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:
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:
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:
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.
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:
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.