UNITED KINGDOM ENVIRONMENTAL LAW ASSOCIATION
CONTAMINATED LAND - AVOIDING THE PITFALLS
INTRODUCTION
In June of this year the Law Society issued a warning card to solicitors on the risks when
advising clients on property deals involving contaminated land. The warning card sought to
alert solicitors to the requirements of Part IIA of the Environmental Protection Act 1990
("Part IIA"), how this may apply to a number of transactions and the protections solicitors
may seek in order to ensure their clients are not exposed to unacceptable risks.
This paper seeks to build on the useful guidance provided by the warning card and to assist
solicitors in working through this complex and specialised area of law. It is intended to alert
solicitors to some of the issues surrounding contaminated land and provide further details on
areas touched upon by the warning card.
All solicitors should nevertheless recognise that the consequences for a client of finding that
it has unwittingly acquired a significantly contaminated property, or perhaps simply the
liability to remediate one, can be exceptionally costly. If a solicitor is unsure how best to
advise a client in relation to a transaction that could involve significantly contaminated land,
then (s)he must consider carefully whether to continue with the matter, while seeking to
minimise the risk of any negligence, or whether to seek assistance from someone with
appropriate experience.
WHAT TYPE OF TRANSACTIONS MAY BE AFFECTED?
The warning card says, "In every transaction you must consider whether contamination is an
issue". The following are examples, rather than a comprehensive list.
To what extent are residential transactions affected?
In the case of a freehold acquisition the normal principle of caveat emptor applies to those
matters disclosed during the process of investigation of title including where the buyer is told
to rely on his own searches and inspection of the property. Further, even where such
investigations would not have revealed the problem, a buyer has to be aware that, if the
person who caused the contamination or is otherwise held responsible cannot be "found" (e.g.
a company that has been dissolved), then the buyer could become liable as owner for the cost
of remediation works.
A long leasehold (one for over 21 years) of a self contained property will be treated in the
same way as a freehold sale.
Where there are multiple leasehold interests in a single property (such as block of flats),
liability for contamination may fall initially on the freehold owner but, subject to the terms of
the lease, may be passed on through the service charge. There is also the risk of disruption to
the tenant from the investigative and remediation works.
A short term residential tenancy is less likely to raise problems for the tenant although the
terms of the tenancy agreement need to be checked. However, will the tenant be entitled to
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compensation for loss or damage if his occupation is interfered with for a period of time due
to the presence and/or clean-up of contamination?
Do commercial property transactions give rise to different considerations?
Generally, commercial property transactions do give rise to wider considerations although the
basic legal framework remains the same. The risks of exposure to liability for commercial
owners will usually be greater given the extent of the land holding and the enforcement
practice of regulatory authorities.
In addition, there are specific provisions in the contaminated land regime which are only
relevant in a commercial context. In the case of a freehold acquisition or a long leasehold,
where the buyer is a large commercial organisation or public body one particular exclusion
from liability test in the statutory guidance to the contaminated land regime may apply (as
may others). Under test 3, if the seller gives the buyer sufficient access to the site, there is a
presumption that the buyer had all the information about any contamination of the property
that a proper investigation would have revealed, whether or not one was made. Accordingly,
the buyer would normally inherit all liability for historical contamination under Part IIA.
This can, of course, be rebutted by an agreement to the contrary, including the terms of the
lease, where applicable.
In the case of a rack rent lease, where the tenant has no capital interest in the property,
liability for historical contamination normally remains with the landlord. However, the
tenant may become liable to reimburse the landlord's costs of remediation through the service
charge provisions or other lessee's covenants. In addition, the tenant will be concerned about
the implications of any interruption of its business caused by any clean-up works which need
to be carried out.
Need a property investor be concerned where the property is already let?
Even if liability for historical contamination is passed to the tenant by the occupational
lease(s) the investor buyer is still concerned about the possibility of liability arising after the
end of the lease(s), or if the tenant does not have the resources to pay for what must be done.
Is all possible expenditure, including liability to third parties, recoverable in practice under
the terms of the lease(s)?
Does it make a difference if the buyer intends to redevelop the property?
Construction work may create a pathway between the pollutant and a vulnerable target and so
give rise to a problem and potential liability. For example, the contamination may be
contained by a solid cap above and/or an impermeable layer beneath, but ground works may
