POSITIVE LIABILITY TRANSFER - Providing new options for contaminated land
By Grant Scott, Director OTEK Australia
A Case of Dirty Laundry!
Before I discuss the concept and approach that is called Positive Liability Transfer or PLT as it is commonly known I thought I would like to briefly discuss a case study that typifies the need for the PLT protection of property transfers in the case of polluted sites and properties.
The case refers to the still unresolved legal action between a company called Premier Properties and the Spotless group.
The simplest way to outline what has occurred is to provide a time line and action points that draws together the various elements involved.
November 1999:
Premier buys an industrial site.
Neighbouring property previously used for dry cleaning by Spotless.
May 2000:
Premier land rezoned to mixed use with Environmental Audit Overlay (EAO).
April 2001:
Planning permit issued for residential units.
Condition reflects EAO requirements.
July 2002:
Council requires audit certificate / statement before issuing occupancy permit.
September 2002:
Construction of 49 residential units (most pre-sold) substantially complete.
2002/2003:
Environmental site assessment to obtain certificate / statement shows land contaminated.
Premier's pre-sales lost
Environmental Protection Authority (EPA) issued 3 clean-up notices to Premier.
North Suburban Properties, current owner of neighbouring "Spotless land", issued with 3 clean-up notices by EPA
North Suburban Properties – claim for statutory compensation from Spotless
Outcome: Ultimately, Spotless was found to be liable to compensate Premier, but only in respect of the clean-up costs it incurred in complying with EPA Victoria’s notice. Notably, Premier’s claims against Spotless for damages for negligence and nuisance failed; the Court found that the Spotless parent company was not legally responsible for the past activities of its deregistered subsidiaries. While deregistration of the subsidiaries was found not to have been part of a scheme to avoid liability, the Court observed that Spotless’ denial of responsibility “reflects on credit on the commercial morality of those whose decision it was that this position should be adopted”.
Much of this legal battle and finger pointing would have been eliminated by utilising the PLT approach as part of the due diligence on the land purchase from day one.
Under Australian law companies and government entities remain liable on an ongoing basis for the contamination of land and groundwater that was caused by their operations. Statutory and accounting best practice requires that these liabilities are quantified and provisions for the future rectification of these environmental issues are placed on their balance sheets.
Property owners, Federal, State and Local Governments are however facing increasing challenges in how they manage this contaminated land and ground water. Unlike in the USA, Australia does not have the range of subsidies and support options to encourage the redevelopment of contaminated properties.
In the case of Government owned land, the absence of public funding to encourage the redevelopment of contaminated site has placed increased pressure on State Governments to release additional land for Greenfield sub-division developments.
While our cities push outward, large areas of inner urban former industrial land or Federal and State Government owned defence or infrastructure properties (rail yards; docks; landfills), lie dormant, due to the unknown cost of remediating them for reuse as commercial or residential properties. Many of them are orphaned sites, long abandoned by their original owners making it impossible to pursue these entities for the cost of fixing the contamination.
There appears to be reluctance for property developers and buyers to take on the commercial risk due to the indeterminate nature of the remediation costs and the concern that doing so may result in a loss or an unacceptable return on investment.
OTEK Australia, an environmental consultancy firm with extensive remediation experience, founded in 1991, is one company that has found a way to change the risk reward paradigm and provide greater certainty of making the redevelopment of inner urban contaminated land profitable by introducing its Positive Liability Transfer (PLT) product.
Positive Liability Transfer (PLT), an OTEK Australia trademarked product, takes on the liability, costs, and ongoing regulatory risk exposures associated with the contaminated property assets, whilst addressing the rectification of any contamination, thereby unlocking the value in these properties and freeing them for redevelopment.
PLT was originally developed as a product to be used in conjunction with the commercial property developer market to enable the redevelopment of contaminated land that often had a significant negative stigma attached to it.
While it continues to be used in this manner, the changing needs of the marketplace have seen it used in many other situations.
In mergers and acquisitions, PLT can remove deal barriers associated with environmental liabilities that can impede transactions between interested parties allowing settlement to proceed without ongoing delays and headaches negotiating these problem sites.
It has also enabled organisations to dispose of contaminated property assets that are surplus to current needs whilst providing the divesting organisation a comprehensive indemnity against future claims that may arise from the existence of any historical contamination.
Where an organisation has an ongoing need to use a property, a sale/leaseback option enables the contamination issues to be rectified whilst the occupier continues the use of property for operational purposes. Funds for clean-up provisions sitting on the balance sheet and from the sale are released so new opportunities can be pursued all with full indemnification against any claims arising from the pre-existing contamination on the site.
PLT can also be used to provide a fixed cost remediation of environmental problems involving no sale or transfer of ownership of the property.
The PLT approach can also be used by property developers and Governments in Public Private Partnerships (PPP’s) or other forms of structured settlements to protect all parties involved in the deal.
PLT provides comfort through an agreed solution for landowners, whether Government or private that removes liabilities and provides a proven indemnification process that can extend into perpetuity if required. By rectifying the contaminated asset prior to sale or as part of the disposal process, an owner can achieve optimal value on the open market.
The PLT process provides complete contractual indemnification, with insurance provided by independent world-class underwriters. Where applicable, compliance requirements associated with cleanup or pollution abatement notices imposed by State Government regulatory agencies are assumed.
This indemnity is unique, providing protection to the disposer of the land by transferring their obligation to remediate the land to OTEK. The protection is transferable to future owners or occupiers thereby removing the risk of inheriting cleanup cost obligations. The indemnity PLT provides is very comprehensive. It covers not only on-site and off-site migrated contamination, but also past, present and future; and known and unknown contamination. This contamination can be above, on or below ground. The indemnity will also cover costs arising from changes to legislation.
The flexibility in structuring PLT transactions for the removal of environmental liability allows them to assist organisations in a number of ways.
The process of assessing whether or not PLT is right for a landowner is simple.
At OTEK, it begins with utilising an independent professional real estate organisation to provide information on the “commercial clean value” for the asset under consideration.
The next step is typically based on desktop study, which includes a review of all the detailed reports of any presently known environmental conditions. OTEK uses this to determine an environmental impairment value. These values are put into a risk indemnity model and a commercial offering is provided to the current property owner for consideration.
PLT enables the risk to human health and ecology and any stigma associated with a contaminated property to be removed whilst providing the vendor with peace of mind that they can focus on future opportunities without the concern of past issues resurfacing. It also enables organisations to be seen as environmentally responsible in the marketplace and projecting a positive image to stakeholders and the media. In addition, organisations can focus on their core activities without the distraction of environmental contamination or legacy issues, impeding their ability to achieve their targeted outcomes.
Positive Liability Transfer should be considered by any organisation as a means for handling environmental exposures on their present assets. Through sale-leaseback; fixed cost remediation; creation of special purpose vehicles; and other processes, a government department or company can use PLT as a real means of environmental liability management in a commercially advantageous and, where applicable, tax effective manner.
At OTEK, we have seen the number of proven PLT projects, both private and governmental, grow steadily with many organisations finding PLT an increasingly useful tool in their armoury for dealing with contaminated land.
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