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Due to the increasing importance being put upon environmental and sustainability issues within Bahrain and across the region more generally, investors appear to be placing greater emphasis on assessing and managing the risks arising from environmental liability.
Following on from our previous article in relation to contaminated land liability in Bahrain, this article sets out below some of the options available to investors in order to mitigate or ensure the effective management of potential environmental liability. The options are not exhaustive and professional advice should always be sought when considering which options are the most appropriate in relation to a particular transaction.
Initial Due Diligence – An investor should be considering what due diligence it can undertake at the early stages of a transaction so as to assess whether any potential environmental liability exists. Such initial due diligence can range from making specific enquiries to reviewing the zoning designation of the property, which will highlight the permitted use in respect of the property and help determine whether further due diligence is required.
Conditional Investment – Making an investment conditional upon satisfactory site surveys and/or upon the satisfactory remediation of any environmental issues is an effective way
to manage environmental risks and potential liability. To the extent that any issues arise, a well drafted condition precedent should protect an investor by providing it with a number of options such as the ability to reduce the price, to place the responsibility and cost of any remediation on the seller or, ultimately, allowing the investor to terminate the agreement. The nature and effect of any condition precedent will reflect the bargaining position of the parties.
Environmental Warranties – An investor should consider seeking a warranty from the seller that the investment is free from any environmental liability. In the event of a breach of warranty, the investor would have a claim for damages against the seller for a breach of contract. However, investors should be aware of the obligation to mitigate their loss arising from any such breach and the potential issues there may be in relation to assessing the damages payable by the seller.
Indemnity – Preferable to a warranty from an investor’s perspective, is an indemnity given by the seller in relation to any environmental liability. The extent of an indemnity (ie the level of protection afforded to the investor and the level of potential liability assumed by the seller) will depend on the drafting and negotiation of any such contractual provision.
However, the inclusion of an indemnity creates greater certainty as to the apportionment of financial risk between the parties and should enable an investor to recover from the seller any costs and damages incurred as a result of the environmental liability. Unlike a claim for breach of warranty, a breach of an indemnity is easier to establish and there will usually be no obligation on the investor to mitigate its loss.
Responsibility Clause – Another option available in order to effectively manage potential environmental liability is to specifically allocate responsibility. The parties could seek to
agree contractually how to allocate liability in relation to contaminated land. For example, if remediation is required, the cost could be apportioned based on a pre-agreed percentage.
Implied Protection/Civil Code – When negotiating the allocation of environmental risk, an investor should seek advice as to whether it may benefit from any implied provisions under existing Bahrain law, particularly as certain obligations under the Civil Code cannot be contractually excluded. For example, decennial liability on the part of a contractor cannot be contracted out. Decennial liability relates to a contractor’s liability for the total or partial collapse of a building within ten years of completion. Decennial liability extends to the collapse of a building even where such collapse arises due to a defect in land, which may extend to contaminated land liability.
Insurance – An investor can insure against potential remediation costs arising from contaminated land or against damages which may become payable as a result of pre existing contamination or pollution. In relation to such insurance, an investor should be concerned to ensure that any such policy applies to its proposed use of the property and that the policy can be freely assigned.
Price Reduction – An investor may seek to negotiate a price reduction in order to reflect any potential environmental liability which it is aware of. In order to effectively mitigate the potential risk being assumed by the investor, the investor should seek to ensure that the price reduction is proportionate to the potential environmental risk.
Retention Fund – An investor may require that part of the price be retained for a certain period of time in order to offset any potential environmental liability which may arise in the future. A retention is usually time capped (for example, three years). If no liability is incurred, the investor will pay the retention to the seller on the expiration of the agreed period.
Withdrawal – Ultimately, if the potential environmental liability is too high and / or cannot be adequately managed, an investor should be prepared to withdraw from the relevant transaction.
Environmental liability can be extremely costly for any real estate investor and careful consideration should be given to the appropriate management and/or allocation of environmental risks. Adequate contractual provisions governing the parties’ responsibility for environmental liability should be considered and included within the relevant contract to ensure that an investor is fully protected.
This article was written by Simon Green and Charlie Marlow.
For more information please contact Simon on +974 40 316610 or email@example.com.