open up a pathway either to the surface or to an underground aquifer.
A change of use, for example, from industrial to residential, may lead to higher standards
being applied to the site – these alone could bring it within the definition of "contaminated
land" under Part IIA.
It is also possible that the Environment Agency or the local planning authority may take the
opportunity to require remediation works to be carried out as part of a development where
such action might not have been required if the property had remained in its existing state.
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This will normally be imposed through the conditions of the relevant planning permission or
by an associated planning obligation.
Are there any special considerations for mortgagees?
Mortgagees will want to assess the potential for environmental liabilities falling on the
borrower as part of the general credit risk assessment. Contamination is also a material issue
in relation to the possible enforcement of a charge - the mortgagee will want to weigh up all
the issues very carefully before entering into possession of a contaminated site given the risk
of being directly liable for any pollution.
What about buying the shares of a company, as opposed to the property itself?
Unless otherwise agreed, the buyer will take over all of the target company's environmental
liabilities when acquiring that company. This will include liability for loss or damage
resulting from pollution incidents prior to the acquisition in relation to sites which have been
sold on prior to the share acquisition. But even an indemnity agreement to the contrary will
be of no use if the other party no longer exists, or has inadequate resources, when called upon
to honour it (which could be many years later).
Are there any other types of transactions which may be affected?
Any transaction which affects property potentially raises an issue. Even the acquisition of an
easement may give rise to liability in certain circumstances. For example, the excavation
work involved in laying a drain might create a pollution linkage so as to give rise to a
contamination liability.
PART IIA IN CONTEXT
Overview
The primary statutory provisions for the contaminated land regime, which came into force in
England on 1st April, 2000, are set out in Part IIA of the Environmental Protection Act 1990.
A virtually identical regime has been in force in Wales since 15th September, 2001, and a
closely similar one in Scotland since 14th July, 2000. A key document for interpreting and
applying the legislation in England is DETR Circular 02/2000, which contains the statutory
guidance governing the actions of regulatory authorities (Annex 3). Equivalent guidance has
been issued for the other jurisdictions. To a lesser extent, the Contaminated Land (England)
Regulations 2000, which deal with such matters as the content and service of remediation
notices, may also be a necessary reference document.
Part IIA imposes strict liability, and the regime applies retroactively thereby extending to
historical contamination. However, these elements of the regime are balanced against the
"suitable for use" approach, which considers risk within the context of the current or
proposed use of individual sites, and the Government's desire to see voluntary clean-up.
What is contaminated land?
Not all land, which may appear on the face of it to be contaminated, will necessarily be
determined as such under the legislation. Contaminated land is defined as:
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"…any land which appears to the local authority in whose area it is situated to be in such a
condition, by reason of substances in, on or under the land, that:
(a)
significant harm is being caused or there is a significant possibility of such harm being
caused; or
(b)
pollution of controlled waters is being, or is likely to be, caused;.."
In general terms, land will be contaminated when its condition is causing, or is likely to
cause, serious harm to people, property (e.g. buildings, crops or animals) or ecological
systems within protected areas. However, pollution of groundwater falls under the second
limb and, as the law currently stands, the extent of such pollution is not material. Amending
legislation is to be introduced to rectify this.
The definition above relies upon three key elements – pollutant, pathway and receptor – and
all three elements must be present for land to be classified as "contaminated land" under the
legislation. As such, simply because contamination is present does not necessarily mean that
the site is "contaminated land". Further clarification of these terms can be found in Part 3,
Chapter A of the Statutory Guidance in the DETR Circular.
Under the statutory regime, which is modelled on that for statutory nuisances, local
authorities have a duty to inspect their areas to determine whether land should be identified as
"contaminated land". If land is determined to be contaminated, then the duty extends to
ensuring that remediation is carried out. Some sites may be identified as "special sites",
which become the responsibility of the Environment Agency. The types of sites which are to
be treated as "special sites" are detailed in the Regulations which accompany the new regime,
and in general the risk they pose is more severe.
What happens if land is classified as contaminated land?
Notification that land has been determined as contaminated land will be given to relevant
parties (i.e. owner, occupier, polluter) by the local authority. Except in emergencies, there
