Considerations for drafting contracts for the sale or purchase of contaminated land

This paper outlines some of the considerations for contracts for the sale or purchase of land that is or might be contaminated
(depending on what side of the deal you are on).

Often site contamination is not readily apparent. The negotiation and drafting process for contracts for land that is or might be contaminated needs to include considerations of uncertainty, liability, time/delay, cost of investigation, future development potential, off-site impacts and disclosure.

What do the parties want?

Commonly, the vendor wants to sell the land, get the money in hand, retire to the tropics and be rid of any liability relating to any contamination. The purchaser usually wants to know what is the nature and magnitude of contamination risk. This informs the decision to purchase, the price, development potential and other matters that will be important to the purchaser for years to come (while the vendor is relaxing in the sun). It is also likely to be of significance to the purchaser’s financiers who will have a keen interest in the value of their security and potentially their own liability. The purchaser is often slightly less concerned about time, and more about risk.

What is contamination?

The term “site contamination” is defined in the Environment Protection Act 1993 (“EP Act”) but only for the purposes of that Act. This is a useful start, but it is important to remember that this definition only applies for the purposes of this Act and may not apply to the express terms of an insurance policy, or any representations or misrepresentations or any action in nuisance or negligence which might be relevant to either party at some point.

The EP Act provides that “site contamination exists at a site if:1

1) chemical substances are present on or below the surface of the site in concentrations above the background concentrations (if any); and
2) the chemical substances have, at least in part, come to be present there as a result of an activity at the site or elsewhere; and
3) the presence of the chemical substances in those concentrations has resulted in

3.1) actual or potential harm to the health or safety of human beings that is not trivial, taking into account current or proposed land uses; or
3.2) actual or potential harm to water that is not trivial; or
3.3) other actual or potential environmental harm that is not trivial, taking into account current or proposed land uses.”

Part 10A of the Act contains various provisions relating to the assessment and management of site contamination. It applies whether or not the contamination or environmental harm existed or arose before the commencement of Part 10A.
Depending on the circumstances, a purchaser may be concerned about other forms of contamination that might be naturally occurring or a result of some other broader regional process (such as soil salinization, acid sulphate soils, naturally occurring arsenic etc).

Considerations for the Vendor

What should the vendor say about site contamination?

The obligations of a vendor about representations and warranties (and misrepresentation and silence etc)2 need to be considered when advising the vendor on any contract as well as determining what information or research to undertake.

1 See section 5B.
2 Competition and Consumer Act 2010 (Cth) and the Fair Trading Act 1987 (SA), Misrepresentation Act 1972 (SA), Land and Business (Sales and Conveyancing) Act 1994 (s7 and 8)

There are the obvious statutory obligations under the Land and Business (Sales and Conveyancing) Act 1994 to disclose prescribed information relevant to the potential contamination of land3. The information required to be provided includes any environmental assessments and orders under the EP Act and potentially contaminating activities undertaken on the land whilst the vendor was the owner.

The hidden nature of site contamination and the particular knowledge of the vendor needs to be taken into account when advising a vendor on disclosure obligations. Contamination related matters and questions of misrepresentation by silence might well arise, for example
where the vendor knows of activity on neighbouring land that may have caused contamination to migrate into the vendor’s land.

Should the vendor get a site assessment report?

Where the vendor has no knowledge of contamination the question is often whether to obtain a report from an environmental consultant to provide some comfort to a purchaser. Vendors ought to be advised of the effect of sections 83A and 103P of the EP Act. The effect of these provisions is that the vendor, or its environmental consultant, is obliged to notify the EPA in the event that a site assessment reveals site contamination. Such assessments cannot simply be retained in confidence by the vendor. If the vendor does not notify the EPA, the consultant must. Once notified,the EPA will most likely record the assessment on the EPA public register4.
If the assessment is in the form of an audit, then it is also possible that the EPA will require the audit to be noted on the title to the
land under section 103P.

