Contaminated Land: Commercial, Regulatory and
Insolvency Considerations
Tamara Farber and Craig Mills1
Introduction
For some, environmental liability is akin to a game of hot potato. In other words, no one wants
to be the one left holding the potato when the music stops playing - otherwise they could be
facing significant obligations to remedy contaminated lands. As remediation costs can be
significant, owners, purchasers and creditors must tread carefully when dealing with
contaminated real estate. On the transaction side, one must carefully manage the transaction
to ensure that the right property is transferred under the right circumstances. While
environmental liabilities may be something of a deterrent to transactions involving contaminated
land, environmental risk management measures can facilitate property rejuvenation and positive
economic return.
On the other extreme, where a polluting owner has become insolvent, those with interest and
control of the land must carefully consider their options and understand the regulator’s options
for requiring investigative or remedial work. Recent cases in this area have dealt with the ability
of the provincial environmental regulator to order the insolvent entity to perform work while
under CCAA protection. While the courts have restricted these enforcement tools, the
regulators still have many tools in their toolkit to find sources of funding for environmental
remediation.
Recent cases from the Supreme Court of Canada and from the Ontario Court and
Environmental Review Tribunal, suggest that the tide is shifting in terms of the measures
required to protect owners, directors, investors, subsequent purchasers, lenders and creditors.
This paper will provide some insight into common considerations in environmental transactions.
It will set out an overview of the environmental regulatory structure, some of the potential
liabilities involved, the elements of environmental due diligence to be undertaken and highlight
some particulars of environmental provisions in agreements of purchase and sale. As
insolvency may become a factor, the authors will discuss the complications that arise when
dealing with an insolvent or bankrupt land owner and how to navigate environmental liabilities.
1.
Environmental Liability Primer
In broad terms, potential environmental liabilities attach to owners, occupiers, and those that
have managed or have had control over a contaminated property, or those who caused or
contributed to a discharge or spill into the environment. Liability can attach to an owner or
occupier as soon as an individual acquires such status, and therefore acquisitions need to be
1
Tamara Farber and Craig Mills are partners at the Toronto office of Miller Thomson LLP. Tamara is a
Certified Specialist in Environmental Law by the Law Society of Upper Canada. Craig practices in the
insolvency area. They acknowledge the assistance of Gregory Cohen, student-at-law, for his
assistance on this paper.
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considered carefully. Depending upon the severity of the contamination, regulatory liability, civil
liability, or both, may follow.
Regulatory Liability
Regulatory liability in Ontario is governed largely (but not exclusively) by the Environmental
Protection Act, R.S.O. 1990, c. E. 19 (the “EPA”) and the Ontario Water Resources Act, R.S.O,
1990, c. O.40 (“OWRA”). While this paper is not intended to review either piece of legislation in
detail, there are broad powers under the EPA2, facilitating anything from an order to monitor or
study, to full remediation, and such orders can be made against a person who owns, owned or
who has or had management or control of an operation or property. On the severe end of the
spectrum, orders can require reimbursement to pay the Ministry of the Environment’s (MOE)
costs in carrying out a remediation that was the subject of an original order to remediate. These
can be collected as a judgment or municipal taxes. Financial assurance can also be ordered in
support of an orderee carrying out the work3.
The impact upon a real estate transaction can be tremendous, especially in light of the fact that
the order provisions under the EPA do not require that the person or company that is the subject
of the order be responsible for the original source of the contamination. Recently, the MOE has
been casting its order net widely to find an entity that can pay – regardless of whether it was the
polluter. Liability can lie with current owners of historically contaminated land, even where such
owner did not know about the contamination at the time of the purchase of the property. In fact,
it is common for vendors to discover they have an environmental issue only after a prospective
purchaser engages a consultant to conduct on-site environmental investigations and discovers
the condition of the property is or may be “environmentally challenged”. While mere discovery
may not involve the MOE, the risk needs to be properly allocated in any transaction. Liability
can also lie with directors4, or even entities that had management roles for limited timing.
In a recent case5 involving a bankrupt entity, Tembec Inc. had a 50% ownership interest of the
company that owned the bankrupt, Marathon Pulp Inc. Tembec found itself on the front end of
an extensive order to investigate and remediate historical contamination.
Marathon’s
receiver/trustee sought to be released from its obligations under bankruptcy legislation. This left
the site with no one to assume historical contamination obligations. Due to the corporate
ownership, the MOE believed that Tembec had “management and control” sufficient to give it
jurisdiction to order significant environmental work which it categorized as work to monitor and
report on environmental matters. The characterization is important given certain order
provisions, appeal rights and stays of the order pending appeal.
Tembec appealed the order (appeals are heard by the Environmental Review Tribunal at first
instance) and requested a stay of the order pending the hearing. The problem for Tembec was
that the stay provisions in the EPA do not provide for an automatic stay pending appeal. The
Environmental Review Tribunal found that the order provisions could not be stayed (under s.
2
3
4
5
See sections 7, 8, 17, 18, 99.1, 124, 157, 157.1
Financial assurance can be ordered against a company that owns the land, and it can, in certain
circumstances also be ordered against a parent company.
Under s. 194 of the EPA, every director or officer of a corporation has a duty to take all reasonable
care to prevent the corporation from discharging or permitting the discharge of a contaminant in
contravention of the act or any approvals or conditions imposed under a permit or licence.
Infra, note 17.
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143 of the EPA) because of the manner in which the order was worded to “monitor, record and
report” – elements that precluded a stay order (they are specifically excluded under the EPA).
This means that even if a company has a legitimate ability to appeal the order, it could still be
ordered to spend significant funds – millions in Tembec’s case – to “monitor, record and report”.
While the case eventually settled, the Ontario Superior Court (Commercial List) noted:
…if an injustice were to occur, it would result from a flawed legislative framework that grants the
Director under the EPA arbitrary powers to cause a citizen or entity to expend its own resources for
the public benefit prior to a judicial determination of the existence of a meaningful legal nexus
6
between that entity and the environmental risk to be addressed.
The MOE has significant leverage because of the stay provisions. In another case, this one
involving CCAA proceedings by Nortel (as discussed below), the Attorney General for Ontario,
acting on behalf of the MOE, presented a ‘regulatory continuum’ to depict the Ministry’s tool kit.
At one end of this continuum, the MOE may impose performance obligations, in its role as
regulator; and at the other end of the continuum, the MOE may seek recovery of money, acting
as a full creditor.
MOE REGULATORY CONTINUUM
Process
applications
Conduct
site
inspection
Issue
order to
entity
Issue
order to
others
Issue
Notice of
Intent
Do
cleanup
work
Issue
costs order
Enforce
order
As such, the MOE may do any of the following:
1. Receive and consider applications for Certificates of Approval for regulated facilities.
2. Conduct site inspections (announced or unannounced) but take no action or issue no orders.
This is sometimes done in conjunction with a plan of voluntary compliance, but is not always
necessary if the MOE believes that the site is not a significant environmental concern.
3. Issue a provincial officer or Director’s order, for example, under ss. 18 and 157.1 of the EPA,
requiring an entity to undertake a range of possible actions to deal with existing environmental
concerns or with conditions that may lead to one. These could include retention of a consultant,
assessment of the nature and extent of contamination, development and implementation of a
workplan to address contamination.
4. Issue orders to assess and address environmental concerns where it appears a regulated
entity has failed to do the work. The orders can be issued to anyone with charge, management
and control, ownership, past or present.
6
Re Marathon Pulp Inc., 2009 CanLII 40568 (ON SC) at para 42.
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5. Issue a notice of intent to do the work itself if no other parties can be located to answer the
environmental liability. This is a discretionary decision of the Director exercised only upon
consideration of many factors.
6. Do the work if there is no one else to do it and the environmental or human health concern is
significant.
7. Issue an order to recover costs pursuant to s.150 of the EPA.
8. Take steps to enforce its costs recovery order
As the regulator’s primary target may not be around in the future, purchasers need to consider
all tools in their toolbox, knowing that the regulator is doing the same.
Secured creditors, receivers, and trustees in bankruptcy
The EPA contains special provisions to protect secured creditors, receivers, and trustees in
bankruptcy, or investigators from exposure to environmental liabilities. The following exemptions
from liability apply:
a) Secured Creditors - The EPA exempts certain actions of a secured creditor from being
classifies as having “charge, management or control” of a source of contamination for purposes
of issuing an order that the MOE would otherwise be able to issue7. Exceptions apply to actions
for the purpose of conducting, completing or confirming an investigation, preserving or
protecting the secured asset (which can include paying taxes, securing the site, insuring the
site, enabling the supply of water, sewage, electricity), and any action taken to respond to a
danger to health or safety that results from the presence or discharge of a contaminant. Even in
situation of a foreclosure, the EPA restricts issuance of an order unless there is gross
negligence or wilful misconduct by the secured creditor. This foreclosure exemption only
applies for a maximum five year period if the secured creditor has not otherwise ceased to be
an owner. The one exception to the exemption is if there is a danger to human health or serious
risk of harm to the environment, plant or animal life8. This means that in cases of subsurface
groundwater impacts where there is or may be a serious risk for off-site migration, secured
creditors may still find themselves on the receiving end of an order.
b) Receivers and trustees in bankruptcy - A similar exemption applies to restrict the issuance of
orders by the MOE against receivers and trustees in bankruptcy9 absent gross negligence or
wilful misconduct unless the order is consented to. Similarly, the exception to the exemption is if
there is a danger to human health or serious risk of harm to the environment, plant or animal
life. A further protection is offered if there is a Record of Site Condition (described below) for
the property in question. If an order is issued, the receiver or trustee in bankruptcy can also
elect to abandon, dispose of or otherwise release its interest in the property.
c) Investigations of property - the EPA has created a category of exemption for someone who
conducts, complete or confirms an investigation or who takes any action reduce the
concentration of contaminants in, on or under a property from being categorized as someone in
7
8
9
These exemptions are specifically set out in section 168.17 of the EPA for secured creditors.
See s. 168.20 of the EPA – exceptional circumstances.
S. 168.19 of the EPA sets out the exemptions for receivers and trustees in bankruptcy.
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occupation of a source of contaminant or a person in charge, management or control of a
source of contaminant.10
While the exemptions are helpful, they are not foolproof.
Evaluating the risk depends upon the nature and extent of contamination, the source or sources
of impact, the nature of the neighbourhood in which the property is located, redevelopment
plans – just to name a few. The risk may extend from an MOE order, or, where there is an
active discharge of contamination causing or likely to cause an adverse effect, a prosecution for
an offence under the EPA (as opposed to an administrative order). Breaches for causing or
permitting discharges can lead to charges, penalties, fines, and even imprisonment in certain
circumstances.
Record of Site Condition:
The regulatory structure also impacts the nature of remedial work, should remedial work be
required. Depending upon the proposed use of the property or intended use of the property,
remedial work may be required with regulatory input. Part XV.1 of the EPA prescribes a
methodology and a set of standards for remediating contaminated sites (including whether
remediation is required at all) and the filing of a Record of Site Condition in the Environmental
Site Registry. In essence, the legislation offers a limited form of immunity from regulatory
orders by the MOE to landowners who file a "Record of Site Condition" (RSC). An RSC can be
voluntary or mandatory. It is mandatory in cases where the land being developed involves a
change of use from a less sensitive use to a more sensitive use in terms of potential
environmental receptors (for instance, a change from industrial to parkland or residential). The
use of the site condition standards related to RSCs11 may not strictly apply to a transaction