will be a period of consultation during which the authority must try to achieve an agreement
for voluntary clean-up.
If that cannot be achieved, the authority will serve a remediation notice on the relevant
parties. Failure to comply with such a notice is an offence.
Who will be liable?
The basic thrust of the statutory regime is that the polluter pays. Thus, responsibility for
clean-up works will be directed at first instance to those who "caused or knowingly
permitted" the contamination on site ("Class A"). However, if no-one in this category can be
found (after reasonable enquiry), liability will pass to the current owner and occupier of the
land ("Class B"), even though they have not caused or contributed to the contamination in
any way.
The concept of "knowingly permitted" (as currently understood) requires both knowledge of
the contaminants on site and the ability or power to take action in relation to them.
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Within both categories of person there are certain exemptions that apply. For example,
property owners who have sold their property with information about the condition of the site
or with a deduction from the sale price to cover the cost of remediation, may avoid liability,
provided the other party remains available to be subject to it. For any transfer of liability to
apply, however, there must be at least two parties within that category. There is also an
ability for parties to reach agreement on the allocation or apportionment of liabilities which
the regulators are required to have regard to.
Other regimes
Liability for contamination may also arise under other statutory regimes or from civil claims.
Importantly, there are some specific areas that are excluded from the ambit of Part IIA, for
example, waste management licensing, integrated pollution prevention and control (IPPC),
discharges to controlled waters (where a consent is in place) and radioactive contamination.
Under the Water Resources Act 1991 ("WRA"), the Environment Agency has the power to
serve works notices for water pollution. Unlike the contaminated land legislation, these
notices may only be served on those who caused or knowingly permitted the pollutants to
enter or to be present in controlled waters (i.e. the Class A category). Nevertheless, the
current owner and/or occupier may well be deemed to be a "knowing permitter". The works
notice may require certain works to prevent pollutants entering controlled waters, or where
pollution has already occurred, works to remedy the damage.
Pollution of controlled waters is also an offence under Section 85(1) of the WRA, and so
leads to a criminal prosecution of anyone causing or knowingly permitting it.
It is possible that situations could arise where both a works notice (under Section 161A of the
WRA) and a remediation notice (under Part IIA) could be utilised as a mechanism to address
possible or actual water pollution.
Government guidance indicates that in these
circumstances a remediation notice should take preference over a works notice.
Civil liability may arise where contamination has caused harm to persons or property, for
example, if contamination has migrated off-site to neighbouring properties or where visitors
or workers on a site are adversely affected by the condition of the site. In the latter instance,
the Health and Safety Executive has the ability to prosecute (although in practice, this is rare).
It is important to remember that any agreement reached between the parties on liability for
contamination (as referred to above) does not apply in the context of other environmental
legislation or civil action and such agreements can be disregarded by the authorities, and
ultimately the Courts, when liability is determined.
Planning
The planning process may also impose requirements for remediation of contaminated land. It
is now commonplace, particularly for redevelopment of brownfield sites, for conditions to be
placed on permissions that require a remediation strategy to be prepared and agreed with the
Local Planning Authority before development commences. Such conditions may require not
only site investigation to establish the condition of the land, but any necessary remediation
identified as a result of the site investigation. Alternatively, obligations relating to
remediation of a site may be imposed in a planning obligation under Section 106 of the Town
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and Country Planning Act 1990. In imposing such conditions or obligations, the LPA will
consult their environmental health department and the Environment Agency.
Ultimately, however, the imposition of such requirements through the planning system will
not relieve the local authority of its statutory obligations under Part IIA, and there may be
circumstances where action is still required to be taken under this regime, for example, if the
development, notwithstanding receipt of planning permission, does not proceed.
OBTAINING INFORMATION ON CONTAMINATED LAND
When advising on a transaction involving the acquisition of land there are a number of
information sources which a solicitor should consider using as part of their due diligence
process on environmental matters. In essence, the aim of environmental due diligence is to
quantify the risk of contamination so as to allow the risk to be discounted or protections to be
sought. For the reasons noted above, environmental due diligence will also be of relevance if
a company is being acquired.
What are the sources of information?
The sources include:

