Managing environmental transaction risks

Infringements of environmental law lead to ever greater liabilities. So it is unsurprising that in recent years investors have been increasingly interested in assessing risks arising from environmental regulations.

Environmental risk assessments are necessary not just when acquiring a large industrial plant. The potential liability for soil contamination is important in any transaction involving real estate. Nearly all businesses are affected by packaging regulations, legal requirements for trading in electrical and electronic equipment, or general rules of waste management.

When negotiating the terms for acquiring real estate, or shares in a company which has an industrial plant, parties often overlook potential environmental problems. This is due to a mistaken assumption that the plant’s buyer is not liable for previous owners’ acts.

Underestimating environmental risks associated with acquiring an industrial plant or real estate may turn out to be very harmful for an investor, especially many years after the transaction, when most of the claims against the seller have expired. Costly remediation of contaminated soil may undermine the profitability of the transaction, especially if any claims of the buyer against the seller might go unsatisfied because the seller is insolvent.

The mere fact of infringement is sufficient for a fine

Environmental law primarily provides for administrative liability. Violation of the law is sufficient for liability. It does not matter that the operator’s actions were not culpable or resulted from circumstances beyond its knowledge. This is clearly shown by the principle in environmental law under which an operator who runs a facility without a required permit must pay a higher fee for use of the environment. Unlawful storage of waste is likewise severely penalised, and the fee levels have significantly increased. Moreover, there is no upper limit on charges, so a seemingly low rate multiplied by the number of tonnes of waste and storage time may translate into millions.

Relevant provisions of the Tax Ordinance apply to charges for use of the environment, largely putting them on an equal footing with tax liabilities.

Investors who are familiar with the conditions for operating a given business can quite easily identify violations of permit conditions or lack of required permits. However, other infringements are not so obvious, and may depend upon interpretations issued by the courts, in particular the Supreme Administrative Court. Additionally, licences associated with the use of the environment are issued by the public administration, whose officials do not have the same comprehensive knowledge of the law that judges have, and therefore it cannot be ruled out that a decision was wrongly issued.

During a review of the formal and legal situation of a plant, often no attention is paid to the date a permit was received. If a permit for a specific facility was obtained late, that does not eliminate liability for operating in the period before the permit was obtained. Furthermore, after a permit is issued, the facility may have been subject to substantial changes which were not reflected in the administrative decision. Finally, it is often overlooked that a permit expires not only at the end of the period for which it was issued, but also if the entity fails to conduct any business covered by the permit for two years—even though according to the letter of the permit it should remain valid.

Nature can prevent development

Development restrictions associated with nature conservation requirements cannot be ignored. Nearby Natura 2000 areas or other nature conservation sites may make later expansion or even current operation of an acquired industrial plant difficult, very costly or nearly impossible. Specific conditions for implementing a development project may also result from the environmental impact assessment. Therefore, when joining an ongoing project, the conditions for implementation of the project should be investigated, together with the possibility of amending the conditions specified in the decision on environmental conditions. Even if a project that was preceded by an environmental impact assessment has already been completed, it is worth checking whether the assessment was carried out properly. This is because operations of the built plant may negatively impact protected species or habitats, and these issues may not have been considered during the assessment. The plant operator may then be held liable for preventing and remediating environmental damage, even if the damage resulted from circumstances beyond its knowledge.

Liability for contamination caused by a third party

Liability for any potential contamination is of particular importance in transactions involving real estate. Above all, foreign investors stress the need for a reliable assessment of this aspect.

Although the current law provides for liability under the “polluter pays” principle, previous provisions apply to damage which occurred before 30 April 2007. In the case of soil, the prior environmental regulations apply, entailing liability of the landholder and so, usually, the owner of the real estate.

Each transaction must therefore be preceded by a thorough legal analysis of compliance with the provisions of environmental law. In transactions involving an industrial plant, environmental consultants must also be consulted with regard to soil testing. Only the joint efforts of lawyers and environmental consultants can provide assurance that environmental issues were comprehensively and sufficiently examined during the transaction, to produce a reliable assessment of possible risks.

Fluctuating legal environment spawns anomalies

The rapidly changing legal environment makes it easier for irregularities to occur. Businesses are burdened with new obligations under specific provisions which are either already in force (such as the REACH Regulation on chemicals, 1907/2006), or provide specific transition periods (such as the CLP Regulation on classification, labelling and packaging of substances and mixtures, 1272/2008), or are yet to come into force but will have a major effect on the operation of facilities which significantly impact the environment (such as the Industrial Emissions Directive, 2010/75/EU). Increasingly, therefore, the legal analysis must cover not only the current operations of an industrial plant, but also the legal issues that will affect the plant’s operations in the future.

Izabela Zielińska-Barłożek, M&A Practice and Environmental Law Practice, Wardyński & Partners

Dominik Wałkowski, M&A Practice and Environmental Law Practice, Wardyński & Partners