Legal Briefing

Site closure and decommissioning of industrial plants

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Projects, energy and natural resources | 01 September 2012

As the prolonged downturn in the Eurozone drags on, there continues to be a steady stream of site closures and rationalisation of manufacturing plants around the EU including in the UK. Many businesses are looking closely at their plants across the world for cost savings and some of those facilities will inevitably close. This article examines the key environmental factors to consider during the decommissioning and site closure process and draws on the practical experience of the authors, who have advised on a number of UK site closures, varying from a light manufacturing plant through to large chemical complexes and power stations.

CLOSURE OR SALE?

The first consideration is whether the plant is in fact going to be closed or sold on. This decision is essential but often it is not one that is taken at the outset of a process. Sometimes the final decision to close a site comes later on once avenues for sale have been exhausted. Clearly, when selling a plant there are different issues to consider such as timing and the terms of protection that would be afforded to the seller in relation to any environmental issues. Planning the closure process can be twin-tracked with a potential sale, at least for a period. However, there ultimately comes a cut-off point beyond which there needs to be certainty, particularly when it comes to surrender of permits.

SURRENDER OF THE PERMIT

The key issue when considering site closure is the surrender of the operating permit. Many manufacturing sites will have an environmental permit issued by, for example, the Environment Agency.

Decisions will need to be taken as to whether the environmental permit needs to be varied during the closure and at what point it should be surrendered. An environmental permit often contains express conditions requiring notice of change in the process and if the plant is going to proceed to closure there is a formal surrender procedure which needs to be followed. The surrender process will dictate to a large extent what needs to be done with the site from an environmental perspective.

Before a regulator will accept the surrender or partial surrender of an environmental permit it must be satisfied that the permit holder has taken all measures to:

  1. avoid any pollution risk resulting from the operation of a regulated facility; and
  2. to return the site at the regulated facility to a satisfactory state having regard to the condition of the site before the permit was granted.

This will often create a tension. On the one hand, the business will want a swift and cost-effective surrender. On the other hand, the regulator will be reluctant to allow surrender until it is wholly satisfied that the environmental aims have been achieved. While the environmental permit is in existence, the regulator has an element of control through the sanctioning regime and it will wish to ensure that it achieves the necessary clean-up before relinquishing that control. The permit surrender is, in practice, an area that takes a considerable amount of time and so it is one of the key issues to look at when planning a site closure. For certain low-risk sites there is an expedited surrender process that can be explored but qualification for low-risk surrender is difficult and most larger industrial sites will need to proceed down the full-scale surrender route.

The process of surrender is a well-trodden path and those that have experienced the process will be in an ideal position to address the regulator’s likely concerns, demonstrate that the site is being managed effectively and facilitate the closure and surrender of the permit in as short a time as possible.

Another area to consider is whether, in fact, some of the permits need to remain in place for the plant. If, for example, there is going to be a sale of the plant it may well be that it is advantageous and, indeed, cost effective to maintain permits. A good example of this may be water abstraction licences, which may have a value in their own right and which a purchaser of a site may want to take on.

GREENHOUSE GAS EMISSIONS PERMITS

Some sites may require a greenhouse gas emissions permit under the Greenhouse Gas Emissions Trading Scheme Regulations 2005. Such a permit allows a site to emit specified greenhouse gases provided that it complies with conditions relating to the monitoring and reporting of emissions and provided also that it surrenders ‘allowances’ equal to the emissions during that compliance year. Allowances have a value and can be traded, so installations that emit fewer greenhouse gases than expected are able to sell excess allowances to other businesses.

If a site is covered by such a permit then careful thought should be given to the fate of the allowances on site closure. Once a site has closed, it will not be issued with allowances in future years. However, if a site is closed and production is moved to other sites within the UK, then the business may be allowed to continue to receive the closed installation’s allowances to cover the increased emissions at those other sites. This process is called rationalisation. The rationalisation procedure is complex and has resulted in a number of appeals to the secretary of state, so it is important to take expert advice on rationalisation at an early stage in the site closure process.

It is also important to note that a greenhouse gas emissions permit must be surrendered within one month of the date on which the activities cease to be carried out (and it is a criminal offence not to do so). The government has admitted that this timescale is ‘tight’ and the period is likely to be extended under Phase III of the emissions trading scheme. However, until those changes take effect, operators need to be aware of this rule.

LANDLORD REQUIREMENTS

Many industrial plants are held on long leases. While considerable focus is always given to the environmental regulation and the environmental permit, many people often forget to consider the practical realities of having to surrender a site lease. Often the lease will not contain detailed provisions of how such a surrender will be handled or indeed whether such an early surrender can be made. In such circumstances, there is a commercial negotiation to be had with the landlord as to what it requires in terms of site handover and clean-up. In extreme circumstances, site operators have been caught out by agreeing a process for surrender and environmental clean-up in relation to the permit with the Environment Agency only to find that the landlord is demanding a different form of remediation and yielding up. One cannot underestimate the time it can take to negotiate and marry up the surrender requirements of the landlord with the surrender requirements under the environmental permit. The landlord will be focused on making sure it does not take possession of a site that gives rise to pollution risk or other environmental or health and safety liabilities and will also be looking at potential reuse of the site and may seek to use its commercial position on surrender to maximise the value of the site going forward.

PLANNING REQUIREMENTS

Occasionally, site planning permissions will impose certain requirements on cessation of plant operations. Planning permissions can, for example, demand that at the end of the operations a site surrender plan is submitted to the local planning authority for agreement. In many cases, the plans put forward to the regulator on surrendering the environmental permit can form the basis of the plan for the planning authority but the interests may not always be aligned and therefore this will require some consideration.

