Drowned by property searches? Welcome to the new era of climate due diligence

Lenders setting the pace

The link between greenhouse gas emissions and global warming has been understood since the 1970s and yet it took over 50 years for the first Law Society Flood Risk Practice Note to be introduced for conveyancers in 2013. Climate change was not viewed as a priority concern.

This has dramatically changed in the last few years.

Lenders and insurers now view climate risks as a Tier 1 risk. The alarming increase in extreme weather events has highlighted the physical and financial risks associated with heat waves, storm events, flooding, ground subsidence and coastal erosion.

• In 2019 the Prudential Regulation Authority issued supervisory expectations for the management of climate-related financial risks to be embedded as far as possible by 2022.
• NatWest, Barclays and Santander now insist on climate predictions in property desktop searches. Nationwide have their own data checks on climate risks.

The Law Society is currently revamping its Flood Risk Practice Note and a new Climate Risk Practice Note is expected in 2023.

Climate predictions in desktop searches

In response to the lender requirements, environmental data providers have developed new climate scenario models to predict climate risks for individual properties.

• In June 2022 Groundsure launched ClimateIndex, which highlights flooding, ground subsidence and coastal erosion risks to specific properties over 1, 5 and 30 years. Future data sets are expected to include EPC ratings and climate modelling on heat waves and storm damage.
• The Dye & Durham Climate Report for homebuyers looks at hazards from flooding, land erosion, subsidence and extreme wind over 10, 30 and 50 years, having regard to a medium emissions scenario (2.4C increase) and high emissions scenario (4.3C).
• Other environmental data companies are expected to launch similar products in the coming months.

It appears likely that climate due diligence will quickly become a mainstream requirement in commercial and residential property transactions.

Implications for real estate lawyers

The concern for lawyers is that:

• Negative climate predictions could potentially block access to funding, increase insurance premiums and reduce property values
• Lawyers are not climate change experts and so require guidance on how to communicate climate risks to clients including signposts for further specialist advice
• If lawyers fail to order climate reports or warn clients about the risks, they could face professional negligence claims

Stephen Tromans QC from 39 Essex Street considered these issues and prepared a legal opinion for conveyancers that is published on the Groundsure website.

Stephen Tromans Legal Opinion - Groundsure

Key points to note

1. Solicitors, licensed conveyancers and legal executives have a duty of care to warn clients of climate risks and to explain the implications of search results.
2. Conveyancers should make use of the commercial search tools which are available. The conveyancer’s duty is to undertake such searches for the client and communicating the results and their implications to clients in the Report on Title.
3. Failure by the conveyancer to follow these practices may result in damages claims for professional negligence, increased insurance premiums, and possible reputational damage.
4. Conveyancers can exclude matters from the retainer, but this would be a very unattractive course to take for climate risk.

How should law firms discharge their duty of care

Funders require future climate predictions, so it is best to embrace the change and develop firm-wide practices for consistency.

• If an engagement letter excludes environmental and climate risks searches, the letter should provide warnings about climate risks and the impacts on property value, and the potential implications on availability of insurance and acceptability of the property as lending security.
• When a desktop search report highlights climate risks for the specific property, the report on title or advice for the client should point out the various hazards, discuss the implications and where possible provide signposts for obtaining future information.
• The report on title should contain disclaimers to protect the law firm.

It is hoped that the forthcoming Law Society Practice Note on Climate Risks will provide further practice guidance on these issues.

If you require further information please contact Keith Davidson or Callum Ross at EnvironmentalTeam@Mills-Reeve.com