Due diligence in real estate transactions
In any real estate transaction, the purchaser needs to verify the authenticity of different matters such as the title of the property, the nature of the encumbrances, liens, outstanding permits, environmental hazards, and many other concerns. In today’s blog post, we will examine environmental liability in real estate transactions and explain how a purchaser can be protected.
What is due diligence?
Due diligence can simply be defined as the process of conducting investigation, assessment, or taking reasonable steps to prevent harm in any transaction. Environmental due diligence in real estate transactions, therefore, is taking reasonable steps to discover potential environmental hazards on a property. Such hazards could include harmful petroleum substances, soil contaminants, groundwater contaminants, buried oil tanks, etc.
Why is environmental due diligence important?
While it is easy for a purchaser to think that they are only liable for environmental contamination after purchasing a property, the provisions of the law state otherwise. Ontario’s Environmental Protection Act, RSO 1990, c E.19, provides that past and current owners of a property can be held liable for environmental contamination, regardless of whether they are indeed responsible for the contamination. What this means is that being a current owner of a property doesn’t keep you safe from liability when contamination occurred before your occupation or ownership of the property.
Neighbors can also sue for damage to their property through civil actions like nuisance, negligence, etc. Therefore, environmental due diligence if you have any indication that there is the possibility of environmental liability is extremely important in preventing substantial regulatory and civil liability from being incurred by a purchaser.
In the case of Hamilton Beach Brands Canada Inc v. Ministry of the Environment and Climate Change, 2018 ONSC 5010, the current owners of property were held liable for contamination caused by a former tenant years earlier. It is important to note that this environmental liability is not just for individual purchasers of property but also extends to corporate purchasers. This was established in Midwest Properties Ltd v. Thordarson, 2015 ONCA 819.
What are the consequences of breach of environmental obligations?
Purchasers may have to pay charges, fines, penalties and comply with remediation orders ordered by the Ontario Ministry of Environment, Conservation and Parks ("MOE").
How can you protect yourself?
Generally, the level of due diligence required depends on the nature of the property in question. There are, however, certain steps that a purchaser can take to protect themselves in a real estate transaction. Many of these steps will be discussed below:
Investigate the history of the property to know if contamination occurred on the property in the past.
Investigate the uses for which the land or property has been previously used. For example, where the land has been used for a petroleum station, it may be expected that there would be petroleum discharges on the land over time.
Contact the MOE to know if there are any records of contamination on the property.
Investigate the history of any storage tanks on the property. As stated by Devry Smith Frank LLP in a recent article. Since 2002, all underground fuel storage tanks must be registered with the Technical Standard Safety Authority, while larger tanks require annual testing.
Have a professional environmental consultant conduct a Phase I or Phase II Environmental Site Assessment ("ESA") to discover if any contamination or harmful substances exist on the property e.g asbestos, lead, petroleum, etc.
File a “Record of Site Condition” ("RSC"). This is essentially a document signed by a purchaser and environmental consultant that the property meets the current regulatory environmental standards. A RSC is usually used when the purpose or use of land or property is to be changed. Tamara Farber in her paper, “Managing environmental risks in real estate transactions”, gives more insight into the limited form of immunity given by the MOE in relation to an RSC.
In conclusion, it is always advisable to embark on due diligence before any transaction is closed so that a purchaser can determine whether to go ahead with the property purchase. It is also important to draft very precise and clear terms in an agreement of purchase and sale so that purchasers don’t incur environmental regulatory liability unknowingly.
If you have any questions regarding environmental liability or due diligence more generally in the context of a real property purchase, Northview Law offers a free consultation available by following this link or you can contact us at 416-639-7639 to discuss any real estate or corporate commercial questions you may have. We look forward to hearing from you soon.