where there is no change of use proposed. Nonetheless, the standards are generally used for
comparative purposes to benchmark current site conditions, and potentially require remediation.
Where land is proposed for redevelopment, and where it involves municipal approval
requirements, the municipality may require an RSC for all or parts of the land. Similarly, the
financing end of a transaction may require that an RSC be filed or that conditions exist in
accordance with the RSC regulation. These often form the basis upon which the RSC provisions
are triggered.
The RSC provides certain general information about the property (description, ownership, etc.),
remediation, maximum concentrations of contaminants found on the site in soil and
groundwater, and provides certifications by a qualified person to the effect that the property
meets the current regulatory environmental standards (which can be based upon generic
concentrations of contaminants or site specific concentrations). A requirement for an RSC may
involve significant considerations.
There are practical costs to filing an RSC. Owners are required to sign declarations as part of
the registration process. Transactions that depend on registration of an RSC may take more
time and money to complete.
10
11
See s. 168.26 of the EPA.
“Soil, Ground Water and Sediment Standards for Use under Part XV.1 of the Environmental
Protection Act, April 15, 2011” as referenced in Regulation 153/04 as amended under the EPA.
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Civil Liability
Civil liability is a separate consideration from regulatory liability. Environmental claims may be
based upon traditional common law causes of action: negligence, nuisance, trespass, strict
liability, breach of contract, etc. Such claims can take the form of historical site contamination,
off-site migration, on-site claims by future owners of the same land, indemnity actions under
existing contracts that may restrict liability, improper operations under tenancies, failure to effect
repairs at the end of the lease term, or insurance coverage denial claims - just to name a few.
Remedial costs both on the property and on neighbouring land can be a significant
consideration in the viability of a transaction. Without proper investigation of the source of
contamination, damages under such a civil claim can include remediation costs, ongoing interior
vapour sampling, barrier walls, losses in property value, and opportunity losses, and can impact
both the original property and neighbouring property.
Civil claims associated with contaminated land tend to involve multiple parties, and can take
significant time and resources. A more fulsome discussion on environmental civil liabilities is
beyond the scope of this paper. The authors simply highlight this is an additional factor for
consideration in any transaction involving contaminated land.
2.
Environmental Due Diligence In Acquisition and Sale Transactions
What then is a vendor or purchaser to do in investigating land and protecting itself in real estate
transactions where the potential for civil or regulatory liability exists?
Environmental due diligence generally involves and begins with the selection and retainer of an
environmental consultant, historical research, and on-site interviews and/or investigations. The
purpose of this research is to obtain a preliminary understanding of the potential for soil and/or
groundwater contamination, and where applicable, identification of designated substances in
interior building conditions that may require environmental management (asbestos, PCBs, lead,
mould, etc.). The level of environmental investigation and due diligence can vary depending
upon the nature of the transaction, the property, requirements of financers, and the degree of
risk the parties may be willing to assume. It involves both legal and consulting expertise and an
appreciation of when further investigation is required. Here are some tips from the trenches:
When – the early bird catches the worm: Inquiries should be made as soon as possible,
even before the transaction takes complete shape to determine what the real issues are, how
significant they are and whether the parties are willing to negotiate in a reasonable way.
Vendors who play hardball may find that the issues do not simply go away by virtue of selling
the property on an “as is, where is basis”.
Where – know your boundaries, building and bases: The property in issue is of key interest.
However, research on the property at issue and on neighbouring sites should be conducted.
While on-site operations may have little to do with environmental concerns, neighbouring sites
may well have contamination or the potential for contamination to have migrated onto the site of
interest. Similarly, the property in issue could also have been the source of contamination,
which then migrated into the soil and groundwater of the neighbour’s property.
Existing environmental reports relating to a property may only tell part of a story. A buyer
should beware of reports focusing only on soil, with no mention of groundwater.
Interior
building conditions also require consideration - if renovation or retrofitting of a building is
planned, latent asbestos may become a costly balance sheet addition. The point of the due
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diligence exercise is not to assign liabilities, but to quantify risk for appropriate transactional
consideration.
Most of the historical investigation is undertaken in the context of a Phase I Environmental Site
Assessment. Recent amendments to the Record of Site Condition Regulation12 clearly describe
the nature of an investigation in support of a Record of Site Condition (RSC). Not all
transactions require an RSC but the framework can be a useful guide for information gathering
and assessment.
With Whom – retaining a consultant: Retaining the right consultant involves consideration of
the nature of potential site concerns. Consider what services are required – Phase I, Phase II,
risk assessment, designated substances survey, compliance audit, transactional due diligence,
risk assessment. Consider whether the consultant has the qualifications necessary for the
assignment, including specialized expertise where necessary, appropriate accreditation (e.g.
professional engineer or professional geoscientist licensed to practice in the jurisdiction),
relevant experience, quality control measures in place, a good working relationship with
regulators, and appropriate insurance coverage. Details of the retainer with the consultant
should also be determined – the particular scope of services, costs, confidentiality, limitations of
liability, conflict of interest scenarios, and reliance issues should be negotiated in advance.
What to search: The searches listed below may be typical in contaminated land transactions.
They can include in-depth examinations by the purchaser of whether the operations carried out
on the site in question meet internal environmental protocols, and consequently, can involve
numerous materials such as corporate organization information, financial statements, past and
pending litigation, material agreements and contracts, employments records, insurance policies,
operating procedures and policies and licenses. Typical searches include:
12
13