pre-contract standard enquiries;

searches of local authority registers;

an environmental consultant's report;

a report from a commercial search provider.
How do I decide which of these sources to use?
To assist in deciding what combination of information sources is appropriate for a particular
transaction, it is helpful to obtain from the vendor, through suitably directed pre-contract
enquiries, an indication of:

the current and past activities undertaken on-site and in the vicinity of the site; and

the risks which such activities may pose to the environment.
It should be remembered that the data provided from searching databases and local authority
searches is only as good as the source data. In some instances, these may not be up-to-date.
It should also be noted that, in many instances, it may not be possible to make any assessment
as to environmental risk at an early stage of the transaction. As such, in many transactions,
reference to a combination of potential sources will be needed in order to get a more detailed
picture of environmental risks associated with the relevant property.
What information will pre-contract enquiries provide?
These enquiries provide the purchaser's solicitor with the opportunity to raise comprehensive
questions on environmental matters. For example, they will typically cover areas such as:
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
the activities (current and/or past) carried out at the property or at properties in the
vicinity, for example, landfill sites and underground storage tanks at petrol stations
without secondary containment;

whether the activities carried out require or have all necessary statutory licences in
respect of waste storage or disposal, water/effluent discharges to sewer or controlled
waters or in some cases pollution prevention and control;

whether hazardous substances or radioactive materials have been used;

whether the property is subject to a remediation notice under Part IIA or whether there
are circumstances which may give rise to the service of such a notice;

whether the property has a land condition record (see below);

correspondence with regulatory authorities concerning improvement, enforcement or
abatement notices;

details of complaints or disputes about noise, odour, emissions or other nuisances;

details of any environmental reports/surveys on the property.
Land condition records were developed following the Urban Task Force Report on
developing brownfield land. The record is intended to be a voluntary log of information on
contamination conditions for a particular piece of land. The record only summarises factual
information, it does not give an assessment of risk and it is generally completed by
environmental professionals. An accreditation scheme is being developed for such
professionals by the Institute of Environmental Management and Assessment.
What information will local authority and Environment Agency searches provide?
The Con 29 local search provides details of environmental matters which are contained in the
public registers of the relevant local authority, for example, air pollution permits,
contaminated land, and waste storage and disposal. Such a search would provide information
on whether a remediation notice has been served.
If the property is located in an area where mining activities have been undertaken then a
search of Coal Authority records provides details of current and former mine activities and
information on the location of shafts and evidence of subsidence.
The public register at the Environment Agency provides details of:

licences to abstract groundwater from aquifers;

waste management licences;

consents to discharge water to controlled waters, e.g. streams, lakes, rivers, ground;

pollution prevention and control authorisations (for certain industrial activities);
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
contaminated land which is designated a "special site" under the Contaminated Land
Regime.
In addition, the local water company records provide details of any consents to discharge
trade effluent to sewers.
What information will Phase I, II and III reports from environmental consultants
provide?
There are a number of investigations, which may be carried out by environmental consultants,
to assist a solicitor and its client in assessing the degree of environmental risk associated with
a property or business.
Phase I report
A Phase I report is the first step in assessing environmental risks. It provides an overview
with qualitative information on contamination risk and the degree of regulatory compliance in
cases where a business activity is being undertaken. The Phase I study generally comprises:

a review of documents which are independent from the vendor. For example, there may
be historical maps including geological and hydrogeological maps, photographs, registers
of public authorities including the Environment Agency, local authority and coal
authority. This is known as a desktop study; and

