There are substantial differences between the regulatory framework in Canada and the US, which impacts the environmental risk that commercial real estate investors are exposed to. In order to adequately manage this risk and protect against liability, those investing in Canada should be aware of the local environmental regulation and the appropriate approach to due diligence.
In Canada, property rights and liabilities are addressed by both the Federal Parliament and the Provinces, and each Province has their own set of Environmental Laws. On a Federal level, in 1999 the Canadian Parliament passed the Canadian Environmental Protection Act, which forms the basis of the Federal environmental regulatory framework. The Act has been amended several times, the latest revision taking place in 2013. Liability for environmental contamination is addressed in Section 205 “Liability of Owner of Substance”, which determines that a property owner is liable for various costs including any remediation that is required. However, a number of scenarios are excluded from this, including if the contamination resulted from an act of war, or was wholly caused by an act or omission of a third party with intent to cause damage. The language of these exclusions is somewhat ambiguous, particularly as it relates to the Act’s definition of “intent”.
Importantly, Canadian legislation does not have specific provisions for liability protections which in the US include the Bona-Fide Prospective Purchaser, Innocent Land Owner and Contiguous Property Owner. These were created in the 2002 CERCLA “Brownfield Amendments”, passed to encourage development of contaminated sites. To be eligible for an LLP, the act requires that the party perform “All Appropriate Inquiries” (AAI) as per the ASTM E1527 Standard for Environmental Assessment, and to establish institutional and physical controls at the property for existing contamination.
The Canadian Environmental Assessment Act, which was passed in 2012 has the main purpose of requiring an environmental impact assessment before starting a project that is located on Federal designated land. The report is standard across Canada and is to the Federal Standard and not Province specific. The most likely US equivalent is an Environment Impact Report produced by the government or a private entity proposing a project on government land.
The Incentive for Performing Phase II ESAs
However, neither of these aforementioned Acts have any language similar to the EPAs AAI rule that requires property owners or purchasers to perform an environmental site assessment in order to be exempted from liability for contamination found at a site. This means that in Canada, the necessity of environmental site assessments exists precisely because the local regulation does not have an innocent landowner category. Without the option to obtain this designation, a Phase I ESA and thorough Phase II Environmental Site Assessment to fully delineate a potential environmental concern is the only option to fully understand and manage environmental risk.
Another reason why many prospective purchasers in Canada choose to perform Phase II Environmental Site Assessments is the lack of, or difficult process to obtain, information and documentation that would clarify a property’s history and current status. For example, FOIAs in Canada are required to be approved by the owner of the property due to the Right of Privacy which can hinder to process to obtain information about nearby properties or past events. In addition to this, data collected for a specific region may be limited due to the country’s low density population. This lack of public data, combined with Canada’s fluid risk-based closure standard which is different for each province (as they are among the states in the US) provides further incentive to thoroughly assess a property in question.
Ensuring Liability Protection When Investing in Canada
If you are buying or considering a property in Canada, how can you ensure that you are not and don’t become liable for environmental contamination? There is some language in provincial environmental regulations that may provide an answer for “innocent purchaser” status, through language that suggests that innocent owners can avoid liability for costs associated with contamination at their site if they perform adequate environmental assessments. Let me outline how a number of Provinces address environmental issues concerning commercial real estate.
Because there is no innocent landowner liability protection clause in the Alberta Environmental Protection and Enhancement Act there is a duty to remediate when contamination is discovered at a property. However under the Alberta Tier 2 Soil and Groundwater Guidelines, a consultant has the ability to adjust the guidelines to site specific levels. Alberta also has Exposure Control Guidelines which allow for a site-specific risk assessment. This allows for the option for management of risks at a contaminated site. Alberta also utilizes the Alberta Environmental Site Assessment Standard instead of the national CSA-Z769 standard. However this standard is in line with the CSA standard.
This language in the Alberta Environmental act does seem to provide some exculpatory opportunity: the Environmental Protection and Enhancement Act 2014 Chapter E-12, Section 229: Due diligence Defense states that “No person shall be convicted of an offence (…) if that person establishes on a balance of probabilities that the person took all reasonable steps to prevent its commission.” However, there is still the requirement to remediate if contamination is found. Therefore an owner may not be charged with the offence of contaminating the land however they may still be required and ordered to remediate their land.
“Section 129 Environmental protection order re contaminated site” also includes some language about the current owner’s position, which considers questions such as: was the substance on the site when the current owner took ownership, did they know of the presence, did they do reasonable pre-transactional due diligence, was the presence of the substance due to another party with no relationship to the owner or former owner (adjacent property) and what was the price paid as compared to the price without contamination?
