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Managing contamination in a sale

Real Estate
|Written By Marg. Bruineman
Managing contamination in a sale

Lawyers have several tools to help buyers mitigate unanticipated environmental issues.

Environmental contamination has become an increasing concern in real estate and the resulting liabilities could far exceed the original cost of the property. Often, it’s simply not a consideration at the time of purchase because it may not be apparent by its current use.

Once environmental concerns are discovered, it becomes a cumbersome burden. In some provinces, the new owner could be left paying the entire bill for the cleanup. In other provinces, such as British Columbia and Ontario, previous owners can be held liable.

However, real estate lawyers can play a significant role to mitigate and help the buyer avoid unanticipated environmental issues early on. There is even potential to renegotiate the purchase price if the level of contamination is tolerable for the end user.

“We’ve got a lot of these sites . . . and the issue is always cost; who should pay and how that should be dealt with in terms of the buyer, the seller,” says Calgary lawyer Rob Omura, referring to unregistered and unregulated dump sites and old drilling wells. “The difficulty always is, when it comes to historical use of the land, sometimes that’s not obvious.

“Prior to 50 somewhat odd years ago, they just did not appear on maps.”

For residential properties, the predominant rule has been caveat emptor. The buyer has the obligation and responsibility to make all the inquiries and investigate previous uses of the land, although the seller is required to disclose known issues.

Commercial properties could be more complicated. In Alberta, for instance, old drilling wells predating 1950 were never mapped out or distinguished. And Omura says there isn’t a clear record of wells drilled prior to 1970.

The possibility of contamination, including historical problems, needs to be considered in every purchase, says James Mosher, a McInnes Cooper partner and office lead in Saint John, N.B., whose practice focuses on corporate commercial law including real property.

“In New Brunswick, if environmental contamination is discovered on a property, the owner of the property is liable for the cleanup irrespective of who actually caused the contamination. So, clearly, you can go after the cause of the contamination, but the owner of the property will be responsible as well. If you purchase a property and it’s contaminated, guess what, you just purchased a liability. So, it’s a major concern,” he says.

Exploring provincial environment departments’ files and contamination registries ought to be part of the due diligence to determine if the property has been flagged in the past. Another approach is examining how the property has been used historically.

The length that a business has occupied that property can also play a role, given changed society behaviour and evolving legislation. Double-walled fuel tanks are now required, for instance. But contamination might remain unaddressed in areas where single-walled tanks once existed, particularly if the same owner has occupied the property for a long period.

Phase 1 environmental assessments are the regular go-to option for purchasers wanting to ensure they know what they’re buying. Asking the buyer about any known issues or historical uses is often part of the process. A search for any assessments that may have been conducted in the area can also provide some indication that further investigation is necessary.

But mitigating land contamination issues begins prior to the closing of a real estate purchase, says Toronto environmental lawyer Donna Shier, a partner at Willms & Shier Environmental Lawyers LLP. The key is building in allowances in the offer to purchase so that the buyer has the time they need to determine that the property is indeed a good fit.

“We see a lot of the problem deals where that’s not in the condition and somebody ends up in a lawsuit. The reason why I like to see the right to investigate is because many clients are quite sophisticated, and they can, with the proper information, determine where there’s a property, the target property, is within their risk tolerance,” says Shier, who has written extensively on the issue dating back to The Toxic Real Estate Manual in 1989 she co-authored with her former partner, John Willms.

The right to investigate should include enough time for at least a Phase 1 assessment to check the historical use of the property as well as neighbouring properties. But there should be enough time allowed to include a physical investigation, allowing for soil and water testing if necessary. Shier also likes to include the right to terminate if the investigation of the condition of the property reveals that there is contamination.

That approach also allows for a strategic purchase. If the property is somehow impaired, the purchaser might still be interested because they deem it adequate for their use. Not everyone requires pristine land, she points out.

“If I have a dirty business, why should I spend for a property that’s totally clean? I might be quite happy with a nicely dirty property, for which I pay a lot less. The question is how dirty is nicely dirty and how dirty is just too dirty for my taste,” says Shier.

The discovery of contamination reduces the property’s value and the right to terminate gives that purchaser some leverage to renegotiate the price. Land on which oil or gas was spilled might be adequate if it is on city services and the ground water is not needed for drinking, for example.

“So,  different purchasers have different plans and partly what they intend to do, that’s one of the elements that affect their risk tolerance. You really have to understand your client and you have to get your client to understand why you have to understand what your client’s objectives are,” she says.

Shier likes to know if they require financing and if financial institutions will be involved, what any redevelopment plans include, if they will have to file a record of site condition because they are going to change from industrial or commercial to residential use and if, when buying a commercial property, they intend to keep it as commercial.

“There are a number of variables that affect a prospective purchaser’s assessment of risk; it is my job to ask those questions and make sure the client understands the importance of the environmental information in the context of the client deciding that the environmental risk is acceptable,” she says.

But it’s a struggle for lawyers who sometimes are not called into the deal until after the purchase and sale agreement is signed. Mosher describes it as a lost opportunity. At that point it’s too late to extract from the vendor that there are no issues around environmental contamination, or the disclosure of any studies that have been done in the past.

“If you look at the history of contamination with either commercial or residential property, a lot of headaches would have been saved if they had done due diligence early on in the process where they could have worked on these issues up front,” adds Vancouver lawyer Selina Lee-Andersen, partner with McCarthy Tétrault LLP.

But, she adds, the buyer can be, to some extent, in the hands of the seller. In Ban v. Keleher, a recent Supreme Court of British Columbia decision, the seller of a residential property was found negligent for not indicating on the property disclosure statement that he was aware of contamination from a nearby dry-cleaning business migrating onto neighbouring properties and had been given notice by an environmental consultant that there was likely some migration of contaminants on his property.

Although the plaintiffs did not retain a lawyer to carry out the conveyance of the property, searches of the property would not have revealed any direct concerns. Lee-Andersen says the case raises the question: To what extent does caveat emptor apply? And, she adds, it demonstrates that potential liability could extend to advisors, including the real estate agent, home inspector and environmental consultant.

But, she points out, B.C. property owners have some protections under contamination site regulations. If due diligence reveals no concerns but contamination is later discovered, the owner is exempt from being liable for that contamination if subsequent remediation is needed. In B.C., property owners can also seek minor contributor status and pay a smaller portion when costs are allocated.

In Ontario, a real estate lawyer was also found responsible after a problem was discovered. In Dobara Properties Limited et al. v. Arnone et al a Hanover, Ont. law firm was fined for having missed the limitation period for its clients who were suing their original lawyer who had acted for both seller and purchaser.

An expired lease discovered after the purchase showed it had once been occupied by a gas station that had underground storage tanks on the property. Aaron Atcheson, partner with Miller Thomson LLP in London, Ont., says the case raises concerns about the responsibility of the lawyer to review title for any environmental risks dealing with deleted instruments.

“If there was something that looked like a contaminating activity, in this case it was a Shell gas station, then you should flag this for your purchaser for them to consider whether or not they want to get more environmental done,” he says.