Pay close attention to assessments, say lawyers

With real estate at a premium in large cities, redeveloping old industrial and commercial properties is a growing trend, but this kind of brownfield reclamation also contains risks when it comes to liabilities.

Pay close attention to assessments, say lawyers
Lana Finney says lawyers are seeing more cases of vapour intrusion, which is an added liability factor in real estate deals.

With real estate at a premium in large cities, redeveloping old industrial and commercial properties is a growing trend, but this kind of brownfield reclamation also contains risks when it comes to liabilities. 

Lawyers say that careful attention must be paid to the disclosure of environmental assessments by purchasers and that it’s important not to rely solely on vendors’ assessments as part of their due diligence.

“We have a regime in Ontario where you need to get a record of site condition if you’re changing a property use from industrial or commercial to residential,” says Lana Finney, a partner with global law firm DLA Piper (Canada) LLP in Toronto.

A number of old industrial or commercial properties in downtown Toronto are being turned into condos and other mixed-used developments. 

Finney says that an RSC can help to reduce liability because the property has to meet ministry standards or have site­specific standards under a risk assessment in order for the record to be granted.

Finney says a filed record can protect clients against certain costly ministry orders.

“Because purchasers, when they’re changing the use, need to get these anyway, we’re now starting to see vendors of property requiring purchasers to file a record of site condition, because if the vendors require it as a term in an agreement of purchase and sale, the vendors themselves can also get the protection,” says Finney.

Lawyers say that even if their clients obtain a record of site condition, it may not protect them against ministry orders related to off-site migration of contaminants, which means they could be liable for cleanup.

“I frequently deal with real estate lawyers who are working through a deal and take them through whatever issues may come up,” says Michael Hebert, partner with Beament Hebert Nicholson LLP in Ottawa. 

“[I]f a piece of land is contaminated, you have serious problems for both a purchaser in terms of assuming liability and a vendor in terms of successor obligations.”

Hebert says that if there is a sale with a remediation by the vendor, then lawyers need to define very carefully what it is that they’re doing and trying to achieve, along with who measures it and what determines what is compliant or not.

“Even if you’re a vendor and the purchaser is going to agree to remediate, you’re going to have very similar concerns because of the fact that you could be liable down the road if the purchaser doesn’t do what they’re supposed to,” says Hebert.

He says what can happen is that a vendor can find the contamination is worse than initially anticipated because the bore holes used to test the site may not have been representative of what is on the property.

“That’s why it’s important to have good environmental engineering going into the creation of Remediation Action Plans, so that the contamination is going to get dealt with,” says Hebert.

He notes that even if the contamination has been satisfactorily delineated, there is never a 100-per-cent guarantee that the remediation costs will be as predicted.

“We always allow a margin of error of at least 20 per cent, which wouldn’t be allowed in other commercial transactions, but that’s a minimum,” says Hebert.

He notes that the language of documents needs to be very carefully examined between vendor and purchaser to ensure there is full disclosure of all of the environmental assessments, and purchasers may want to consider getting their own assessments or peer review of existing assessments so that the client is not relying solely on the vendor.

The downside of that, however, is the associated cost.

Finney notes that if a vendor is selling a property while leaving behind contaminants, they need to measure the level of sophistication and financial position of the purchaser with respect to dealing with the issues.

“I’ve certainly seen instances where there’s a transaction and the purchaser either goes belly up and they just don’t have the sophistication to deal with the issues, so they don’t or they make them worse or they just don’t deal with them . . . In Ontario, if there’s a serious enough issue or neighbourhood concern and the ministry gets involved, even if you allocated the liabilities to the purchasers . . . and they’re not taking care of it, the ministry doesn’t care,” says Finney. 

“You can be held liable.”

She adds that such future exposure could be worse for the vendor.  

Many contaminated lands in cities were left undeveloped because the costs of remediation exceeded their values, notes Charles Kazaz, partner with Blake Cassels & Graydon LLP, who practises in both the firm’s Montréal and Toronto offices.

Kazaz says this is why maintaining or containing the level of contamination was seen as the way to manage them for years, but he adds that the situation has changed recently because density and development potential can now support the remediation costs. 

“When I deal with these issues, we deal very closely with engineering consulting firms because there’s a lot of technical information that we need to generate, and that mostly relates to trying to estimate the cleanup costs,” says Kazaz.

He says it can be difficult to get that estimate because doing the investigation can be costly and who pays for the assessment can be a factor.

He also notes that if a property’s use is being changed from commercial or industrial to residential, standards for residential properties are much more stringent, so the cleanup costs will be higher for a residential development than a commercial one. 

If the remediation is being done by way of risk assessment — where there is a special dispensation from the ministry to go below the generic standard because of certain conditions being met — there tend to be restrictions on future land use.

“There are restrictions on how an owner of a property can use that property in the future, which will impact on land value,” says Kazaz. 

“There is that discussion to take place as to whether risk assessment is worth it given the future land use restrictions and the time and cost associated with it.”

Kazaz notes that this can be of concern to lenders as well, given that the cost of remediation usually comes out of the future value of the property rather than being paid with by cash on hand. 

Finney says an added liability factor to consider that lawyers are seeing more of is vapour intrusion, when contaminants or the soil or groundwater end up off-gassing and going into the air in the building.

“It’s something that regulators are becoming more interested in,” says Finney. 

“People are aware that it’s not just in the soil and groundwater, but it might actually be getting into your building and impacting the occupants.”

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