Environmental liability – Beware!

Environmental liability – Beware!

Source: Ottawa Business Journal, September 23, 2013
By: Jeysa Martinez, Brazeau Seller LLP

Innocent and blameless property owners may be exposed to significant environmental liability risk.

When assessing environmental liability one might think that, if a land owner did not create nor contribute to an environmental spill or contamination, fault and fairness would be taken into consideration before a cleanup order is issued against an otherwise innocent party. In May of 2012, in the case of The Corporation of the City of Kawartha Lakes v. Director, Ministry of the Environment, the Ontario Divisional Court concluded that an innocent party can be held liable for the pollution on their property, even though that pollution was caused by someone else. In this case, the Court upheld the decision made by the Environmental Review Tribunal in 2009. The Court focused on the purpose of the Environmental Protection Act and, although the Court did not go so far as to exclude the fairness factors from being considered (as they were in the Appletex case, a previous decision which set out the “fairness factors”), the Court did confirm that the Ministry of the Environment’s Compliance Policy allows the Ministry to exercise their authority and issue cleanup orders against innocent owners. The Divisional Court further noted that the Environmental Protection Act specifically contemplates that innocent owners can be held responsible for environmental cleanup costs regardless of fault and, accordingly, the Director is not required to consider the fairness factors before issuing a cleanup order to one or more parties.

We have stepped away from the days where the size of the deal dictated the nature and extent of a buyer’s due diligence efforts. As we have learned from the case above, innocent landowner’s may be served with environmental cleanup orders. As a result, now more than ever, a prospective purchaser must always assess the potential risk for environmental liability and cleanup costs and should at all times conduct an Environmental Risk Analysis as part of the due diligence process in order to avoid liability for environmental spills or contamination caused by previous owners.

During the due diligence process, a review of government records, on-site visual inspection(s), and a Phase I Environmental Site Assessment Study should be conducted. A Phase 2 Environmental Site Assessment Report must follow if it is recommended in the Phase I report.

A wise prospective purchaser will scrutinize all of the information pertaining to the land and all of the previous uses/activities on the land, regardless of the passage of time. A prospective purchaser should also use all efforts to identify potential risks related to adjacent properties. In other words, it is equally as important to consider previous uses of the adjacent lands as it is to consider the previous uses of the land being purchased in order to determine whether there is potential for contamination from those adjacent lands. While there are few absolute guarantees of buyer protection, it is prudent for a potential buyer to exercise all efforts and obtain reliance letters from the seller.

During the due diligence process, whether dealing with industrial, commercial or residential properties, it is recommended that the prospective buyer scrutinize the scope of the work to be carried out and the information contained in all reports; as they say: the devil is in the details. Following a thorough due diligence process, a potential purchaser should secure adequate environmental insurance coverage. Lenders are often updating their environmental/appraisal policies, specifically for commercial real estate; it is important to be well versed with the lender’s due diligence and insurance requirements. Given the uncertainty and increased environmental liability risk it is imperative that a prospective purchaser develop a due diligence strategy early on in the process in order to adequately assess potential environmental risks. The first critical step for a prospective purchaser is that of selecting knowledgeable consultants and legal counsel. Now more than ever, prospective purchasers must ensure that he/she has the right team in place guiding and advising them in planning and executing the due diligence process.

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