Environmental consultants are generally not salespeople. Their reports are usually qualified and limited. Often they attempt to limit the reliance that may be made on their reports to the “client”. These reports are often lengthy, with pages of graphs, bore logs, tables and references to chemical compounds and health and environmental risks.
Few lay people comfortably comprehend them. The process of undertaking an assessment is not always simple. Sometimes the process involves
phases of assessment with reasonable delay (several months) and considerable expense.

Another approach is to allow a purchaser to undertake its own assessment, at its cost. This does not how ever resolve the risk that the assessment will be notified to the EPA and the purchaser may decide not to proceed with the sale. The special conditions ought to specify the nature, scope and timetable of the assessment and the relevant standard to be achieved (assessed or remediated etc) at the conclusion of the assessment.

3 See Schedule 1, item 7 and Division 2 particulars of the Regulations under the Act.
4 See section 109 of the EP Act.

Passing EP liability

The EP Act provides that an “appropriate person”5 can be held responsible for certain orders to assess or remediate site contamination. The default position is that the person taken to have caused the site contamination will be liable. “Causing” site contamination can include occupying land when an activity that caused or contributed to contamination occurred, or by bringing about a change in the use of land.6 A person can cause site contamination by being the occupier when an activity that causes contamination occurs and by bringing about a change in use of the land.7 The definition of “occupier” in section 103A refers to the definition in section 3. It should be noted that a mortgagee in possession is not an “occupier” unless they assume “active management” of a site. A mortgagee in possession therefore needs to be very cautious when selling off contaminated land. The more that is done by or on behalf of the mortgagee to prepare the land for sale, the greater the risk of liability arising. There is a fair chance the owner won’t be co-operative and won’t be in a position to comply with any orders issued by the EPA.

If it is not practicable to order the person who caused the site contamination to undertake an assessment and/or remediation (i.e., because that person cannot be found or has died etc), then the current owner of land may be responsible in appropriate circumstances.8 Whether those circumstances exist and make a landowner responsible depends on certain matters listed in the EP Act.

Section 103E of the EP Act allows certain liability under the EP Act to be transferred from a vendor to a purchaser. The necessary agreements must be lodged with the EPA and if accepted, placed on its public register. The EPA takes the view that the site contamination for which liability is being transferred must be known to exist.9 As such, the EPA will not, as a matter of practice, allow a vendor to transfer potential or unidentified contamination liability. One solution is to have the nature and extent of site contamination assessed in a report, prepared by an environmental consultant, to be included in a “compliant” section 103E agreement and lodged with the EPA.

It is crucial to consider the likely timeframes involved with securing the EPA’s consent to a section 103E agreement. Similarly, negotiating parties should ensure that the terms of the section 103E agreement will in fact be acceptable to the EPA.

For what it is worth, arguably the purchaser could indemnify the vendor for any EP Act liability that was not otherwise transferred under s103E. That will not free the vendor from action by the EPA

5 See section 103C.
6 See section 103D.
7 See section 103D.
8 See section 103C and EP Regulations, regulation 50 and Schedule 3.
9 EPA – “Site contamination fact sheet – transfer of liability”, updated October 2010.

under the Act but may provide some protection for the relevant costs incurred in undertaking site assessment or remediation.

Passing common law liability

Apart from the liability under the EP Act, there is also the liability at common law. Mere compliance with the EP Act does not necessarily indicate that a common law duty of care has been satisfied. 10 Possible actions against owners of contaminated land can include actions under the torts of negligence and nuisance11. Again, for what they are worth, a purchaser might indemnify a vendor for any common law liability that might arise, particularly to neighbours for site contamination.

Time

Vendors in a hurry to sell need to be conscious of the time to undertake site assessments. In many instances the assessment will reveal some contamination that can be managed (for instance by excavating some soil, removing an old oil tank etc), albeit with some risk and uncertainty. Vendor’s assuming that they will just excavate the contaminated soil and dump it may find it expensive and time consuming. They may need to plan for contingencies (when more contamination is found underground) and the cost and delay. Likewise, special conditions that relate to site assessments and any consequential remediation requirements on the purchaser need to deal with timing and the risk of other contamination being discovered once excavation starts.