environmental management systems (including all procedures and policy
manuals and all other procedures, policies and plans with respect to
environmental matters) relating to on-site operations. This might include
environmental reports, audits, assessments and results of monitoring and testing;

environmental permits with respect to the on-site operations of the property;

inquiries of environmental regulatory authorities - notices, directions or orders,
licenses, approvals (including remediation, stop and control orders) issued
against the property owner; complaints, inspections or abatement records; spills
or discharges;

insurance policies covering liability in connection with environmental matters;

designated substances survey;

existing or potential civil litigation with respect to environmental matters;

environmental records searches13
O. Reg. 153/04 as amended by O. Reg. 511/09 made under the EPA.
Typical record searches can include some or all of: EcoLog ERIS, MOE Environmental Site Registry
(Records of Site Condition), Environmental Bill of Rights Registry, National Pollutant Release
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
planning and development issues that might trigger the filing of a Record of Site
Condition;

environmental site assessments and/or compliance audits as appropriate (which
may incorporate some of the above searches)
Consider the example of 66295 Manitoba Ltd. v. Imperial Oil Ltd.14 where obtaining a history of
the property’s ownership could have avoided problems. In that case, the numbered company
purchased commercial land in 1984. Unbeknownst to the purchaser, Imperial Oil had owned
the land between 1951 and 1977 and operated a gas station on the property. In 1999,
petroleum chemicals were discovered in the soil. The contamination apparently presented no
health risk, but when the numbered company attempted to sell the property, it found that the
impacted soil created a stigma. The court dismissed the numbered company’s claim against
Imperial Oil, and suggested that the numbered company could have avoided the situation had it
undertaken appropriate due diligence when it purchased the property.
3.
Specific Environmental Considerations in Negotiating Acquisition and Sale
Agreements
An early and full understanding of the environmental issues relating to the property and the
context of liability that might require protection under the terms of an agreement will benefit
drafting the acquisition/sale deal. Consider, for instance, an indemnity negotiated with a shell
corporation, an ambiguous definition of “contamination”, a reference to “remediation” without
consideration of the appropriate standards, the documents to be used to confirm the
remediation is complete, or the uses to be made of the property.
As a starting position it is important to note that each agreement must be drafted based upon
the particular facts in each case, and that different risk allocation concerns will result in different
forms of agreements. The following highlights some key components of agreements that should
be given consideration.
Definitions
Definitions are important to any commercial agreement draftsperson. Determine whether your
interests are better suited to broad or narrow definitions: whether the terms of the agreement
apply to specific contaminants, whether they encompass the area under or inside a building,
and whether they extend to neighbouring land. Careful and clear delineation of the purchased
assets is critical. “Environmental Laws”, “Hazardous Substances”, “Environmental Claims” are
standard terms without standard definitions. Common pitfalls in agreements are ambiguous
terms, such as “clean-up”, “standards”, “pristine”, and “contamination”, which require careful
consideration. Exclusions, acceleration clauses, or any terms that may affect other definitions
should be clarified with as much precision as possible to avoid later conflict in interpretation.
14
Information, MOE Hazardous Waste Information System, MOE Inventories of Waste Disposal Sites
(1991), Coal Gasification Plant Waste Sites (1989), and Coal Tar Sites (1998), MOE PCB Inventories,
MOE Index Record of Orders and Approvals, MOE Freedom of Information and Protection of Privacy
Act Search, Ministry of Labour Freedom of Information and Protection of Privacy Act Search,
Technical Standards and Safety Authority Fuels Safety Branch, Local and/or Regional Municipality,
Ministry of Natural Resources, Regional Conservation Authority, Local Health Unit, Environment
Canada, Department of Fisheries and Oceans
[2002] M.J. No. 12451 (QB)
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Representations and Warranties
Consider what the vendor or purchaser is able to disclose, and then ensure that this is reflected
in the representations and warranties. Typically, on the simpler side of vendor representation
where there is no real concern about environmental matters, these include the following:

