institutions can do. Full due diligence investigations should be carried out on any new lending proposals. A full site investigation and environmental report should be obtained on the business operations.

Banks should ensure that their borrowers are aware of their own environmental risks.

They should carefully examine what pollution coverage their borrowers may have and, in appropriate cases, should ensure their borrowers take out pollution cover both for own site clean-up costs and third party liability. Written confirmation from the insurer should be obtained that the cover has been taken out. To protect the bank's own interest, it should be noted on the policy in the same way that a mortgagee's interest is noted on a property insurance.

Merely having the insurance in place is insufficient if the borrower fails to comply with all the complex terms and conditions of the insurance. Financiers will need to satisfy themselves that borrowers are complying.

Alternatives to insurance are few. The operation of risk management, captives and loss stabilisation plans should all be explored. Lenders must realise that they cannot stand entirely clear of the activities and liabilities of their borrowers, particularly in relation to developing contaminated land.

The increasing body of environmental law and regulation both from the EC and Parliament, together with its active enforcement and the extension of common law, requires attention to be paid to due diligence, contractual terms and warranties, site surveys and environmental compliance in order to assure lenders that their own liabilities are being minimised.

If anything is certain contaminated land and its problems are not going to go away because the introduction of the registers has been suspended. You have been warned!

Jeremy Wood and Laurence Messer

Jeremy Wood is a corporate insurance partner and Laurence Messer is a commercial property partner at international insurance law firm Davies Arnold Cooper.
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 from Jeremy Wood or Laurence Messer (Tel.071 936 2222).
Copyright Mondaq Ltd 1995 Tel +44 171 820 7733.