Business Money – Finance and Banking for Business

Property development

July/August 2006

Lenders take action on contaminated land and environmental risks

Richard Pawlyn

In a hot property market it isn’t usually the environmental issues that keep bankers lying awake at night. However, it appears that environmental risk has been creating enough disturbed sleep for several major banks to change their practices in order to protect clients, protect the bank’s reputation and ultimately avoid contaminating their loan book.

Surveyors acting for nine major commercial property lenders, including Barclays Bank, HSBC, Anglo Irish Bank, Clydesdale, Yorkshire and Alliance & Leicester are being instructed to use environmental screening reports to identify potentially contaminative features and historical land uses, rather than rely on caveats or general assumptions on the environmental risks of a commercial property. There are other major lenders looking to do the same, as the risk of developing on contaminated land or old landfills begins to move up the risk management agenda.

So why this growing concern over environmental risks? Has the UK’s land mass suddenly caught a contagious disease which is spreading throughout the country’s property developments? If so, do we have a vaccine?

Well, it’s not quite like that, but what is certain is that the whole property industry, from financiers through to developers, is in desperate need of its MMR injection. And if it’s a disease which affects the balance sheet, which this does, then it’s no surprise that the banks have cottoned on to the fact and signed up for their vaccinations.

While the amount of contaminated land itself has not increased, the likelihood of landing on it, and the penalties of doing so, have increased dramatically.

Firstly, with the government announcing in March that 209,000 homes will need to be built every year to cater for demand, coupled with that same government’s drive to build 70% of new developments on brownfield land, it’s easy to see why the likelihood of landing on something contaminated might be more likely than before.

Secondly, legislation in the form of the Environmental Protection Act has raised the bar when it comes to who is liable for the costs of remediation.

The recent Bawtry case in the High Court is a warning to all, where the judge ruled that even the builder of the development could be liable for the clean up costs, estimated at between £400,000 and £700,000. As the building firm has long gone out of existence the full cost falls to the site owner.

Suddenly, the alarm bells ring louder for asset holders, debt and equity participants in the commercial property investment market.

It only takes that owner to default on their loan, or go bankrupt because of the cost of the remediation, and the lender has a contaminated asset in its loan book and the possibility it will have to foot the bill to clean it up. There are many examples where this has happened and one such case whereby the lender was forced to cover over £3m in remediation costs.

It’s all brewing towards those sleepless nights, and lenders are therefore becoming, quite rightly, cautious about committing to sites without fully understanding all the issues. Reputational risk and defaulted loans hold the largest risk on the inheritance of environmental issues for the bank. The change in their instructions to surveyors reflects this.

Banks know, or at least should know, that, at present, when conducting valuations, surveyors are leaving themselves and their client lenders exposed, as many are not covered by professional indemnity insurance to comment on environmental issues. And the common practice of using caveats in reports is understandably deemed “potentially unsafe and professionally inappropriate” according to the Royal Institution of Chartered Surveyors.

Hence, the move towards the use of desktop screening reports which are PI backed, such as Landmark Information Group’s Enviroscreen, and which will not only provide accurate information to aid the valuation but also invaluable protection for surveyors, and their client lenders, who no longer need rely on caveats.

Rupert Dodson, head of valuations at surveyor firm Cushman & Wakefield states that the changing views of lenders towards environmental concerns will impact on the work of valuers: “Banks want valuers to commission an environmental assessment of the site so that they can have a clear idea of how property or portfolio complies with environmental regulation.”

Eric Shearer, partner at Knight Frank, agrees: “With the Environment Agency announcing there are 100,000 sites situated on around 200,000 hectares of contaminated land in the UK, it’s absolutely clear that an assessment of environmental risk is no longer optional but has become an absolute necessity in all commercial land and property transactions.”

This change of focus can also be seen with leading Self Invested Personal Pensions (SIPP) providers, such as James Hay, who have also confirmed they will not approve transactions against investment acquisitions unless a screening tool is used.

Ultimately, as always, it comes back to cash. In this case, protecting that cash by making sound investments and being aware of all the facts.

Savvy lenders have seen the landscape changing and are a step ahead of the competition. By applying rigorous risk management processes they are not only protecting their cash, they are making more of it – minimising the risk means minimising the amount needed to be set aside for provisions.

As an antidote to sleepless nights it doesn’t come much easier than this, and surely the thought of more cash in the vault and less risk on the loan book is enough for any banker to sleep like a baby.

Richard Pawlyn, managing director of Landmark Information Group’s
Property & Environment company.
Further information and advice on environmental risks can be obtained from www.landmarkinfo.co.uk or by calling Landmark on 01491 413030.

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