Under a recent bill to amend the Waste Management Act 2002, the federal government will be granted a statutory preferred pledge for all costs incurred when securing and remediating contaminated properties. This pledge will take priority over all other liens and property-related charges. The new pledge may involve risks for banks and other creditors whose claims are secured by mortgages in the Land Register.

Overview

Under Section 73 of the Waste Management Act, authorities may impose remediation measures on the obliged party if waste is not collected, stored, transported or managed in accordance with the act. The addressee of such orders is generally the person that caused the pollution or to which the risk of pollution may be assigned. Section 74(2) of the act provides for subsidiary liability of the property owner or the property owner's successor if a responsible polluter cannot be:

  • identified;
  • held liable for legal reasons (eg, if it has been liquidated without any successor); or
  • held liable for other reasons (eg, in case of insolvency).

In such cases the property owner may be held liable for remediation measures if it agreed to or tolerated deposits and failed to take reasonable measures.

The property owner's successor may be held liable for remediation measures if it was aware or could have been aware of the contamination had it undertaken appropriate due diligence.

In case of non-compliance with the remediation obligation, the competent authority may issue formal orders in order to take proper measures with respect to the soil that was contaminated by unlawful waste disposal. If the polluter fails to take proper measures or in case of imminent danger, the competent authority may take preventive and remediation measures on its own initiation. In such case the polluter and, if subsidiary liability applies according to Section 74(2), the property owner must reimburse the federal government for the costs incurred.

Against this cost-shifting rule, the bill proposes the introduction of a preferred pledge under statutory law in favour of the federal government.

Preferred pledge under statutory law

If the polluter or property owner fails to take proper preventive or clean-up measures, the competent authority must take proper measures on its own (ie, substitute performance). To ensure that the authority is reimbursed, the bill provides for the option to grant the federal government a preferred pledge under statutory law (Section 74a of the act). Such preferred pledge is linked to the property on which the preventive and remediation measures have been performed. The pledge will be granted in respect of all costs incurred in relation to prevention and remediation (including costs incurred in relation to any action taken in order to shut down the respective facilities). However, the preferred pledge cannot exceed the amount by which the property's value has increased as a result of the remediation measures.

Claims secured by way of a preferred pledge will be subject to the following consequences:

  • In case of a forced sale, the statutory preferred pledge must be satisfied before all other pledges.
  • In case a property is over-encumbered, the default risk of subordinated pledgees is increased by the amount of the preferred pledge.
  • In case of insolvency proceedings, the preferred pledge will reduce the assets involved in the insolvency proceedings, which may result in smaller recovery percentages for creditors.

The adverse consequences and risks for pledgees are reduced by the amount of the statutory preferred pledge, which will not exceed the increase in value generated by remediation. Therefore, the reduction of the liability fund for banks and creditors that are subordinate to the preferred pledge will be compensated by the increase in the property's value generated through soil remediation.

Banks and other creditors whose claims are secured by mortgages must still take into account the following aspects:

  • The amount of the increase in value generated by remediation may be controversial. If the expected increase is not equivalent to the actual increase in value, pledgees will be at a disadvantage.
  • In this context, it is unclear who will determine the increase in value and what valuation methods will be used. In addition, the bill does not clarify whether subordinated creditors may take action against the registration of an unjustified preferred pledged in terms of amount. This question must be resolved based on the pertinent legal provisions under the Enforcement Code. Regardless, banks will have to revalue any collateral on the initiation of enforcement proceedings.
  • The preferred pledge also includes costs incurred due to property-related securing measures. Unlike remediation measures, securing measures seek to prevent environmental damage (or the occurrence of more significant environmental damage); thus, they need not necessarily result in a direct increase in the property's value. However, there will likely be controversy over whether the mere threat of damage (or the threat of an increase in damage) constitutes a decrease in value so that the amount of the preferred pledge is assessed on that basis.

Comment

The introduction of a preferred pledge may involve further risks for banks and other pledgees. In addition, banks and pledgees will likely have to monitor the Land Register status of properties secured by mortgages continuously in order to identify the initiation of enforcement proceedings or the existence of a preferred pledge in a timely manner. Further, the creation of a preferred pledge may necessitate a revaluation of collateral.

For further information on this topic please contact Bernd Rajal or Sandra Schönbäck at Schoenherr Rechtsanwälte by telephone (+43 1 5343 70) or email (b.rajal@schoenherr.eu or s.schoenbaeck@schoenherr.eu). The Schoenherr Rechtsanwälte website can be accessed at www.schoenherr.eu.

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