Impacts of climate change on real property

In this special edition of their environmental law podcast, partner, Elizabeth Wild and special counsel, Sarah Mansfield, discuss how climate change impacts real property, including in terms of its value, insurability and development potential, and the advice that the legal profession should be providing to their clients in light of these impacts. 

The significance of this issue continues to grow, not only due to the increased frequency and severity of natural disasters, but also the recent publication of the Law Society of England and Wales entitled ‘Guidance on the Impact of Climate Change on Solicitors’ here.  In this podcast, Liz and Sarah also refer to the Australian Federal Government’s Productivity Report here, the Australian Law Council’s ‘Climate Change Policy’ here and Chief Justice Preston’s ‘Implementing a climate conscious approach in daily legal practice’ presentation here. 

The Norton Rose Fulbright Environment & Planning team have been providing advice on this topic to UK environmental and climate analysis authority, Groundsure. Groundsure has created a report which is readily available in the UK which predicts how climate change impacts individual properties. Learn more about this report, including the version which will shortly be available in NSW, here. With Groundsure’s permission, this podcast discusses the most recent advice we have provided Groundsure, regarding the duties owed by solicitors to advise their clients on climate change-related risks in NSW. A copy of this advice is available here. 

This webinar was recorded on 30 May 2022.

Transcript:

Elizabeth Wild (Liz)

Hello and welcome to the latest in our series of Environmental Law podcast from Norton Rose Fulbright. As always, I’m joined by my colleague, Sarah Mansfield, and today we’re going to talk about something a little bit different.

Our regular listeners have heard us talk about a whole range of impacts such as pollution, contaminated land and waste, and what those impacts are on property and other types of impacts. Today our topic is a little bit different – we are delving into the world of climate change. But not the net zero emission target area of climate change, we’re talking about climate change as yet another impact on real property and how it may impact a property and what you can do to try and identify where the impacts exist so that you are able to take some sort of action.

As I said, it is a bit different, so we are talking about a particular client matter today. We’ve got permission from our client to talk about an exciting development in this space. So I’ll give a little bit of background before we get into the guts of the topic –

So, we were approached by our London office to advice one of their key contacts, Groundsure, on the obligations of lawyers in NSW to advise their clients in relation to what we call, climate risks, and in particular the physical risks of climate change as they might impact the property, particularly a property in the context of acquisition of land transaction. Before we get in any further and talk about that specific matter, I’m going to throw to Sarah and ask her to explain what are we talking about when we talk about climate risks on property – what do we mean, what are those risks?

Sarah Mansfield (Sarah)

Climate risks have been defined or characterised in various ways, but the way I like the most is that adopted by the Bank of England actually, which splits it into three different categories of risks:

The first are Physical risks to real estate assets – so real property. And that are the physical risks presented by essentially natural disasters, so things like flooding, bushfires, coastal erosions and draught – because these physical risks are exacerbated or made more severe or more frequent as a consequence of climate change, and that is well recognised. So those physical risks impact real property. Other issues arise due to these physical risks.

The second is called Transition risks. Those risks are the way that regulators and commercial institutions, and actually the community, change their behaviour in light of climate change. So, some really tangible examples of transition risk is development consent authorities might change their planning control, or be more reluctant to issue approval because of the way that climate change is or isn’t anticipated to impact a particular property. Insurers may in fact in time ceased to insure certain properties for certain types of risk, or may make the cost of doing so prohibited. In turn, this may affect a bank’s willingness to grant some mortgage over a particular property because it is quite a common condition that you have to ensure that the property is adequately insured. So there’s just some examples of some transition risks, so it’s the way the market and community and more affects the property because of climate change – change in behaviour, change in control.

And the third type of risk are Liability risks. This is what we’re going to focus on today, it’s certainly something that got my attention and made me feel slightly ill for a moment – because that’s the risk people such as ourselves – professionals – don’t keep up with the times, don’t take into account the physical and transition risks associated with climate change in their day to day practice, because it’s well accepted that what you need to do to discharge duty of care under negligence is not frozen in time. What was reasonable standard of care or a reasonable way of advising on this sort of topic 20 years ago, will not be the same standard that will be accepted or considered competent today.

So it’s making sure that you adapt and evolve with the times, because in light of climate change, and that’s relevant to lawyers, but I can also say it’s relevant to other professionals including Planners, Valuers, Contaminated Land Consultants, and a whole host of professionals. It’s also relevant to land owners, for example, if you let your property be in a certain condition: previously that might not have caused any adverse impacts on your neighbours, but due to, say, for example an increase threat of bushfires, having your property heavily vegetated may in fact present an increase bushfire risk and that may in fact be negligent.  So it’s that adapting behaviour and practices in light of the very real effects of climate change.

Liz

So a lawyer’s obligation is dynamic, it’s constantly evolving and there is an increasing awareness, knowledge and education about climate risk, so too, do the lawyer’s obligation evolve to respond to that increased risks.

Sarah

That’s right.

