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PROPERTY INVESTMENT SPECIAL - DISH THE DIRT

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Contaminated land can lead to crippling liability claims for trustees and owners. But are investors aware of the ri...
Contaminated land can lead to crippling liability claims for trustees and owners. But are investors aware of the risk, asks John Barraclough?

During the 1990s environmental issues demanded and were afforded a much higher profile. The signing of the Kyoto protocol together with the emphasis placed on the issue following New Labour's first election victory in 1997 has resulted in the subject attaining political importance.

In 1999 prime minister Tony Blair said in his foreword to the statutory guidance for contaminated land: 'The last 100 years have seen a massive increase in the wealth of this country and the well-being of its people. But focusing solely on economic growth risks ignoring the impact - both good and bad - on people and the environment. Had we taken account of these links in our decision-making we might have reduced or avoided costs such as contaminated land or social exclusion.'

A raft of new legislation, guidance and regulation concerning this issue now affects all sectors. Of these the most emotive is the Environmental Protection Act 1990, which resulted in the introduction of the so-called s143 registers of contaminated land. In 1995 the registers were withdrawn by primary legislation.

On 1 April 2000 the government introduced a more onerous environmental regime in accordance with part IIa of the 1990 Act. This Act enshrines, in UK legislation, the polluter pays principle. If the polluter can be found and is sufficiently strong financially to meet any claims, the landowner is protected. However, in the oldest industrial society in the world, many of those responsible for pollution have ceased to exist. If the polluter cannot be found the owner or occupier will be liable.

In addition to the important issues arising from

historic use, the occupier's actual use of land and property gives rise to greater concerns. An occupier is

not defined in the legislation or guidance notes but is viewed by the government as the tenant or licensee of

the premises.

Banks and other financiers escape liability if they are not 'mortgagees in possession' but trustees, fund managers acting on behalf of trustees, or equity owning pension funds face strict and retrospective liability. The fund is potentially the 'deep pocket' for environmental liability purposes.

The law relating to contaminated land may be at odds with the Welfare Reform & Pensions Act 1999, the law of trusteeship and the Charities Acts 1992 and 1993 (c.10), but it is now of crucial importance when making investment decisions.

The risk of investing directly in land, which contaminates adjoining land, is clear to see. Our survey, conducted among local authority pension schemes investment officers, examined their awareness of this issue.

The results indicate all the councils who responded were aware of the issues surrounding environmental liability when placing new money into direct property investments. But the environmental risks of investing through property unit trusts or segregated funds appear to be less clearly understood.

Two-thirds of respondents who invested via a property unit trust were not aware of the managers taking environmental considerations into account. This contrasts with 62% who are aware of environmental factors being taken into account when investing via an externally managed direct portfolio.

The survey indicates 43% of those questioned were not aware of the statutory responsibilities imposed upon owners, trustees and advisers in respect of any pollution emanating from property sites.

When asked whether they believed their legal advisers were aware of the responsibilities placed on them for these issues, a surprisingly high 45% believed they were not. A further 14% of legal advisers are understood not to be raising any specific enquiries on environmental matters at the time of purchase. If the sample result were to be replicated across the industry, this lack of awareness is potentially very serious.

In June 2001 the Law Society published its warning card on contaminated land. It states solicitors must 'in every transaction' consider whether contamination is an issue in purchases, mortgages and leases.

In respect of property unit trusts any claim against a trust is likely to be met from the property of the trust, unless a claim can be made against the polluter or an insurance policy, as no other route of recourse exists. In such an event the capital of the trust would be reduced or possibly exhausted in meeting a claim.

Due diligence at the time of purchase and prudent management can be used to reduce the risks of claims arising from investment holdings.

A land-quality statement looks at how environmental issues affect the land transaction and the impacts for the property in the longer term. The survey showed that, of those respondents who invested directly, all acquired a land-quality statement or similar. But if nearly half of

the legal firms involved in these transactions are not aware of their obligations, the importance of these statements is clearly diluted.

While insurance against rectifying undetected contamination is increasingly sought, the market is not particularly wide. Few underwriters are prepared to ride the risk of insurance. In addition, policy renewal is generally not guaranteed and depends on claims experience. The level of premium payable is likely to be volatile and rates are expected to rise steeply.

This survey indicates there is potentially a substantial lack of awareness of how environmental considerations may affect both directly and indirectly held portfolios. This appears to be the case not only at the time of purchase but during the ongoing management of property portfolios.

Of greater concern is the failure of those people authorities/fund managers turn to for advice to adequately address these issues. This represents a potential claim for negligence, not only for legal advisers but against fund managers from an aggrieved beneficiary who discovers his fund has been exhausted by a claim.

Despite these fears, the survey indicates a reasonable degree of confidence in the role of commercial and industrial property within an investment portfolio. The majority of respondents indicated a wish to either maintain (69%) or increase (25%) property weightings.

Interestingly, the IPD Monthly Index set the level of initial yield offered by All Property at 7% in September 2001 - above that available on gilts and significantly in excess of income returns on equities. Despite this, the majority of local authority investors (65%) still look to property more as a means of portfolio diversification.

-- Additional information supplied by Philip Wilbourn & Associates

John Barraclough, FRICS

Chief surveyor, CCLA Investment Management and

fund manager of the Local Authorities' Property Fund

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