a visit to the property where observations are made on environmental impacts apparent
without intrusive investigations and verbal information can be obtained from employees
and site management. The site visit comprises gathering verbal, written and visual
evidence from interviews, reviews of documents and a tour of the property.
The Phase I report records the above information and provides a general assessment of the
level of environmental risk that is posed by the property concerned (usually on a low,
medium or high basis). The report may also give recommendations for further work. If the
risk assessment has identified a high or medium level of risk then a Phase II study is often
recommended.
Phase II report
A Phase II study is a more detailed physical review of the property and will involve intrusive
investigations. This entails the installation of boreholes and excavations across the property
(or in areas of concern). Soil and groundwater samples are taken and analysed for a number
of organic and inorganic substances, such as solvents and metals. The sampling locations will
depend on the information obtained in the Phase I study. The Phase II study should quantify
the contaminants present and assess the risk these concentrations pose by reference to (1) the
properties of the contaminant (i.e. toxicity, volatility, solubility, mobility and potential for
biodegradation), (2) the pathway (exposure route) and (3) the receptor (such as humans,
property, flora and fauna).
Some consultants compare the concentration of substances to the (now dated) guidelines
historically used in the UK (issued by the UK Interdepartmental Committee on the
Reclamation of Contaminated Land (ICRCL) from 1987) and other national standards (the
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Dutch Soil Clean Up Criteria from 1993). The results of the Phase II study are subjected to a
further process of risk assessment and recommendations are made for remedial action on the
basis of whether the land is suitable for its current use.
Part III
Phase III work involves remedial action to address the pollution concerned. Remedial action
may include the excavation and removal of contaminated soil to an appropriately licensed
waste facility and the extraction and treatment of polluted groundwater.
What information can commercial environmental search providers give?
A number of commercial companies provide environmental search reports on property.
These companies search databases and provide reports comprising factual information from a
number of sources including:

the British Geological Survey;

the Coal Authority;

Ordnance Survey; and

Environment Agency registers.
Some companies provide a risk rating in instances where the environmental information
produced as a result of the searches is interpreted by an accredited environmental auditor. It
should be noted that these sources of information are the same or similar to those used by
environmental consultants in a Phase I study.
If a solicitor decides to commission a commercial provider's report, the following matters
should be borne in mind:

if the report does not provide any interpretation of the information, the individual reading
the report (for instance, the lawyer who commissioned it) may lack the expertise
necessary to interpret the findings correctly;

what kind of comfort is provided with the report such that a solicitor (or his/her client)
will have adequate redress against the authors of the report in the event of it being
inaccurate? What are the terms on which the report is produced and are there any
material caveats to it? What professional indemnity insurance cover does the company
have?
USING ENVIRONMENTAL CONSULTANTS
What is the procedure for instructing an environmental consultant?
Often initial instructions are given verbally to a consultant although it is preferable to provide
these in writing. In many cases a standard letter of instruction could be used. The consultant
will need to know brief details of:
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
the location and activities carried out at the property;

the purpose for which the client is acquiring the property;

the nature of the client's proposed ownership (freehold or leasehold).
This allows the consultant to decide on the scope of its investigation. The consultant should
be asked to confirm these details in writing together with a draft scope and a copy of their
terms and conditions. The scope and terms should be carefully reviewed for limitations. In
particular, consideration should be given to terms concerning the use of the report, the limit
of professional indemnity insurance and the conclusions and recommendations. In a number
of cases the scope and terms will need to be negotiated with the consultant.
What are the potential pitfalls of using an environmental consultant?
Things to consider are:

a consultant's report may not cover environmental liabilities that the property may be
subject to under contract or common law. In addition, in the acquisition of a company an
environmental consultant's report may not give any indication of former sites the
company has owned or occupied and potentially contaminated;

the terms of the consultant's professional indemnity insurance. PI insurance is comfort
for the client if, for instance, the consultant has been at fault in appraising the
environmental risk and an action in negligence or for breach of contract needs to be
made. The level of cover should be checked to ensure it is adequate. Also, it is prudent
to ask for such insurance to be maintained for a number of years following completion of
the report, as problems with contamination assessment and remedial work may not
become apparent for a substantial time;

attention should also be paid to the time limit within which claims can be made by the
client and the maximum amount of money which is recoverable under the consultant's
terms. The financial limit on claims should be adequate to cover any amounts of
compensation the client may want to seek to recover. This is particularly important in
Phase II and III studies where the consequences of any inaccurate assessment of the
extent of contamination and/or inadequate remediation can be a significant amount and,
in some cases, larger than the market value of the property;

financial institutions which may be lending money to the client to purchase the property
may wish to be able to rely on the report as if they themselves had commissioned the
consultant. In addition, if the property is to be resold in the near future then it may be
advantageous for the client to ensure the reports can be relied on by future purchaser
(perhaps through a collateral warranty or a reliance letter being issued by the consultant).
This should be agreed up-front with the consultant if possible;

