Reed Smith Client Alerts

Authors: Indeg L. Kerr Nicholas Rock Siobhan Hayes

Introduction  In this third in our series of briefings on topics relevant to those involved with “brownfield” land, we focus on “baseline” contamination surveys.

As readers will be well aware, in very general terms there are three types of environmental site investigation that can be commissioned: (i) a desktop report; (ii) a Phase I report; and (iii) a Phase II report.

A desktop report only involves a review of publicly available material and is of limited use in the case of all but the most environmentally benign sites. Where a site is already known to have a history of potentially contaminative use, or there are other good reasons to anticipate historic environmental impacts, it generally makes more sense to undertake a more detailed study from the outset.

Whilst a Phase I investigation also includes the same basic desktop report, it contains the additional, often highly instructive, step of a site visit and discussions with management. A Phase II investigation is, however, the only type of report that involves “intrusive” site investigations: sampling and analysis of soil and water through sinking boreholes and/or digging trial pits around the site. A true “baseline” survey will always be of the Phase II variety.

Although largely identical in physical process terms, compared to a more general Phase II intrusive site investigation a baseline survey has a particular distinguishing purpose and gives rise to certain specific considerations. It is these that are the focus of this briefing.

Purpose of a baseline survey  As the name suggests, the chief purpose of a baseline survey is to provide an evidential “line in the sand” between the condition of a site before and after a relevant date to assist in resolving who caused what in the future (for example in indemnity claims).

  • There are two main situations in which baseline surveys are commissioned – one mandatory and one voluntary – as explored further below:
    Where required by industrial permitting legislation 
  • Upon change of ownership or occupation of a site

Mandatory baseline surveys  There are still relatively few contexts in which there is a mandatory regulatory obligation to carry out a baseline site investigation in the UK. There is no legal obligation on buyer or seller, landlord or tenant to do so in the context of a sale or lease of land.

However, such a duty does arise when applying for an environmental permit to operate certain industrial sites under the Environmental Permitting regime.

Requirements for baseline data to be submitted were introduced under the PPC Regulations1 and have been retained under the new Environmental Permitting Regime. In order to comply with these requirements, an application for an environmental permit (to operate a process/ installation covered by the PPC Regulations) requires an accompanying “Site Baseline Condition Report”, which must detail the baseline conditions of soil and groundwater quality at the site at the start of operations under the new regime.

The significance of this is that when the licensed process ceases and the facility is closed (or perhaps significantly scaled back), the operator must submit a “Site Closure Report” which provides details of the soil and groundwater quality at the time of closure. This will then be compared with the original baseline report in order to determine whether any new soil and/or groundwater contamination has taken place whilst the permitted process/installation has been in operation. If so, the new contamination must be cleaned up as a condition of permit surrender. Such clean up obligations are more stringent than those under, for example, the UK’s contaminated land regime, because they are not dependent upon the existence/threat of an imminent level of environmental harm. The stringency of these duties has been further tightened by recent changes to implement the EU Industrial Emissions Directive.

Consequently, those buying the shares of a company that possesses one or more permits containing this clean up liability (or acquiring assets including such a site and accepting a transfer of such a permit) need to appreciate the clean up obligations that will follow if they subsequently cease all or a material part of the current operations. Those obligations will not be restricted to their own period of ownership/use, but instead relate to the lifetime of the permit (subject to any indemnity protection obtained from the outgoing seller).

Voluntary baseline surveys  There are various situations when a buyer/incoming tenant will be well advised to at least consider undertaking a baseline survey to establish an evidential ‘benchmark’ of ground conditions.

These include for example:

  • By a tenant or landlord upon the grant of a lease, to ensure that the yield-up and other provisions within the lease do/do not extend to remediating any contamination which preceded/occurred during the tenant’s occupancy
  • By a buyer or seller of land where, for example, the seller is retaining some or all liability for “historic” (pre-completion) contamination, or perhaps the seller holds adjacent retained land and that may be impacted by the buyer’s future operations

However, when considering a baseline survey there are many competing factors to be considered.

Timing  A baseline survey involves selecting and formally instructing a suitable technical consultant on appropriate terms, drilling boreholes and trial pits, analysing the results in a laboratory and then considering and reporting upon the results. The time that a baseline survey takes (typically a minimum of four to eight weeks, but longer depending on the extent of the investigation) can have significant repercussions for the timing of the overall transaction.

