Introduction

It is estimated that 160,000 sites in Australia are contaminated, with approximately 75,000 different contaminants.[1] Managing the risks of these sites poses a significant challenge for landowners, regulators and insurers, particularly as the scientific data concerning the environmental and health impacts of historical contaminants such as PFAS develop. These challenges often come to a head when the site is redeveloped, a business ceases operations at the premises, or where the contaminant migrates into surrounding land or waters.

Environmental regulation of remediating sites undergoing decommissioning

In New South Wales, the Contaminated Land Management Act 1997 (NSW) (‘CLM Act’) provides power to the Environment Protection Authority (EPA) to declare land to be “Significantly contaminated”, and compel landowners and polluters to undertake investigation and remediation works. The EPA may serve management orders to carry out management of the land or request submission of a "plan of management" for the EPA’s approval. The EPA can alternatively approve “voluntary management proposals” whereby any person can submit a plan for remediating or managing the contamination, and for providing progress reports to the EPA. Comparable powers are held by environmental regulators in most Australian states and territories, to compel a landowner or polluter to take clean-up action.

The impetus to undertake remediation works may also be triggered when a legacy site is sought to be rezoned and redeveloped. Pursuant to the Environmental Planning and Assessment Act 1979 (NSW), State Environmental Planning Policy no.55 (‘SEPP 55’) requires in such circumstances that any contamination be remediated or managed to ensure the site is appropriate for its proposed redeveloped use.

It is not uncommon for planning approvals or environment protection licences (referred to environment authorisations in some states) to deal with decommissioning. This can be done in a number of ways, for example:

  1. As a condition within a planning approval, whereby conditions are imposed requiring particular decommissioning works to be completed at the end of the premises' use. For example, as conditions of approval for mining operations where the resource will eventually be exhausted.
  2. As a condition on an environmental licence, where ongoing operations are licensed on the condition that insurance, bank guarantees, or bonds be provided to secure remediation of the site.

Some recent litigation and governments audits relating to remediation of decommissioned sites suggest these measures are not always adequate to ensure that the works are completed. As sites undergoing decommissioning are typically at or towards the end of their profitable life, this raises questions including:

  1. Whether the remediation costs exceed the remaining assets of the company,

  2. Whether any bonds, bank guarantees, or insurance held by the company concerning decommissioning are adequate to actually complete the work and address any third party pollution caused by the decommissioned site, and

  3. Whether third parties, such as former directors, the State, or related bodies corporate should be required to contribute to decommissioning and remediation costs.

Remediation of sites undergoing decommissioning can be complex and expensive. For example, inspections by the NSW Resources Regulator found five Hunter coal mines failed government audits of their environmental remediation works.[2]

Resolving legacy contamination issues can also bring risks of protracted litigation and class actions. They involve complex issues. For example, residents from Williamtown in New South Wales, Oakey in Queensland and Katherine in the Northern Territory brought class actions against the Department of Defence for contaminated groundwater by PFAS chemicals (per-and polyfluoroalkyl substances) used in firefighting foam.[3] The Australian Government has now reached an agreement with communities, several years after the commencement of proceedings. The Minister for Veterans' Affairs and Minister for Defence Personnel, The Hon. Darren Chester outlined in a joint statement, published 26 February 2020 on the Australian Department of Defence website, that an 'in-principle' agreement to settle these three Federal Court class actions have been reached.[4] He further noted that parties are in the process of finalising detailed terms of the settlement and assured that ongoing monitoring and engagement with communities will be taken once investigations are complete.[5]

