Managing environmental risks

Solicitors involved in a range of types of commercial and corporate transaction need to be aware of the contaminated land regime.  Their clients may be affected whether their interest in the land is as purchasers or sellers, lenders or borrowers, trustees, receivers etc.

The potential liability which may arise is onerous and may arise with retrospective effect.  The solicitor’s client may be required to “remediate” the contaminated land and that obligation can arise even though the contamination occurred prior to the client’s acquisition of the property.

The situation is further complicated by the fact that it is not always definite and predictable which party or parties will be pinned with this liability.  For instance, a property may have been sold at a price which is intended to reflect the fact that the site is contaminated.  In those circumstances, while liability would be expected to attach to the purchaser rather than the seller, liability could revert to the seller if, for any reason, responsibilities cannot be enforced against the purchaser.

How are solicitors at risk?

The terms of engagement agreed between solicitor and client and the scope of the solicitor’s instructions may say otherwise, however it seems likely that solicitors will have responsibility for advising clients on the potential liabilities imposed by the contaminated land regime.  That means that solicitors could be held liable:

• if they fail to alert their clients to the implications of the regime and the potential liabilities it creates
• if they fail to make the enquiries that are necessary to establish liabilities that a purchaser client may be assuming on acquisition; a seller client may retain notwithstanding disposal of the property; a lender client may assume in the event of calling up a loan and enforcing a security; a corporate client may be acquiring along with properties in a company acquisition etc
• if they fail to protect the client’s interests by including, deleting or revising provisions in the missives, lease or other agreement regulating the terms on which the client buys or sells, leases or rents, or otherwise transacts with the property

How to control the risks?

There is some degree of complexity about the application of the regime.  It is essential therefore that everyone with responsibility for advising on commercial property and corporate transactions has a thorough working knowledge of the regime itself and of the firm’s risk control arrangements.  Risk control or risk management arrangements might include some or all of the following:

• Terms of engagement - ensure that the extent of the firm’s responsibility is properly reflected in the terms of engagement agreed with the party you are representing
• In high value transactions, it may be appropriate to seek to agree a contractual limitation of the firm’s liability
• Watch carefully the terms of lenders’ instructions.  If in any doubt, clarify/qualify the terms of your instructions and qualify/limit the terms/scope of your report to the lender
• Where other professional advisers are involved, ensure that it is clear what is the extent of each adviser’s role and responsibilities
• Controls over style and proforma documents ensuring that the styles and proformas in use in the firm for transactions which involve environmental issues are kept up to date; and that there are no rogue styles or proformas in use that contain inappropriate conditions, warranties, indemnities etc
• Develop a checklist or set of checklists for different circumstances to help ensure that all appropriate enquiries are made, questions asked and/or answered
• Devise checklists or transaction plans and then diary the relevant dates to help ensure that these enquiries are dealt with at the appropriate stage of a transaction (usually prior to conclusion of missives, agreement etc)
• Take particular care in the drafting/revisal of warranties, indemnities and other relevant clauses.  It may be helpful to develop a set of style clauses (with explanatory commentaries) which can be adopted/adapted when drafting or referred to when revising agreements
• In corporate transactions, due diligence would normally be expected to include appropriate enquiries regarding environmental issues and again check lists, whether standardised or tailored to the particular transaction should flag up these enquiries
• It may be appropriate for clients to be advised about the availability of relevant insurance arrangements (Environmental Impairment Liability insurance) and again checklists should include appropriate prompts.  Insurance to cover the risk of contaminated land liabilities is not provided by standard business insurance policies.  This is specialised cover which will only be available if an environmental audit is carried out to the satisfaction of the specialist insurers.
• In reviewing the terms of environmental audit reports, it is crucial to check the precise terms of engagement of the consultant who conducted the audit, to be satisfied that your client can rely on the consultant’s report and that the client will have rights arising out of the report that are capable of being enforced against the consultant bearing in mind any claim might arise some years later. Another point for your checklist.

Caveat

The contaminated land regime creates issues of considerable complexity for clients and advisers involved in various types of commercial property and corporate transaction.  The comments above allude to these complexities in only the most superficial terms.  The objective of this article is not to address the legal technicalities or their potential implications.

The principal aim of the article is to draw attention to the way in which it may be practicable to manage and minimise the many risks for solicitors including the risk of errors or omissions in legal advice; drafting errors in contractual and other documents; or failure to protect the client’s interests by obtaining appropriate reports, warranties, indemnities etc.

The approach which is being advocated is the application of various disciplines and systems including checklists tailored to the circumstances and requirements of the particular transaction and controls over documentation.  These are the same disciplines and systems that can help to minimise the risk of errors and omissions in relation to any type of client work.

The information in this page is (a) intended to provide guidance on matters of practical risk management and not on issues of law and (b) is necessarily of a generalised nature.  It is not specific to any practice or to any individual and should not be relied on as stating the correct legal position.

Alistair Sim is Associate Director in the Professional Liabilities Division at Marsh UK Limited