CONTRACTUAL PROVISIONS

Part of the due diligence at the outset of considering any closure of a plant will be to evaluate what contracts are in place and what needs to be terminated in relation to the plant operations, its suppliers or its customers. It is also vital to check what historical contractual protection has been given or received in relation to environmental matters. Often contracts with suppliers will need a period of wind-down, meaning cessation of production cannot take place immediately. This will have a knock-on effect on the timing of any environmental clean-up at the site. Contractual indemnities might be in place to cover the costs of extensive clean-up. Careful analysis of these contractual provisions is essential because if certain activities are undertaken at the site without the consent of the person providing the indemnification then the cover of these indemnities may be impacted and there is a chance that indemnification could be lost altogether.

CLEAN-UP: THE KEY INFLUENCES

A question often asked by site operators when considering the closure of a plant is ‘what level of remediation may be needed at the site?’ Clean-up can be influenced by a number of factors and in practice is often a negotiation between a number of parties. We have already pointed out that a landlord negotiating the surrender of the lease may well ask for things that are not, strictly speaking, required by law or by the Environment Agency. It is very important to get clear legal advice on the property aspects of environmental issues under the terms of the lease so that one can understand the negotiating position and the strength of the landlord’s hand. The process for surrender of an environmental permit and the levels of clean-up required under the permit are dictated by the Environmental Permitting (England and Wales) Regulations 2010. However, there may well be ambiguity in the interpretation of what does or does not constitute satisfactory state and the Environment Agency will no doubt take a prudent view. Baseline audits detailing the state of the site when the permit was first granted are supposed to provide the site condition for surrender but the surveys are often inconclusive and have often been carried out with speed in mind without considering the realities of closure. If the audit did not test for a particular suite of contaminants and these are subsequently discovered on site, then the Environment Agency may well expect the operator to address those contaminants at surrender.

Businesses may have environmental policies that go beyond the strict legal position. Adhering to such policies has obvious benefits from PR and CR angles but it can also minimise, to a greater or lesser extent, risks of future issues with the site or facilitate the sale of the site. Often the business itself may decide it is prudent to go above and beyond what the strict letter of the environmental permit surrender requires.

Local factors in a particular region can have a strong influence of the standard of clean-up required by the regulator. If there have been particular problems in the past, for example, unexpected pollution, or threats to particular habitats or sensitive water bodies, then it is natural that the regulators will be concerned not to see a repeat of those problems (and this is especially true if there has been significant negative publicity over an issue or if the regulator has received criticism for its role).

The other factor that impacts significantly on what needs to be done is how quickly a company wishes to close a site. Often a more balanced approach can be taken if there is plenty of time within which to manage a clean-up. If, however, a company wishes to exit a site and surrender the permit as quickly as possible then it may be forced down the route of certain more expensive remediation techniques.

FITTING ENVIRONMENTAL ISSUES INTO THE WIDER CONTEXT

Although this article focuses on environmental issues, it is important to realise that such issues are just one component in a variety of elements that affect site closure. Clearly, health and safety is a concern on any site closure. The potential demolition of a plant on site, the change from operations to closure processes and the reduction of the workforce introduces new hazards or may give rise to increased risks, which must be managed. The issue of trespass becomes much more important on a closure especially if there are fewer staff around and if plant, equipment, electrical cables and other potentially valuable materials are still on site. Trespassers can cause further pollution events, which then need to be dealt with by the business. The whole process of environmental closure and clean-up needs to be balanced against which parts of the site are being wound down and when, whether any of the plant and machinery is being dismantled and sold on and what structures are remaining in place.

Businesses can often underestimate the time it takes to conclude the contracts that will need to be put in place with demolition contractors and/or remediation contractors and how those work together. The contracts for the sale of the site, surrender of the site, demolition and remediation need to be carefully considered and attention should be given to the interaction between them to avoid issues falling between the cracks.

THE PROCESS

The environmental process for closure of the site broadly falls into five distinct phases. Phase 1 is initial information gathering, due diligence, identification of the key stakeholders and understanding the legal and contractual obligations that may be in place. Phase 2 involves agreeing the necessary studies that need to be carried out to categorise the environmental status of the site in liaison with the Environment Agency and (if applicable) the landlord and gaining an understanding of the level of clean-up that is required. Phase 3 involves carrying out any further investigations, characterising the site and finalising any requirements for remediation including negotiating and finalising the contracts. Phase 4 is the actual carrying out of the works and the supervision of them and Phase 5 is the verification that those works have been carried out to the satisfaction of all stakeholders and finalising surrender and exit.

THE TEAM

The change from operation to decommissioning is a big one and it is very important for the business to put in place a closure team that can work closely together and draw on experience of managing site closures elsewhere. It is a big advantage to have a team that has worked together in the past on major site closures. The team is likely to include legal advisers, environmental consultants, valuers and agents, site management and business management.

CONCLUSION

There are many legal issues to consider in relation to any site closure and the above is just a handful of the main environmental issues. Site closure and decommissioning of industrial plant can take many months and often years depending on the status of the site. It is not a simple process and can require significant resources at a time when the business is looking to minimise its costs. However, if done properly with experienced advisers, the process can run smoothly and the proper planning and execution of site closure and exit will often save a business considerable time, money and heartache in the long run as well as minimising potential environmental liabilities for the future.