Of course it is not necessarily essential for a Phase II investigation performed for baseline purposes (as opposed to transactional due diligence) to be performed prior to exchange or completion. Obviously, bargaining opportunity is likely to be lost if the survey is done later (unless the contract provides for adjustments to terms), the opportunity to agree the results with the seller may be lost, and arguments about whether certain contamination revealed by the report may have occurred on the new occupier’s watch may be run in the future.

However, in practice and in the absence of unfortunate catastrophic events immediately post-completion, if a baseline survey is carried out very promptly after the new owner/occupier takes possession and is documented professionally, its results are likely to be essentially the same and have equivalent evidential value as they would have had if done beforehand. Sometimes a post-completion baseline exercise may be the only feasible option and the possibility should not be forgotten. The value of seeking to "agree" the contents of the report is in any event questionable.

Who is going to pay for it?  A Phase II investigation is not cheap. Obviously the cost depends enormously on the size and nature of the site and therefore how many boreholes/trial pits are needed to adequately characterise it but will typically run to several tens of thousands of pounds.

Who pays this is a matter for negotiation but the answer will also affect who has reliance on the report, the extent to which its contents and conclusions are able to be “agreed” between the parties and so on. These have timing implications and bring other complexities. The collection of sampling data can also lead to issues relating to site access and the disturbance of the site’s ongoing activities.

Is it worth it?  This obvious question frequently does not receive the prompt attention it deserves.

Clearly, any Phase II survey may have significant benefits in a due diligence context if permission can be obtained to perform it sufficiently in advance of completion to enable the results to be taken into account in the deal terms. As noted above, it is also sometimes possible to agree for a survey to be undertaken between exchange and completion, or even after completion, and its results reflected in price/term adjustments if circumstances make it impossible to do it beforehand.

 However, if for whatever reason the purpose of the survey is not driven by due diligence (for example, the decision to buy/rent and on what terms being already fixed) but purely by a desire to establish an evidential baseline, then the nature of the past and proposed future uses of the site will be a highly relevant consideration.

The classic situation where a baseline survey may be essential is where past and future uses are identical and it is not likely to be easy to distinguish between old and new contamination of the same type (for example, hydrocarbon contamination at petrol filling stations).

Conversely, if the planned future use of the site will not involve use or storage of any of the same substances that might be present as a result of historic uses, one might conclude that common sense and documentary evidence of comparative uses will be a sufficient substitute for a baseline survey in any future litigation about contamination liability. (Particularly bearing in mind that in civil proceedings (for example indemnity claims) the burden of proof is only on a balance of probabilities basis.)

Of course, the deal terms and the current and anticipated future status of the counterparty are also vital considerations. There is clearly much more purpose in a baseline survey; if you are receiving long term, valuable indemnity protection against “historic” contamination from the seller/landlord. Conversely, there may be a less compelling reason to do it if, for example, the outgoing seller is not retaining any future risk, and/or is likely to be wound up soon after completion. That said, the fact that the immediate predecessor is of no future relevance/covenant strength is not necessarily determinative: there may be other predecessor entities that have caused contamination at the site and remain in existence such that a baseline is still useful.

One must also add to the “is it worth it?” melting pot the fact that even a Phase II intrusive survey will not tell you exactly what contamination is present beneath a site. By definition, such surveys depend on sampling and extrapolation of results to build up a picture of the likely nature and extent of contamination. Note that for this reason one party may be keen to define historic contamination purely by reference to what is revealed by the survey, whilst the other is likely to prefer a generic definition that includes but is not limited to what is in the survey.

To some extent you get what you pay for in this context. A poorly prepared/reasoned report, or one based on insufficient data will clearly carry less weight. On the other hand, assuming the report is prepared professionally, it is likely to be the only, and therefore best, evidence of ground conditions at that point in time. Therefore, whilst it cannot be denied that there will theoretically be scope for a defendant to argue later about its probative value, in practice it is likely to be highly persuasive.

Another important factor is the impact on the buyer/tenant of the knowledge gained from such a report. The same applies to any Phase II investigation in a due diligence context. Sometimes a little knowledge can be a dangerous thing. In this context, the risk is that under certain UK statutory provisions and/or at common law the buyer/tenant might incur liability with the passage of time if it is aware of the existence of contamination, but does nothing about it and that contamination later creates an environmental problem. One must always ask, in the context of a proposed voluntary survey, whether the advantages of evidence outweigh the advantages of ignorance.

If you would like any more information about any of the issues raised in this article, or brownfield land in general, please contact any of the authors or your regular relationship lawyer.

1.  The Pollution Prevention and Control Act 1999 and the Pollution Prevention and Control (England and Wales) Regulations 2000



Client Alert 2014-101