In the early 1990’s there was a great deal of concern in the property industry about the so called registers of contaminated land. It was proposed that these were to be introduced by virtue of section 143 of Environmental Protection Act 1990.
After years of debate, representation and lobbying by a wide range of professional bodies and stake holders in property; significant changes were made to the legislation and the regulations repealed. As a consequence banks found themselves in the fortunate position whereby they were excluded from liability because of amendments made to primary legislation. The reason why the banks were so concerned is that they were worried that by virtue of corporate lending that they could be exposed to significant claims of environmental cleanup and damage.
Thus the words “other than a mortgagee not in possession” added to the definition of an owner who was liable under the act and this is set out in section 78A (9) of Part IIA of the Environment Protection Act 1990. In fact the definition of an “owner” under the act is as follows:-
“a person (other than a mortgagee not in possession) who, whether in his own right or as trustee for any other person, is entitled to receive the rack rent of the land or, whether the land is not let at a rack rent, would be entitled if it was so let….”.
Let us now spin forward. The contaminated land regime has been operating for nearly 10 years and for many it has dropped out of sight. Whilst a great deal of additional environmental due-diligence has been undertaken at a corporate level in many cases very little has been undertaken when a great deal was really needed. On too many occasions banks and those other stake holders to any property transaction obtained environmental reports on a “least cost” basis. It is seen as a “distressed purchase” rather than as adding value to the asset overall. Although 45% of all commercial environmental reports require “further action”, only a fraction of those reports ever was acted upon notwithstanding many issues that needed to be articulated in a more formal report which would run with the property title.
It seems that there was too much profligate lending over the last 10 years and too much “tick the box” compliance with professional standards and not enough care and attention given to detail of what those outputs were actually saying to them.
So now the banks find themselves in the position of owning a significant amount of real estate where their loan to value has been eroded by the collapse in property values and re-financing is proving problematic. They have become “mortgagee in possession”. The number of properties which are distressed and in need of being worked as assets so that the bank can restore its balance sheet runs into the tens of thousands. RBS alone is understood to have 66,000 distressed assets being worked on by a specialist department.
However, before the banks acted upon their obligations became “mortgagee in possession” did they carry out any secondary due-diligence? There has been no upsurge in other demand for commercial environmental reports beyond the seasonal norm and as a result the answer is that none was carried out. Therefore the banks are in the position of having to rely upon the quality of work that was undertaken by the investor/developer at the time of the banking covenants were entered into. This in my professional opinion has often come up short where:-
- Assets were acquired using the cheapest possible report notwithstanding the complexity of the scheme;
- Where recommendations were made, these have not been acted upon.
- That planning requirements have not been fully complied with.
- Remedial work is incomplete.
This of course deals with the issue of contaminated land and there are new challenges on the environmental front posed by a growing body of European legislation such as the Environmental Liability Directive requiring that assets are restored to natural state, climate change with the increase incidents of flood risk and that 1 in 6 homes for example is affected by inundation and that clients demand more knowledge about how buildings function over the life-cycle of their occupation.
It isn’t just the bank who are coming up short on environmental due diligence. Many pension companies operating a SASS or SIPP scheme have seen their numbers of enquiries plummet. As a result short cuts in the acquisition cycle appear to have being taken with the onus being put on the pension scheme member to do everything. Instead of guiding them through the process and making sure that their valuable pension monies are not placed at risk, the scheme administrators are all too quick to complete the deal and accept the fees. There are of course exceptions to this practice where AXA for example the SIPP centre of excellence runs a high quality, highly proficient service at a reasonable cost. But many others do nothing at all hoping that the issue will go away. But when the scheme member wants to sell their asset, to cash in on the pension pot it is more than likely that any purchaser will do more not less due diligence in the future and the value will be impaired as a result.
To this end the RICS have updated and focused significantly on the importance of the green issues and its roll within all forms or real estate consulting. The latest edition Contamination, the Environment and Sustainability; their implications for Chartered Surveyors is to be published in late 2009. This makes the position crystal clear; that these issues cannot be ignored during the valuation process and the challenge for the Chartered Surveyor is to articulate how these issues affect all forms of real estate. The new guidance note gives the Chartered Surveyor the tools to property advice and comment on all matters concerning contamination the environment and sustainability. It has overhauled the property observation checklist which is expected to be used during the course of all surveys by any Chartered Surveyor in whatever sector to identify not just contamination but invasive species such as Japanese knotweed and the potential for flood risk.
The guidance note also forms part of the Red Book and introduces for the first time a sustainability survey which will be of immense use to corporate occupiers.
What is clear is that the pendulum of compliance should swing from ticking a box to doting I’s and crossing t’s but the banks need to specify in which font the I and T are going to be in. More not less due-diligence is needed if asset value is to be protected and enhanced.