Some of the challenges in dealing with decommissioning of sites became evident at the former Cockle Creek smelter site, which involved the redevelopment of a contaminated former industrial site, in circumstances where the landowner was insolvent, and the contamination required perpetual management to ensure the site would be appropriate for future redevelopment. This ultimately necessitated amendments to SEPP 55 specific to the Cockle Creek site, dealing with the future remediation and perpetual management obligations over the site.[6] These amendments had commercial implications for the landowner and a prospective purchaser of the land, resulting in a dispute in the Court of Appeal as to whether the contract for the sale of land had been frustrated.[7] The Court of Appeal ultimately held the contract had not been frustrated, and that it is foreseeable that when a polluter fails to remediate its land, steps should be undertaken to ensure obligations are performed.[8][9]

Use of Financial Assurances and Environmental Insurances by Environmental Regulators

One potential response by regulators to ensure that adequate funds are in place for decommissioning could be to impose more onerous conditions on licences and approvals. For example, requiring larger financial assurances, or requiring environmental insurance as an ongoing operational requirement.

For example, the NSW EPA will hold onto financial assurances until they are satisfied that the actions for which they are required have been satisfactorily carried out.[10] Failure to carry out actions means that the EPA can claim on or realise the financial assurance.[11] The NSW EPA may require:

  1. Financial assurances for the remediation or decommissioning of licenced or contaminated sites, reflecting known or anticipated costs of clean up works; and/or
  2. Environmental insurances, to insure against unknown or unanticipated environmental risks which may arise.

On February 2020, the EPA (New South Wales) published a 'Draft Financial Assurance Policy' which outlines how they may impose financial assurances to secure or guarantee funding for certain actions required by EPA licence holders or holders of a management order.[12] Specifically, these relate to management orders under the CLM Act, environment protection licence under the Protection of the Environment Operations Act 1997 (NSW) ('POEO Act') and radiation management licence under the Radiation Control Act 1990 (NSW) ('RC Act').[13]

The EPA takes a risk-based approach in justifying the requirement for financial assurance. The factors the EPA takes into consideration include:

  1. the degree of risk of environmental harm from actions;
  2. the remediation work that may be required because of the actions;
  3. environmental record or the environmental record of any former holder of the Licence; and
  4. any other matters prescribed by regulations.

The EPA will categorise the risk as either low risk, medium risk or high risk. Generally, financial assurance requirements will only be applied to actions which are categorised as medium or high-risk.[15]

The EPA has outlined that the amount of financial assurance required can be no more than the total cost of carrying out the actions that the financial assurance is required for.[16] These costs are assessed through an independent assessment that the EPA will require under the relevant legislation (being either the CLM Act, POEO Act or RC Act).[17]

Insolvency: what happens when a company enters insolvency with a site with legacy contamination issues?

It is not uncommon for insolvency legislation and contamination legislation to interact, where a company engaged in polluting activities enters insolvency. In those circumstances, administrators or liquidators may find themselves in a situation where the main or only asset of the insolvent company is a heavily contaminated site with significant clean-up costs. As liquidators and administrators become persons concerned in the management of the insolvent company, they may in turn find themselves personally subject to environmental orders by regulators to carry out clean-up works. This can raise complex questions of priority between creditors and owing clean-up costs, and who bears responsibility for decommissioning and remediating the site.

This issue arose in the Linc Energy liquidation, which has resulted in a string of high profile litigation. After entering administration, Linc Energy was the subject of environmental protection orders by the Queensland Department of Environment and Heritage, essentially requiring remediation works at their Chinchilla gas plant. After entering liquidation, the liquidators then disclaimed the site under the Corporations Act 2001 back to the state, to avoid paying remediation costs. This resulted in a number of sets of proceedings, including:

  1. Proceeding to determine who was responsible for paying the remediation costs. Ultimately, the Court of Appeal[18] found that the liquidators could disclaim the asset without remediating the site, meaning that responsibility for these works would fall upon the state. The outcome of this case let to 2016 amendments to the Environmental Protection Act 1994 (Qld), by the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld), to expand the power of the Department of Environment and Heritage Protection to issue an environmental protection order to ‘related persons’, being holding companies, certain landholders and person with a ‘relevant connection’ to a company that is carrying out the relevant activity.
  2. Subsequent orders made against a former director of Linc Energy, which was appealed by the former director. The Court ultimately upheld the orders, which require the director to personally contribute towards remediation costs.[19]
  3. Criminal litigation against Linc and five of its former directors, relating to criminal charges for wilfully damaging the environment. The Brisbane District Court fined Linc Energy $4.5 million for five offences relating to causing serious environmental harm, and the proceedings against the former directors are ongoing.[20]
  4. There has been some discussion by nearby rural landowners of a potential class action against the Queensland Government, for approving the gas plant, in circumstances where the operation of the plant is alleged to have caused soil and water contamination.[21]

Directors and officers

Directors and officers should be aware that that they may hold personal liability under environmental laws with respect to remediation of contaminated sites. For example:

  1. Directors may face personal criminal liability where the company fails to comply with management orders issued by environmental regulators (eg s98 of the Contaminated Land Management Act 1997 (NSW));
  2. Directors may in some circumstances face orders to manage contamination at their own expense, where the company has been wound up or transferred assets to avoid remediation costs (eg Part 7 of the Contaminated Land Management Act 1997 (NSW)).

These obligations may also generally interact with duties of directors under the Corporations Act 2001 (Cth) and common law, for example to exercise their powers with due care and diligence, and to prevent the company trading while insolvent. Where the company owns or acquires sites or businesses with significant contamination or future decommissioning/remediation obligations, future liabilities of such sites should be carefully managed.

Pitfalls for buying and selling contaminated land

Contamination is one of the key considerations vendors and purchasers have to take into account when selling or buying property. Purchasing land which contains known or latent contamination can cause a significant liability for the purchaser and restrict future development and use of the land. Due diligence of former land uses and potential contaminants is often advisable, particularly when acquiring sites at high risk of contamination, such as former or current petrol stations. Purchasers should also consider the potential decommissioning costs and associated risks as part of assessing whether to purchase the site.

In a NSW contract for sale of land, the prescribed warranties from the vendor include that the land is not subject to an adverse affectation, and that the section 10.7 (formerly section 149) certificate attached to the contract specifies the true status of the land the subject of the contract in relation to the matters set out in Schedule 4 of the Environmental Planning and Assessment Regulation 2000 (NSW).

Schedule 4 of the Environmental Planning and Assessment Regulation 2000 (NSW) and section 59 of the Contamination Land Management Act 1997 require disclosure of whether land is: significantly contaminated land,[22] subject to a management order,[23] subject to an approved voluntary management proposal,[24] an ongoing maintenance order[25] or a site audit statement.[26] A breach of this prescribed warranty is significant as it means that a purchaser may be entitled to rescind the contract.[27]

For developers of land which has been rezoned from industrial uses, decommissioning and remediating the former use for a new residential or sensitive use can be complex and expensive. This was highlighted by the redevelopment of the former Ashmore industrial precinct in Erskineville. The developer for the Sugarcube Apartments and Honeycomb Terraces was subject to onerous obligations by Council to carry out remediation of groundwater and other heavy metals, hydrocarbons and asbestos on site. As noted on the City of Sydney website,[28] Council disputed the detail and manner of remediation plans prepared by the developer, necessitating the preparation of further documents and information. This has also delayed the ability of purchasers to move into the development, while compliance with conditions regarding contamination is unresolved. The costs of negotiating with Council and providing further information or remediation works can impact on the cash flow and profitability of redevelopment projects.

Key takeaways

Complexities in dealing with contamination on legacy sites highlights the importance of identifying and managing any contamination risks given potential impact on use, development and costs to landholders, insurers, government and the community. The changing regulatory landscape of contaminated land and the increasing awareness of pollutants in the environment give rise to liability risks in this area, with concerns about the impact on the environment and human health.

All stakeholders involved in contaminated lands should take a thorough approach in assessing their roles and responsibilities in managing remediation and decommission of sites.