Audits

The EP Act refers to site assessments and audits. The term “audit” is also often used in contracts. Audits are not the same as assessments.

Site assessments can be undertaken by almost anyone. It is important to get such assessments done by an experienced credible consultant. However, it may not be necessary to use an ‘auditor’. Many experienced consultants are also accredited auditors under the EP Act. There are plenty of good consultants who are not ‘auditors’ too. An auditor is not necessarily required as part of a transaction.

An audit is a review of the assessment done by another consultant. Because it is a form of peer review, it necessarily increases the cost and time associated with assessment. It is probably only practical to engage an auditor for a transaction where there is considerable risk, a need for independent verification and plenty of time.

10 See EP Act section 8.
11 See Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520.

Disclosure

Vendors face the conundrum of providing confidence about a site to promote a sale without looking so hard that site contamination or risk is discovered. The general law and principles about misrepresentation and misleading and deceptive conduct apply. Advice and strategy needs to be considered early in the marketing and sale negotiation process.

Any assessment by any consultant that uncovers contamination will be notified to the EPA under section 83A. It will then become public.

Considerations for the purchaser

Quantifying the risk

Purchasers are often given a report commissioned by the vendor from an environmental consultant, along with a disclaimer in the report and a clear qualification by the vendor that the purchaser may not rely on the report and must make its own enquiries. It is important to ad vise purchasers to get advice on such reports from a suitably qualified consultant so that the extent of uncertainty can first be ascertained. There are many factors that can affect the utility of such reports and expert advice is often very helpful.

It may be necessary to consider requesting from the vendor an opportunity for the purchaser’s consultants to access the land and undertake testing. What might be needed, the extent of invasive testing and the time and cost all need to be considered. It is likely that the vendor will only agree on the basis that the purchaser first enters into the contract to purchase subject to satisfactory assessment within a certain time.

The risk to the purchaser needs to be considered in the context of the development potential of the land (if contaminated will it inhibit the purchaser’s proposed use or development?), whether the purchaser will be exposed to remediation cost in the event of development of the land and whether the purchaser will inherit a liability to neighbours for material that migrates off site after the purchaser takes over.

Proper due diligence includes examining the EPA register, reviewing any planning approvals and probing the vendor about past use of the land.

Development potential

The effect of site contamination on the development of a site is usually important to a purchaser. The act of changing the use of the land can “cause” site contamination for the purposes of the EP Act and thus bring about a liability to the purchaser. Thus where it is contemplated that construction or excavation work will be undertaken or where the use of the land may change, the effect of contamination ought to be considered by the purchaser. The effect of contamination might be anything from the cost and delay in preparing reports and enduring a more onerous development assessment process, through to testing or remediation. It may even prevent some forms of development. This risk might be resolved by special conditions that provide for the obtaining of development approval for a particular development on terms acceptable to the purchaser. Another option is to provide in the conditions for a site assessment (even an audit) that certifies that the site is in a certain acceptable condition.

Off site liability

The purchaser should be careful to ensure that any contamination on site is not migrating off site. Arguably, once the purchaser takes possession of the land, any contaminated groundwater (which may have been contaminated by the vendor) which then migrates beyond the boundary becomes a potential problem for the purchaser.
This will create common law and general EP Act pollution liability that may be worse than the limited development potential of the site itself.
Likewise, depending on the nature of the land, the proposed use of it by the purchaser and the circumstances of the surrounding area, sometimes the purchaser is at risk of material moving onto the newly purchased plot. Little can be done between the parties to address this risk. Instead the purchaser needs to ensure that it has undertaken its own due diligence and obtained advice from an environmental consultant on this issue.

James Levinson December 2014