Does automatic transfer of emissions permits to the acquirer of a plant make sense?

A proposal to amend Poland’s Environmental Protection Law would eliminate the need to transfer permits by providing for automatic passage of rights and obligations under environmental permits to the acquirer of an installation.

Verifying the passage of rights and obligations under environmental permits to the acquirer is often one of the key aspects of transactions involving acquisition of an enterprise, real estate or other assets. Such permits are issued in the form of an administrative decision. Determination of the conditions for operations with an impact on the environment on the basis of the decision is an authoritative act by the public administration. This means that the recipient of the permit cannot freely dispose of the permit, particularly by transferring rights and obligations under the permit to another entity through a civil law transaction, e.g. to the acquirer of the installation.

Transfer of permits is the exception, not the rule

Transfer of rights and obligations under environmental permits is possibly only under the conditions set forth by law. Application of these conditions in practice is problematic, because the rules for passage of permits depend on the type of administrative decision involved and the type of transaction. For example, the limited administrative succession provided for in the Commercial Companies Code in the case of merging companies eliminates the need to transfer rights and obligations in certain instances. There are similar exemptions, but not quite the same, with respect to transactions involving an enterprise. But there is no such relief when real estate is transferred.

In the case of emissions permits governed by the Environmental Protection Law, the rules set forth in Art. 190 and 191 of the act generally apply. Under these provisions, an entity interested in acquiring legal title to the entire installation may file an application to transfer to it the rights and obligations under the permits for the installation. If the administrative authority grants the application, it will issue a decision transferring the rights and obligations under the specific permit, effective upon obtaining legal title to the installation or a designated portion of the installation. If the applicant does not obtain title to the installation within one year after issuance of the transfer decision, the decision will expire.

These provisions apply to permits for emission of gas and particles into the atmosphere, certain water permits, integrated permits, and waste processing permits, i.e. instruments governed by the Environmental Protection Law. Other laws do not provide for such procedure, or handle it differently—first and foremost under the Water Law (Art. 134), the Waste Act (Art. 53(6) and 54(9)), the Act on the System for Trading in Greenhouse Gas Emission Rights (Art. 47(5)) and the Geological and Mining Law (Art. 36).

The seller’s loss of legal title to the installation often means termination of the permits for the installation (if they were not transferred), which results in violation of the law if the seller continues to operate the installation. This leads to an obligation to pay increased environmental fees and a risk of imposition of administrative sanctions. It should also be borne in mind that the Environmental Protection Law requires that the procedure for transfer of rights and obligations under a given permit be completed prior to the date of passage of legal title to the installation. Otherwise, the permit that was going to be transferred will terminate before the administrative authority issues the relevant transfer decision.

Thus an essential element when planning the transaction is a thorough analysis of the decisions issued to the seller and determination of the procedural route to be followed for transfer of each permit to the acquirer.

Changes beneficial to business…

The proposed amendment to the Environmental Protection Law is designed to provide for certain simplification of these procedures. The Ministry of the Environment decided while drafting regulations to introduce the Industrial Emissions Directive (2010/75/EU) into the Polish legal system to propose significant changes in the rules for passage of rights and obligations under emissions permits for industrial installations, although these changes are not required in order to implement the directive. According to the justification for the proposal, the changes are chiefly designed to reduce the administrative burdens on business.

The proposal would amend the wording of Art. 189 of the Environmental Protection Law to provide that an entity that obtains legal title to an installation or designated portion of an installation assumes the rights and obligations arising under the permits for the installation or designated portion. A consequence of this change is elimination of the provision for termination of permits in this situation. Enactment of the new wording of Art. 189 would result in “automatic” passage to the acquirer of an installation of rights and obligations under environmental permits.

The proposed change would be significantly beneficial for the parties to transactions, particularly when working under a relatively tight schedule. The need to conduct the entire procedure for transfer of permits before finalising the transaction has in many instances delayed transactions for several weeks or even months, as the closing can take place only after the transfer decisions are obtained.

… but not to regulators

While the proposal would be beneficial for businesses, it would revolutionise the structure of administrative law. Generally speaking, administrative decisions in Poland are authoritative acts which unilaterally define a party’s rights and obligations. The ability to change the entity to which the decision is addressed without involvement by the administrative authority would deprive the authority of ultimate control over performance of the obligations under the permit.

The lack of involvement by administrative authorities in ownership changes on the part of entities operating industrial installations would mean the loss of knowledge of who is the operator of an installation at any given time, who is the holder of the permit, and, accordingly, who bears the obligations under the permit at any given time. Even if the authorities managed to determine this, the party subject to the permit might attempt to avoid sanctions by presenting an agreement to the authority (e.g. backdated) to show that legal title to the installation is held by a third party, which should perform the obligations under the permit.

This could be particularly relevant in the case of imposition of administrative fines for exceeding allowable parameters in a permit or violation of other conditions of a permit (Environmental Protection Law Art. 276(1) and (2)). Thus it seems that when faced with the threat of particularly severe sanctions, a dishonest operator might attempt to use this construction to prevent the authorities from making a proper determination of the party required to comply with the conditions of the permit.

This problem is exacerbated by the relatively flexible definition of “legal title” in the Environmental Protection Law (Art. 3(41)) to include ownership, perpetual usufruct, permanent management, an easement, or a contractual relationship, with the last concept covering such common forms as traditional lease, tenancy, usufruct, or, for example, finance leasing. Conclusion of contracts of these types does not require any particularly rigorous legal form, but may be made in ordinary written form.

Currently, in instances in which there is an “automatic” change in the holder of the permit, the date of the change may be clearly determined: An agreement involving an enterprise must be notarised (Civil Code Art. 751 §1), and a merger of companies occurs effective on the merger date, which is entered in the Commercial Register (Commercial Companies Code Art. 493 §2).

One possible solution to these problems could be to introduce a provision under which the effectiveness of passage of rights and obligations under a permit would be conditioned on notification of the administrative authority that issued the permit. This would replace one obligation with another one that is less onerous.

Enactment of the approach included in the proposed amendment would nonetheless clearly make life easier for potential acquirers of industrial installations or enterprises.

It should be borne in mind, however, that the proposed rules would not apply to changes in legal title to installations that occurred prior to the effective date of the amendment, or to permits other than emissions permits governed by the Environmental Protection Law. While the wording of the proposal does not expressly state this, that is the conclusion that would be called for by a systemic, purposive interpretation. Thus even if the current proposal were enacted, it would still be necessary for legal advisers to review changes in ownership of installations during the period before the amendment went into effect.

This means that when considering entering into a transaction, the parties must very carefully review the consequences of the transaction with respect to the rights and obligations under administrative decisions involving environmental impacts. The proposed loosening of the regulations would apply only to certain emissions permits governed by the Environmental Protection Law.

The proposal is currently at the consultation stage and has not yet been submitted to the Polish Parliament.

Dominik Wałkowski, Wardyński & Partners