Contamination is a problem for vendors and purchasers alike. For vendors it may worry potential purchasers resulting in a lower sale price. Most estate agents don’t bother to fully investigate contamination issues, and we have seen purchasers win bargains where the estate agent has been unable to answer crucial questions about the extent or nature of the contamination.
For a purchaser, buying a contaminated property may affect not only personal health, but also the resale value of the property.
Careful investigations may reveal that the contamination is within acceptable limits, but what if the title is permanently marked as “contaminated”?
Problems for the vendor
A vendor who sells contaminated property will, in most cases, be required to make disclosure to potential purchasers through the Section 32 Vendors Statement.
In some cases, the vendor’s lawyer may advise the vendor to pass responsibility for proper investigation to the purchaser, by way of a special condition. For example, we often find the following special condition in contracts:
“The Vendor has not made and shall not be construed as having made any representation or warranty that the Property is free of contaminants. Prior to entering into this Contract the Purchaser has made its own enquiries and investigations as to the environmental state of the Property and the Purchaser has relied and relies entirely on the result of its investigations and on its own judgment in entering into this Contract.”
However, while this may limit the vendor’s liability, it may also have serious consequences for the sale. We provided advice to a client of ours regarding a contamination condition, and the result was described to us in an email he sent to us after he bought at auction:
A quick note of thanks once again to you and your team for your assistance with the pre-purchase advice, conveyancing and solicitors certificates on our recent purchase. You’ll be pleased to know your pre-purchase advice on the contract and Section 32 Vendors Statement was used to good effect on auction day.
If you recall, you identified a slightly unusual special condition in the contract regarding environmental issues. Further research on our part revealed that there had in fact been a minor environmental issue with the property in the past, something that had since been dealt with and cleared by the EPA. Separately, we also found that the agent also owned a share in the property, which he publicly declared not to be the case at the auction.
At the auction, after the grand sales spiel the auctioneer invited any questions, and not expecting any jumped straight into drumming up bids. I interjected and asked why there was a special environmental condition in the contract but nothing was disclosed in the Section 32 Vendors Statement. Suffice to say this didn’t go down well!
The auction was halted and the flustered auctioneer came across and spoke to me privately (as an aside, giving a response which I knew not to be true) – speaking to me privately only added to the drama and I know for a fact spooked at least one couple from bidding.
The property was passed in after a short while, and while the auctioneer went inside “to confer with the vendor” the couple I mentioned asked what we knew and how we found out. I mentioned your name, and believe you have a future customer in waiting!
After some negotiating we picked up the property well below what we expected to pay (and below the subsequent bank valuation). The whole experience reinforced to me that agents really can and do act dishonestly, that independent advice can be worth its weight in gold, and that doing your own research is a must!”
In this case, the auctioneer’s failure to properly inform himself as to the extent and nature of the contamination, and his inability to allay the concerns of other potential purchasers, resulted in a loss for his client. (It should be borne in mind that the loss to the estate agent would have been minimal, as a full commission would have been paid, with only a small deduction for the thousands of dollars lost by the vendor.)
Problems for the purchaser
In some cases, contamination information may be permanently on title. In other words, a search of the title will reveal a contamination problem. We recently reviewed a Section 32 Vendors Statement for a client, and noted that the title included reference to what is known as a Section 173 Agreement. The Section 173 Agreement in turn made reference to contamination on the property under the heading“Addressing Contamination”.
The document made reference to an environmental audit, and to the “capping” of the contamination with “clean fill”. Under the heading “On-going Precautions” appeared the following:
“The Owner must ensure that, at the Owner’s cost, the fill or other material constituting the capping the subject of Clause 2.8 is maintained properly and to the satisfaction of the Council so as to isolate any contamination.”
Under the heading “EPA Involvement” was the following:
”The Owner must, at the Owner’s cost and to the extent required by the Council, comply with the requirements of the Environment Protection Authority in relation to matters relating to those the subject of this Agreement.”
We advised our client to consider the following issues when deciding whether or not to bid at the auction:
From a personal health position:
- What is the nature of the contamination?
- How stable is the contamination?
- How is the purchaser supposed to “ensure that the fill or other material constituting the capping is maintained properly”?
- What if the neighbours don’t maintain it properly?
- What are the signs of poor maintenance?
- What ill effects would result from failure to maintain the cap?
- How can the purchaser be sure that the cap has been maintained so far?
- What are the costs of maintenance?
- What would be the costs associated with a clean up, if the cap is breached?
From an investment and resale position:
- Will future purchasers be concerned about the contamination?
- Will a purchaser be put off by the requirement to “maintain”?
- How will a failure of the cap affect resale values?
- What if someone falls ill and, rightly or wrongly, suggests that the contamination is the cause?
- What if negative publicity brings about a market crash in the area?
- How can the effects of the contamination be proven or disproved in the event of negative publicity?
- Will the purchase price reflect the above risks so as to make the purchase worthwhile?
There are many factors to be considered when contamination becomes an issue. Sound legal advice, thorough investigation, and careful consideration of the possible consequences are all essential components of any due diligence enquiries when a property may be affected by contamination.