Even for the most seasoned property buyer, every acquisition will involve some environmental risk.
In order to understand the extent of the risk, one of the key due diligence requirements for any transaction should be an environmental report.
There are different formats but basically, an environmental research report includes information on the layout, land use, the presence of radon, possible flood risks as well as previous uses that may have led to a risk of contamination. It is no secret that SIPPs operate in a highly regulated environment, resulting in additional due diligence requirements that must be met with respect to the initial purchase, ongoing management and eventual disposal of a property. commercial.
The need for an environmental report can generate friction between customers and suppliers.
If a client is selling a property to their SIPP (also known as a related party transaction) and they have in-depth knowledge of the property, it may be difficult to demand an environmental report, the cost of which would be covered by SIPP. This is especially the case if there are other requirements or issues raised in the report that require investigation.
However, the environmental report is an extremely important part of purchasing due diligence. The results of the report could affect the market value of the property, the ability to use or develop the property as intended, or the eventual disposition of the property. Understanding environmental risks is essential to the success of a real estate investment.
It is important to understand why environmental surveys are necessary when buying a property through the SIPP. The government defines land as “contaminated land” where substances cause or could cause:
- significant harm to persons, property or protected species
- significant pollution of surface water (eg lakes and rivers) or groundwater
- damage to people due to radioactivity
Properties that have already been used for certain purposes are more likely to generate additional environmental requirements during a transaction. For example, old landfills, mills, steel mills and factories may require additional attention to ensure that all risks are known or can be mitigated.
If contamination is identified on a property, the cost of remediation work can be extremely expensive. There is a “polluter pays” principle in environmental law. Simply put, whoever created the pollution should pay the cost of cleaning it up. However, there are myriad reasons why this isn’t always possible. For example, if the polluter was a company that no longer exists, or it is simply unclear who created the pollution, and the property was owned by a SIPP, then the cost of remediation (if required ) may well fall to the pension fund.
If contamination issues are identified then, depending on the severity of the findings, this may affect the supplier’s ability to proceed with the acquisition or even the customer’s appetite to do so. If the client intended to undertake work that would break the ground or use the property for a certain purpose, they may not be able to do so due to the environmental risk associated with the property.
So what if potential environmental issues are identified on a property? It’s worth checking your vendor’s specific processes.
However, from Curtis Banks’ perspective, we will take the advice of our environmental research provider on the recommendations they suggest. This may be an additional desk report, which includes information obtained from local authority planning officers or licensing officers, to give a more in-depth understanding of the risks associated with the property in question . Rather, they may advise that depending on the risk, appropriate environmental insurance may be obtained, to protect the SIPP in the event that contamination is identified on the property at a later date.
The third option is even more in-depth. In some cases, although very few, an on-site survey of the site may be necessary. The cost of this process can vary depending on a number of factors including the size of the site, previous land uses or proposed works the client wishes to undertake. The extent of investigations also varies – from soil samples to digging boreholes.
If clients are looking to use their SIPPs to purchase a commercial property, it should be remembered that the cost of any survey of a property’s condition or environmental risks would be borne by the SIPP.
In summary, environmental risk should be a key part of any buyer’s due diligence, and it’s no different in a retirement environment. Ensuring that appropriate advice has been obtained, risks are mitigated and ownership is considered against investment intentions and suitability is essential to ensure subsequent benefit from the investment.
Caitlin Southall is a senior marketing executive at Curtis Banks