Liz

And so we know that it’s already clear that the lawyer’s duty in the UK has now evolve to include climate risk, and the UK Law Society recently released guidance to lawyers on climate change and these risks.

Sarah

That’s right. And so the UK Law Society has issued practitioner guidance to the legal community and it says a range of things, but most pertinent to us is that it says that you may need to be able to discuss climate change related issues competently with your clients and potentially encourage those clients to engage with climate issues when relevant to a particular matter. So you may have to, for example, tell them to consider how climate change may affect a property in the course of an acquisition. Interestingly when I looked deeper into this, the Law Council of Australia back in 2021, issued a policy that says something not too different to the UK Law Society’s most recent guidance to the profession, which is that lawyers should be alive to the unfolding legal implications of climate change and its consequences when advising their clients.

The Chief Judge Preston of the Land and Environment Court has also issued a range of papers on this topic and he also says that it’s a natural extension of your everyday duties to take climate change into account. So, there is sort of, a lot of commentary on pressing the profession to make sure they’re keeping up with the times, and taking into account climate change.

Liz

We also know that the Director of the NSW EPA developed a policy on climate change, so you can see there’s a real movement towards making climate change part of the day to day regulatory framework.

So again, with that background, we were asked by our client where the NSW lawyers are potentially obligated to advise more clients in relation to climate risk, specifically during the course of real estate transactions. If we were in the view that such an obligation did exist, when did that duty arise and what is the nature of that duty?

Sarah

I have to say when I was first presented with this question, I was sceptical, and I certainly took the view of like “Oh no, that’s a technical issue… That’s an issue for a consultant... That issue goes to the quality of the property… That is outside of my scope of work... That is outside of my expertise to advise on that…” But I thought well, before fronting up with that answer, I better look at the case law, and certainly the commentary I mentioned previously, did give me cause to reconsider that – once I informed myself almost. But the case law also says some very interesting things: for example, and this is the NSW Court of Appeal decision in David v David – which essentially states if you become aware of information, you must speak up if it’s relevant to your client’s interest; you must speak up and inform your client of that information. So that’s not just on the contract special condition 20.2 that says that if you aware of information that is relevant to your client’s interest whether they be commercial or otherwise, you need to speak up and inform them.

Liz

Even if it doesn’t strictly fall within the scope of the retainer.

Sarah

I think this is just an ongoing thing from a lot of the case law which is that you cannot just stand behind your retainer, you cannot just say that “I’m a lawyer, I don’t deal with the practical implications of what you’re doing”. The case law is extremely clear that No – you’re a lawyer, you need to engage with your client where they are and tell them what it is – is what they’re doing, comment on whether or not they are aware of pertinent information relevant to their commercial and other interest. So if you are aware that they are purchasing a property in an area well known to be badly affected by floods, for example, you should not just sit back and say well, that is a commercial issue for them; that goes to the quality of their property, I do not need to comment on that. The case law is very clear that you need to advise, and in some case, the term is, step in front of your client and advise them of the follies of their plan, and just because the risk might be obvious to you, it may not be obvious to your client. So you have to inform them.

Liz

Or that the consequences of that risk might not be obvious to your client.

You have to be living under a rock to not be aware of the huge increase in floods and storm events that we’ve had in the past few years. But a client might not be aware that because they are buying in a flood prone area that that might affect the ability for them to develop that land, or carry out their intended use.

Sarah

That’s right – or their ability to insure that land, or get finance in that land, or whether or not, even if they can do that today, whether or not future purchase around that land is going to be able to insure it and finance it.

Which will affect value and developability.

There’s also things like ongoing maintenance cost to rebuild and just really selling out the practical implications of this for their interest. But the difficulty is, is that on what basis other than your own knowledge do you give that?

Liz

Yes, well, before we look at that particular aspect, I might just add that it’s not just relevant to solicitors who are advising purchases, who are acquiring property, it’s also relevant to vendors. As you know there was a case where a well-known law firm was sued for preparing disclosure materials based on an outdated planning certificate, and then for failure to disclose information regarding flooding. That was told to be misleading and deceptive.

But if you are sitting there in the vendor’s position, and you are aware of a risk, or should be aware of a risk, such as a climate impact on a property and you don’t disclose it, there’s a real possibility that you could find yourself liable in that misleading and deceptive conduct.

Sarah

And that is an obligation that lawyers are subject to: our obligations to our client, they come under contract law and negligence that actually lawyers are subject to the law of misleading law, deceptive conduct as well, and so they could actually potentially find themselves liable to third parties in the course of preparing disclosure materials, have made inaccurate representation because they have not adequately take into account climate change and that is the relevant – whether or not that representation was innocently made or not. If it’s inaccurate, it’s inaccurate and therefore potentially misleading or deceptive.

Liz

So where does that take us?

Sarah

Well, in large part, we’re saying you need to take into account climate change when advising your clients, including in the context of property transactions. But, how do you do that? Do you tell the clients have you taken into account climate change? Good luck with that. No client is going to thank you for that level of advice.