it is important to review the report in its entirety and not just to concentrate on the
executive summary, conclusions and recommendations. It is also important to fully
understand the scope of the report. For example, the extent of sample locations may have
been curtailed in a Phase II study because of operational difficulties on site and in such a
case there may be a reference to this curtailment in the main body of the report.
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Bear in mind that instructing a consultant, the carrying out of the instructions and assessing
the results all take time. Unless the client is prepared to allow for this, it may become
committed to the transaction without an adequate appreciation of the environmental liabilities
coming with it. The client's solicitors will have to ensure that the client fully understands and
accepts that risk itself, and so has no ground for accusing the solicitor of negligence if/when
the risk materialises at some later date.
IF CONTAMINATED LAND IS AN ISSUE, WHAT PROTECTIONS ARE
AVAILABLE?
The first line of protection is to obtain as much information as possible through the due
diligence exercise. The client will then be best placed to make an informed judgement as to
how the deal may best be constructed. Sometimes, for example, the buyer will prefer to
manage the environmental risk in exchange for a reduction in the purchase price or some
other (wider) commercial benefit to the buyer.
Should the buyer seek warranties from the seller?
Any information from the seller on which the buyer intends to rely should be the subject of an
express or implied warranty. As with all warranties, care needs to be taken as to the extent to
which warranties are qualified, by time, amount, reference to the knowledge of named
individuals, etc. Importantly, warranties are commonplace in corporate transactions and far
less so in property deals.
What about indemnities?
Generally, obtaining indemnities must be a "good thing" for a purchaser. However, they are
only as good as the covenant of the person given the indemnity. In addition, they are likely to
be heavily qualified. If too onerous an indemnity is required of the seller, then this may be
reflected in an adverse impact on the other terms of the deal. Note that environmental
liabilities may not crystallise for many years, quite possibly only after the usual 6 year
limitation period for warranties has expired. The limitation period for an indemnity does not
generally begin to run until the conditions that trigger the indemnity arise.
Can insurance help?
Insurance is now available in the market for longer term environmental liabilities arising from
land contamination. A range of different policies is available. Typically, they involve
payment of a single premium and provide cover either for full remediation costs or for costs
in excess of an agreed limit (and, in some cases, for third party liability). A period of 20
years is usually considered adequate to cover the possibility of historical contamination
giving rise to liability (where there is no intervening cause). However, these are relatively
new products and will not be off-the-shelf policies. Some negotiation may be required on the
terms of the policy.
What other forms of protection are available?
Solutions need to be worked out in relation to the particular transaction. However, the
following points may be appropriate to consider in certain situations:
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
the terms of a lease need to be carefully negotiated to protect the tenant against the
possible situations where liability could arise, or at least to minimise the tenant's
exposure;

where there is historic contamination in the sub-soil, it may be desirable for the tenant to
take a lease of the surface only (together with the minimum amount of ground to
incorporate foundations and underground conducting media). These are sometimes
referred to as "pie-crust" leases. Nevertheless, a literal interpretation of the statutory
definition of "contaminated land" would make this device ineffective;

where the client accepts a liability or an obligation to carry out remediation work, care
needs to be taken that it has the right to conduct any associated litigation and/or carry out
any necessary works on, for example, retained land of the buyer;

a mortgagee should seek early warning of environmental problems, so that it is able to
react promptly and take appropriate action to protect its interests;

in certain cases a price reduction may be appropriate to cover the anticipated costs of any
clean-up required or potential liability to third parties;

so far as possible, utilise any relevant exclusion from liability and apportionment tests
contained in the guidance to Part IIA;

in more complex transactions, consider whether it is viable to restructure the deal and
ring-fence or exclude any potential liabilities.
20th November, 2001
This article has been prepared by the Contaminated Land Working Group of the United
Kingdom Environmental Law Association. The Group was closely involved in the development
of Part IIA of the EPA and the associated statutory guidance. It made numerous detailed
representations to the Government on the proposals for the new regime.
This paper is intended as a briefing note only and does not contain definitive legal advice. For
further details of any aspects of this paper more specialist legal advice should be obtained.
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