Absence of contamination;

Former use does not include contaminants;

Absence of underground storage tanks;

Absence of waste or hazardous substances;

Absence of notices, orders;

Possession of proper permits;

Compliance with environmental laws.
Consider also the value of environmental representations and warranties when qualified.
Unrestricted representations and warranties are of higher value to a purchaser, whereas
representations and warranties that are limited by time, “best of knowledge”, or which may have
a “material adverse effect” are of lower value to a purchaser. Indemnities, as will be seen below,
may require a breach of a representation or warranty as a condition but may only be available
for a specified time after closing. Representations and warranties may also be limited to a
capped dollar amount in the event of a breach. Careful consideration of the potential
environmental liabilities, and the regulatory or civil costs that may be associated with them
should inform these discussions.
Indemnities
An indemnity is only as good as the party providing it. It has no value if the indemnifier is or
may become insolvent. Will the indemnifier actually have the resources to satisfy a claim one,
two or ten years later? Typical limits on indemnities include contamination “caused” by their
activities, monetary caps or time limits. An indemnity, however, will have no affect on the
MOE’s ability to issue orders, or require compliance at any time. It can, however, defray some
or all of the costs of such compliance if properly drafted.
There can be entire agreements relating to indemnities, or less detailed clauses within a
purchase and sale agreement. The clause can bind the vendor or the purchaser or a host of
related or affiliated entities. It can be tied to breaches of representations and warranties, or
restricted to broad or narrow definitions of “Environmental Claims”. It can require action based
upon simple regulatory requests, or trigger involvement only after a third party judgment. It can
relate to on-site contamination alone, or off-site contamination. Often there are cross
indemnities provided depending upon who caused current known conditions, and who is
responsible for future contamination discoveries. Other times, clauses can include both known
and unknown contamination.
If secured by an escrow fund or letter of credit, indemnities can act as a form of self-insurance.
Their diversity is the precise reason that they have become one of the key tools for allocating
risks in environmental transactions.
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Releases
Release provisions may be required by vendors on “as is” sales. The benefit of a release to the
vendor is clear – to secure a waiver of any claims the purchaser may have against the vendor
by reason of environmental defect in the asset. However, one should be mindful that a release
does not insulate the vendor from regulatory orders as a past owner.
Disclosure, Access, Reliance
Confidentiality considerations are associated with environmental documentary disclosure during
the due diligence period, and these are important to keep in mind both as the purchaser and as
the vendor. As the purchaser, when carrying out on-site investigations during the due diligence
period, consider timing, cooperation of on-site personnel, site access, reliance on consultants’
reports, and retaining a peer reviewer for work done by the other side.
Access can be particularly important in cases dealing with off-site contamination and associated
off-site work. If details of access rights need to be outlined, they should be specifically
referenced so that the parties are aware of the exact nature of access granted, thereby avoiding
future disputes.
Remedial Work
Remediation is the most complex issue to deal with in an agreement of purchase and sale, and
involves a number of different considerations, and allocation of costs and liabilities. The options
run the gamut from environmental escrow funds to hold-backs on the purchase price, to straight
abatements, and can involve simple excavation to complex, long term in-situ remedial methods
both before and after closing.
The Record of Site Condition can be used as a tool to facilitate timing, scope, cost, and success
of the transaction, but involved many considerations:
• who undertakes the remedial work?
• who undertakes the costs?
• who is responsible to ensure that the RSC is appropriately filed?
• by when should the RSC be submitted to the MOE?
• what is the nature of the remedial work to be undertaken and who is overseeing it?
• are there remedial options and who decides which option to pursue?
• is risk assessment a viable solution?
• what if the possibility of a risk assessment is not addressed but ultimately required?
• what if restrictions are placed on development as part of a risk assessment that affects
construction budgets and timelines, or redevelopment or future property
care/maintenance?
• what if the remedial plan does not work? takes too long? uncovers a new issue?
The list is not exhaustive but provides some examples of the complexities involved. Time lines
are critical for ensuring that development does not get caught in risk assessment approval
delays, which can take years. Depending upon who bears responsibility under the contract for
the risk assessment, penalties for failing to achieve deliverables at particular points can also be
implemented.
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Environmental Transactions Recap
Understanding the regulatory structure and potential liabilities on both the regulatory and civil
side provides the backdrop for allocating risks in transaction documents. There are many
varieties of agreements involving the transfer of contaminated land, and a cookie cutter