The four Maritime Provinces, Nova Scotia, Prince Edward Islands, Newfoundland and Labrador and New Brunswick, each of which has less than 1 million in population, have formed an alliance regarding public information on contaminated sites to assist in real estate transactions, standard risk based corrective action (RBCA) levels and climate change.
The excerpt uses the term “all appropriate inquiries” but does not reference any standard. Part 4 Division 3 Liability for Remediation 46 states that persons are not responsible for contamination if: “(i) at the time the person became an owner or operator of the site (a) the site was a contaminated site, (b) the person had no knowledge or reason to know or suspect that the site was a contaminated site, and (c) the person undertook all appropriate inquiries into the previous ownership and uses of the site and undertook other investigations, consistent with good commercial or customary practice at that time, in an effort to minimize potential liability; (ii) if the person was an owner, the person did not transfer any interest in the site without first disclosing any known contamination to the transferee; and (iii) the person did not, by any act or omission, cause or contribute to the contamination of the site.”
Manitoba has an interesting take on liability. The Province’s Environmental Act defines the “person responsible for a pollutant” as (a) the owner of the pollutant, and (b) any other person having charge, management or control of the pollutant. Property ownership is not mentioned. This allows for both the potential tenant as well as the owner of the property to potentially be liable for the contamination.
The Manitoba Contaminated Sites Remediation Act includes a section on Site Investigation and Designation which includes the following notice to owners:
The Director (an individual appointed by the Department Minister) must send the owner of the impacted site (a) a notice of the designation; and (b) a statement informing the owner that he or she may apply to have the director determine responsibility for remediation of the site by filing an application with the director by a deadline set out in the statement.
There doesn’t seem to be any exculpatory language in the Environmental Protection Act in Ontario. The Act details that “A person responsible for a source of contaminant may submit to the Director a program to prevent or to reduce and control the discharge into the natural environment of any contaminant from the source of contaminant”. It also details that any person responsible for a source of contaminant that discharges into the natural environment must notify the Ministry. However, Ontario does have its own standard, known as the “Guide for Completing Phase One/Two Environmental Site Assessments under Ontario Regulation 153/04”.
Ontario also has a set out procedure when completing a Record of Site Condition (RSC) for a property that was remediated to the standards that were applicable at that time. It should be noted that this document only covers the area which is outlined on the RSC not the whole property. Therefore if an area around a previous tank was remediated and received an RSC but contamination is found adjacent to that area due to an oil/water separator there is no protection to the current owner this area would require to be remediated to the current standards.
The Saskatchewan Environmental Code does include pretty clear exculpatory language. In other parts of the code devoted to property transfers and site assessments, an investigation is defined as a Phase II. There is a requirement that the owner should have known if a “notice of condition” had been filed, which is something that should have been identified in a Phase I.
The Province’s Environmental Protection and Management Act 2010, Division 2 Persons Responsible Article 12(3) explains qualifications to avoid liability, including that an owner is to determine where the substance was discharged before taking ownership, and who could not have known or expected to discover this fact at the time of taking ownership.
Quebec has the clearest language of the group. Quebec’s Environmental Quality Act, Environmental Division IV.2.1, Land Protection and Rehabilitation Section 31.43 states that: An Owner or Lessee will not be liable if it can demonstrate that it initially performed an investigation with “due care”, once discovering it acted lawfully in regard to the duty of care and diligence of the contamination or is determined to have migrated from offsite from a third party. However, without reference to a standard “due care” is of course open to interpretation.
Ultimately, even despite such local clauses, if the government feels there is any human or environmental risk due to contamination at a site, they can order the landowner to clean up the site. Obtaining a Record of Site Condition (or equivalent depending on the Province) submitted to the governing body showing that the remaining contamination is safe, or writing liability exclusions into the purchase agreement may provide some protection against this. However, the possibility that you may be forced to clean up the site remains if the regulatory agencies feel that the contamination poses a risk in the future, or the party that you entered into the agreement with dodges liability by claiming bankruptcy.
The regulatory and liability landscape in Canada is less black and white than the liability protection requirements in the US. The lack of a “standard of care” in the regulatory framework on a national or provincial level and the government’s ability to enforce cleanup despite liability protections, along with limitations in public data collection means that commercial real estate investors are exposed to increased risk in Canada. Thorough due diligence is therefore arguably even more critical when investing in Canada, and doing a Phase II Environmental Site Assessment in transactions with risky site history and neighbors is therefore advisable.