Contaminated land - risk to lenders?

Anyone in the business of lending money for the purchase or redevelopment of land in Western Australia should ensure they are familiar with the risks and obligations under the Contaminated Sites Act 2003 (CS Act) regardless of whether they consider the land to be contaminated or not.  Failure to determine if land is contaminated or indeed what the extent of that contamination is prior to lending can have potentially distastrous consequences in regards to responsibility for remediation.

CS Act essentials

The core premise of the duty to remediate contaminated land is set out at section 25 of the CS Act, which states that a person who caused or contributed to the contamination of land site is responsible for the remediation of the site.  In the event there is no person responsible under section 25, the person responsible cannot be identified or does not have the financial capacity to conduct the remediation works then the following hierarchy will apply:

• The person who caused or contributed to contamination of the site.
  
  
• The owner of the site, who became the owner of the site prior to the commencement of the CS Act and knew or suspected the site was contaminated (see section 27(1) and (2)(a) of the CS Act).
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• The owner of the site, who became the owner of the site after the commencement of the CS Act (see section 27(2)(b) of the CS Act).
  
  
• A person who is the owner of the site and was an owner of that site at the time the contamination was caused (see section 27(2)(c) of the CS Act).
  
  
• A director or mortgagee in possession of an insolvent who caused or contributed to the contamination of the site (see section 27(2)(e)(ii) and 31 of the CS Act).

However, an owner or occupier who changes or proposes to change the use of a contaminated site will move to the top of the hierarchy (see section 26 of the CS Act). 

Risk to lenders

The CS Act defines an ‘owner’ as:

• a holder of freehold land; and
  
  
• a mortgagee in possession.

The risk to lenders is that should a borrower default on a loan contaminated land, then the lender will be deemed as the owner of the land should they take possession, pursuant to the mortgage.  Therefore, the lender will take on the capacity as owner for the purposes of the CS Act and may ultimately be responsible for remediation of the land.

As a result, mortgagees in possession may be liable to significant costs of remediation or take hefty penalties for non-compliance.

It goes without saying that the responsibility to remediate a site is potentially onerous and may require considerable expenditure to resolve.  Consequently, lenders have basically been hesitant with lending money to purchasers and property developers for the purposes of purchasing or redeveloping land that is potentially contaminated or classified as contaminated due to the potential risk that the remediation costs may outweigh the land value.  However, the greatest risk to lenders in respect of contaminated land is the unforseen risk.  Often land may not appear contaminated at the time of purchase or at the time money is lent, but is later discovered when the borrower becomes insolvent that the land is contaminated and the lender is required to make a decision as whether or not to take mortgagee in possession and assume the risk to remediate.

According to the Department of Conservation's (DEC) 'Potentially Contaminating Activities, Industries and Landuses Guidelines' (DEC, 2004) (Guidelines) land that has been used for any of the following purposes could be potentially contaminated:

• fuel storage (service stations);
  
  
• chemical manufacturing (including pesticide formulation);
  
  
• power stations;
  
  
• gas works;
  
  
• agricultural use (including market gardens);
  
  
• landfill sites;
  
  
• large industrial facilities; or
  
  
• mines.

Contamination on land used for any of these purposes will often go unnoticed and lie dormant in the underlying soil or groundwater on a site.  The contamination is usually discovered years later when an environmental investigation of the site has been undertaken or the contamination has leaked off site.

Mitigation

It is imperative prior to lending money in relation to the purchase or redevelopment of land in Western Australia that a lender makes the necessary inquiries as to the current and historical land use.  If land is or has been previously used for one or more of the purposes listed in the Guidlelines then it is prudent to consider engaging an environmental consultant to undertake a preliminary site investigation to determine the likelihood and risk of contamination.

In circumstances where land is known to be contaminated a lender may wish to implement a number of safeguards at the point of lending for the purposes of minimising long term risk.  Some safeguards that may be considered include:

• requiring security to be provided to cover the costs of remediation; whilst the exact cost of remediation is difficult to ascertain, engagement of an environmental consultant and consultation with the DEC would assist in determining the nature of the remediation works required and provide a good idea of the security to be requested;
  
  
• requiring remediation to occur during the redevelopment of the land and factoring in the remediation costs into the loan amount; and
  
  
• making the loan conditional upon certain actions occurring, such as ongoing monitoring of the site to ensure contamination does not migrate off site. 

Whilst each transaction will be different, lenders' requirements for protection will differ and will need to be determined on a case by case basis. 

Although it is important to undertake the necessary investigations and searches to determine the presence, or potential presence, of contamination it does not mean that the site poses a high risk to a lender.  Rather the identification of contamination will enable the formulation and implementation of the appropriate means and measures to reduce the potential risk to the lender and to facilitate lending for those sites. 

If you would like to know more about lender liability under the CS Act or to discuss the implementation of protection measures, please contact senior associate Craig Wallace or associate Shauna Mounsey.

The Lavan Legal Environment Team would like to thank you all for your input and instruction throughout the year and wish you all a very Merry Christmas and happy and prosperous new year.  

Our office will close at 5pm on 23 December and reopen on 3 January 2012.  In the event that you require urgent assistance during that period please do not hesitate to contact partner Paul McQueen or senior associate Craig Wallace.