approach is not feasible given the spectrum of liabilities that need to be protected. The
examples and contingencies referenced above are collected from an array of transactions and
litigation claims, ranging from small developments to multiple commercial and industrial real
estate holdings. No two transactions involving contaminated land are identical. Some are
simpler and some more complex. Many tools are available to assist in the risk allocation. Not
all are necessary but it is helpful to know what they are. While this may not prevent events like
the issuance of an MOE order or bankruptcy of a party who provided an indemnity, it may assist
to plan for them.
4.
Enforcement of Security and the Impact of Insolvency
In light of the potential minefield associated with contaminated properties, lenders and debtors
alike need to give careful thought to their approach to realization where the debtor owner
defaults. As discussed above, environmental damage is not just the concern of the property
owner. Through a broad interpretation of the EPA, the approach taken by a creditor in dealing
with the property in question could potentially attract liability.
Should the lender opt to effect realization through the appointment of a receiver or a trustee in
bankruptcy, or if the owner seeks creditor protection in attempt to restructure its affairs, the
insolvency professional will need to undertake the same type of analysis to ensure that the
trustee, receiver or monitor does not become responsible for environmental costs, particularly in
light of the priority given to some environmental costs under the Bankruptcy and Insolvency Act
(“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”). As noted above, while certain
protections are afforded to trustees and receivers under the BIA, and to court-appointed
monitors under the CCAA, this protection is not absolute.
The tension between the policy concerns behind environmental regulation (the “polluter pays”)
and insolvency legislation (compromising liabilities and the “fresh start”) has been tested in
some recent decisions of the Supreme Court of Canada and the Ontario Superior Court. As will
be seen in these decisions, the crosswalk between environmental and insolvency law can make
for an “untidy intersection”.15
Potential Liability of Lender
Whenever there is a default in respect to a loan, a lender will need to determine whether to
forbear or enforce its security. While typical considerations such as valuation of one’s security
and the financial wherewithal of the debtor will be important, when it comes to contaminated
land, other considerations such as the extent of the environmental damage and potential liability
being trigged through enforcement may outweigh everything else.
At one end of the spectrum, it appears unlikely that a secured lender that passively holds
security over the land will be considered to have control or occupation of the property, even
15
Nortel Networks Corporation (Re), 2012 ONSC 1213 (S.C.J.) at para. 8 (Morawetz J.)
9214647.1
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where a default has occurred16. However, as demonstrated in Tembec Industries Inc. v.
Ontario17, the MOE can and has adopted a broad interpretation of the EPA. In that case,
although the owner of the land was Marathon Pulp Inc., the MOE issued several orders to
Tembec in its capacity as a shareholder in Marathon’s parent company, on the basis that it had
de facto management and control of the lands.
Bankruptcy and Receivers
In light of this potential exposure, a lender may consider commencing an application for a
bankruptcy order as against the defaulting owner. If the order is granted, the property of the
bankrupt would automatically vest in the trustee in bankruptcy18, thereby insulating the creditor.
Alternatively, it may appoint a receiver pursuant to its security or by way of a court order.
In a bankruptcy, as a result of the vesting of the property, courts have held that the trustee can
be responsible for clean-up costs.19 Similarly, where the creditor has appointed a receiver
(either privately or pursuant to a court order) to take control of the property and manage the
insolvent business, it may be responsible for complying with an environmental order and the
cost of cleaning up the property.20 However, in both cases, the liability would be limited to the
funds realized from the estate (subject to the fees of the trustee or receiver).21 The receiver
may well have to negotiate a sale factoring in the considerations above.
Since the imposition of liability upon a court officer who did not cause the environmental
damage was a strong deterrent to court officers agreeing to be appointed in these
circumstances,22 Parliament undertook to limit this potential liability by way of amendments to
the BIA and CCAA in 1992 and 1997. The clear policy objective behind these amendments was
to create a mechanism through which steps could be taken to remedy a property without
imposing those costs upon a trustee or receiver. In particular, s. 14.06 of the BIA significantly
limits the liability that might be foisted upon a trustee in bankruptcy in the context of dealing with
a contaminated property. Under section 14.06(2) of the BIA, a trustee is not liable for
environmental damage that occurred prior to or following its appointment, unless it was the
result of the trustee’s gross negligence or wilful misconduct23. This is consistent with the EPA
as noted above. In such cases, the liability does not rank as an administration cost24.
16
17
18
19
20
21
22
23
24
Canadian National Railway Co. v. Ontario (1991), 3 O.R. (3d) 609 (Div. Ct.), aff’d 87 D.L.R. (4th) 603
(C.A.); Ontario (Attorney-General) v. Tyre King Tyre Recycling Ltd. (1992), 9 O.R. (3d) 318 (Gen.
Div.)