But I guess, excitingly Groundsure is imminently going to make available reports which sets climate risk and how it affects a particular property, and including giving it a climate score and identifying the particular climate risks which is most relevant to that specific property. And I think this is where the availability of information is really shifting when it comes to climate change because we’re no longer talking about just carbon trading schemes and net zero, but we’re actually getting really specific as to how climate change is affecting individuals and individual assets.

Liz

I mean, when you look at it, the reason we are aiming for things like net zero, and eliminating emissions is because of the impact of climate change on things like property. Now this is, for us, as lawyers, we are advising our clients about these risks but we haven’t known where to point them, other than to say you might need expert assistance, but now I think we are able to say: because there could be a risk of climate change impact on your property there is now a report available that is not just vague, and sort of, generic report, but it actually has real data that is tailored to the property. So we can say you might need to take into account climate impacts – here is a report you can get that will give you a risk rating about whether it is an impact likely to affect the issues we talked about, and then a decision can be made on whether they should proceed with the purchase, but certainly whether they need more information or expert input into that decision-making process.

Sarah

And I think, interestingly, the report gives it a ranking of that today and then it projects how that risk is going to evolve in the future. And I think this is the key difference between the climate risk assessment and what we call in NSW, the 10.7 certificate because that will tell you what the planning controls are on the property today, but it doesn’t give you an indication as to how those controls might evolve in the future. That’s where it’s a real value add.

And I think what’s a real benefit is, previously when we were in the midst of a property transaction and you say, you might need an expert assessment on how climate change might affect the development potential, or the value of this property - well that obviously comes with significant expense and delay. Whereas this report, I understand, is going to be available instantaneously, even faster than your typical pest and building report, and it’s going to be relatively affordable.

Liz

So it’ll be part of the suite of searches that you get when you’re buying a property and you get a range of report that you can get online from InfoTrack. It’ll be one of those report where you can press a button and say I want the climate risk report, and that risk will be dealt with or assessed with the other risks that you currently get reports for.

Sarah

And it’ll become, when we advise clients, we say, get a building and pest report, we’ll say if you want to develop a property, well let’s check whether or not you’re going to be able to develop it for your proposed years. Liz and I often love to say better assess contamination into another one of those matters that do go to the quality of the property but also go to the very heart of your client’s interest and why they are considering buying the property. And you’d be foolhardy not to.

The value, the developability, the maintenance cost, insurability both now and in the future, it’s pertinent to all of those interest.

Liz

So, it’s like all those other reports, it’s not going to be a mandatory report but there’s some interesting comments that have come out of the Australian government productivity commission.

Sarah

Yes, this is really interesting, So the Australian government productivity commission has, in a very recent 2023 report, and we can include a link to this in the show notes as well as other commentaries and sources that were mentioned, acknowledges that the climate change related risks are hugely pertinent to the interest of purchases, and may not be voluntarily disclosed by vendors because of the impacts on value and the future use of the land,. So the productivity commission is actually recommending that consideration to be given to making mandatory disclosures in relation to climate change related risks. So this is just, if it needed further confirmation, it’s giving that in relation to the pertinence to this information to purchases and I think once the legal fraternity recognises this and notes that information is available about it, why wouldn’t you recommend it, that information be obtained to protect yourself?

Liz

Certainly, from a lawyer’s perspective, the fact that it might not be mandatory is really not a here nor there if you know that you could be negligent, in failing to advise your client to get it.

Just to conclude where we’ve got to, we’re very clear that there is an obligation on lawyers in NSW to advise their clients on risks associated with climate change impacts, given their potential to affect value, ability to get finance and insurance, and future development potential of the land, we’re now able to say that there is a report available in usual conveyancing search process that can provide a tailored and specific assessment of the risk of climate change on that particular property – imminently. Therefore, a lawyer in NSW who doesn’t avow themselves of that opportunity, or inform their clients when seeking instructions from their clients whether they wish to get that search, would be a dangerous thing to do, to not at least mention that.

So, we’ll include in the notes to this podcast, some links to relevant information of the issues we’ve talked about today. We want to thank you again for listening to us and we look forward to joining our audience for the next podcast.

Sarah

And don’t hesitate to reach out with any questions.

Liz and Sarah

Thank you.

Links to relevant information:

• The recently released Law Society of England and Wales’ Guidance on The Impact of Climate Change on Solicitors – click here to find out more.
• The Australian Federal Government, ‘Prosperity Report’ Volume 6, 5-year Productivity Inquiry: Managing the climate transition (2023) which discusses reforms requiring the mandatory disclosure of climate risks in property transactions – click here to read the full report.
• The Law Council of Australia’s Climate Change Policy – click here to find out more.
• Chief Justice Preston’s ‘Implementing a climate conscious approach in daily legal practice’ presentation, February 2020 – click here to read the full report.
• Norton Rose Fulbright 'Legal Opinion on Climate Risk Duty of Care - Groundsure'