Ontario Environmental Review Tribunal, case nos. 09-047/09-071/09-187/10-021 (October 26, 2011)
BIA, s. 71
Re Lamford Forest Products Ltd. (1991), 63 B.C.L.R. (2d) 388 (S.C. (Bkcy)) although note that this
predates recent amendments to the Environmental Protection Act providing certain exemptions for
receivers and trustees in bankruptcy as outlined above.
Panamericana de Bienes y Servicios, S.A. v. Northern Badger Oil & Gas Ltd., (1991), 8 C.B.R. (3d)
31 (Alta. C.A.); Canada Trustco v. Bulora Corp. (1981), 39 CBR (N.S.) 152 (Ont. C.A.).
th
Bank of Montreal v. Lundrigans Ltd. (1992), 92 DLR (4 ) 554 (Nfld. S.C.); Re Lamford Forest
Products Ltd. (1991), 63 B.C.L.R. (2d) 388 (S.C. (Bkcy))
Lamford, supra note 19
BIA, S. 14.06(2)
BIA, s. 14.06(1.3)
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This limitation of liability includes both a trustee in bankruptcy, a proposal trustee and a receiver,
including one that has been privately appointed25. However, regardless of this limitation, the
BIA requires that the trustee or receiver must make any report or disclosure required by federal
or provincial environmental legislation.26
The protection afforded to receivers with respect to environmental liabilities is echoed in the
“model” Receivership Order developed by the Commercial List Users’ Committee of the Ontario
Superior Court of Justice. In most cases, the Model Receivership Order contains a provision
that the receiver is not obligated to take possession, control or manage a property that might be
contaminated. It further provides that the receiver shall not be deemed to be in possession of
the property within the meaning of any environmental legislation, unless it is actually in
possession.27
If an order is issued by an environmental authority which has the effect of requiring a trustee or
receiver to remedy any environmental condition or damage, the trustee or receiver can avoid
liability if:
(a) it complies with the order;28
(b) on notice to the issuer of the order, it abandons, disposes or otherwise releases its
interest in the property within 10 days of the order being made;29
(c) it contests the order;30 or
(d) it applies for a stay of the order for the purpose of permitting the trustee or receiver to
assess the economic viability of complying with the order.31
Where a trustee or receiver abandons the property, remediation costs do not rank as a cost of
administration32. (Under the BIA, the costs of the trustee or receiver in administering the estate
rank ahead of the claims of unsecured creditors.)33 However, the BIA does provide that the
government (federal or provincial), to the extent it undertakes remedial work of its own accord,
has a super-priority in the form of a first ranking charge over the subject property and any
property contiguous to it that is related to the activity that caused the environmental condition34.
The charge (only up to the value of the land35) ranks ahead of all other claims including those of
a secured creditor. Finally, a claim for environmental damages is a provable claim in the estate
25
26
27
28
29
30
31
32
33
34
35
BIA, ss. 14.06(1.1) and 243(2)
BIA, s. 14.06(3)
The Model Receivership Order can be obtained through the Commercial List website at:
http://www.ontariocourts.ca/scj/en/commerciallist/
BIA, s. 14.06(4)(a)(i)
BIA, ss. 14.06(4)(a)(ii) and 14.06(4)(c). Pursuant to s. 20(1) of the BIA, a trustee may divest itself of a
property by registering a quitclaim or renunciation. See also the corresponding sections of the EPA
noted above.
BIA, s. 14.06(4)(b)(i)
BIA, ss. 14.06(4)(b) and 14.06(5).
BIA, s. 14.06(6)
BIA, s. 136
BIA, s. 14.06(7)
BIA, s. 14.06(6)
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regardless of the fact that the damage occurred before or after the date of the bankruptcy or the
filing of a proposal.36 This means that, although the claim cannot be pursued in a usual sense,
it will be entitled to a pro rata share of the estate along with other unsecured claims. The trustee
would have to assess the viability of such an environmental claim.
Although the above-noted provisions appear to create adequate shelter for a trustee or receiver,
it will be up to the respective trustee or receiver to assess the situation on a case by case basis.
CCAA
Unlike a bankruptcy, a debtor having sought protection from its creditors under the CCAA37
remains in control of its assets and property while it formulates a restructuring plan. As a
counter-balance to the stay of proceedings granted in favour of the restructuring debtor, a
monitor is appointed by the Court to monitor the company's business and financial affairs to
ensure compliance with the law, the court orders and terms of the restructuring plan.
The CCAA also affords similar protections to a court-appointed monitor for liabilities arising
under environmental protection legislation. For instance, a monitor is not personally liable for
any environmental condition or damage arising either before or after the monitor's appointment
unless it is established that the condition arose or the damage occurred as a result of the
monitor's gross negligence or wilful misconduct38. However, the monitor must still comply with
any statutory obligation to report or make disclosure imposed by environmental legislation.
As the protective provisions in the CCAA relating to environmental matters essentially mirror the
above-noted provisions of the BIA, we will not review them in any great detail except to refer the
reader to subsections 11.8(1) to (9) of the CCAA. Similarly, the “possession” provisions
contained in the Model Receivership Order discussed above are closely tracked by the Model
Initial Order (the order which grants the debtor owner protection from its creditors) developed by
the Commercial List Users’ Committee of the Ontario Superior Court of Justice39 in respect to
monitors.
5.
Recent Case Law at the Intersection of Environmental and Insolvency Law
As noted above, there have been a number of notable cases involving environmental issues in
the realm of insolvency. In each case, the judiciary has had to grapple with the conflict between
societal concerns relating to the environment and maintaining commercial certainty sought for in
restructurings. The provincial environment ministries in all of these cases sought to restrict the
reach of CCAA protections from their orders. In each case, so far, the courts have inquired as
to whether the true nature of the orders was that of a regulatory order or a payment obligation
(i.e. a claim). In each case, the court held that, although the environmental regulator was
advancing a position of great societal concern, the orders were essentially claims and could be
compromised under the CCAA.
36
37
38
39
This modifies that general rule that, in a bankruptcy, only claims that existed prior to a bankruptcy or a
proposal are considered to be a "provable claim: s. 121(1).
The CCAA is a federal statute that allows insolvent corporations owing their creditors in excess of $5
million to apply for creditor protection to allow them to restructure their business and financial affairs.
CCAA, s. 11.8(3)
The
Model
Initial
Order
is
available
on
the
Commercial
List
website
at
http://www.ontariocourts.ca/scj/en/commerciallist/.
9214647.1
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Nortel Networks40
The demise of Nortel and the CCAA proceedings that followed has led to many interesting
issues concerning pensions, allocation of assets between estates and, most recently,
environmental remediation orders. The decision resolves around several properties formerly
owned by Nortel. All of them were contaminated through Nortel’s manufacturing operations.
Nortel had been taking steps to remediate some of the properties on a voluntary (or in some
cases, on a contractual basis), but was not subject to any MOE orders.
However, subsequent to the CCAA filing and despite the stay of proceedings, the MOE issued
remediation orders which Nortel maintained would require extensive efforts and cost (in the
many millions) to address. Nortel sought authorization and direction from the court to cease the
remediation work that all future environmental orders should be dealt with under the CCAA. The
thrust of Nortel’s position was that the MOE orders were ultimately financial in nature and
should be stayed. To hold otherwise, it argued, would alter the established priority structure for
claims. In contrast, the MOE’s position was that these were ‘performance obligations’ and not
claims that could be subject to a stay. The MOE argued that it was premature and speculative
to quantify the cost of required work, the extent of which is unknown.
Morawetz J. was not persuaded by the MOE’s position. In his view, when the entity that is the
subject of the MOE’s attention is insolvent and not carrying on operations at the property in
question, one had to consider the substance of the MOE's actions. In this case, Nortel was
being ordered to do remedial work and would expend money to do so. By issuing the orders,
the MOE would be enforcing a payment obligation, a step prohibited by the stay. Nortel would
have to incur a financial obligation.
The decision is currently under appeal, but has been made potentially more difficult for the MOE
given the Supreme Court of Canada’s decision in Abitibi Bowater, as discussed below.
The Nortel case is also interesting from the perspective that other orders have been issued by
the MOE to current and interim property owners to pick up the remediation tab on the basis of
their ownership, management and control. This is despite the fact that these owners were
known by the MOE not to have caused the contamination. Some of these orders are under
appeal before the Environmental Review Tribunal. Although some of the subsequent owners
had a contractual indemnity from Nortel (as part of their transaction agreements), their ability to
collect on these indemnities is governed by the CCAA claims process. As it is unlikely that
there will be a surplus in the Nortel estate, the new owners will likely not recoup sufficient funds
to fully compensate them for their costs in addressing the remediation required under these
orders.
Northstar Aerospace Inc. (Re)41
Soon after his decision in Nortel Networks, Morawetz J. was asked to approve an asset sale in
the Northstar’s CCAA restructuring and grant a vesting order. Despite the fact that the sale
excluded contaminated property owned by Northstar, the motion was opposed by the MOE and
others.
40
41
2012 ONSC 1213
2012 ONSC 4423
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As in the Nortel Networks case, Northstar had conducted remediation activities on a voluntary
basis at the contaminated site at a cost of $20 million. Due to concerns over Northstar’s
solvency, the MOE issued orders against the company. Northstar subsequently sought creditor
protection under the CCAA.
Northstar conducted a comprehensive sale process of Northstar’s assets (not including the
contaminated property)42, following which it entered into a sale agreement with a third party. As
in the Nortel case, the MOE contended that the MOE order was regulatory and therefore was
not subject to the stay of proceedings under the CCAA. It also opposed the sale as the effect
would seriously prejudice the public interest. Although the first secured creditor supported the
sale, it stood to suffer a shortfall from the sale. Therefore, there would be no surplus available
to cover any of the costs of remediation of other property (contaminated) retained by Northstar.
Morawetz J. approved the sale on the basis that it was reasonable and fair. In doing so, he
concluded the MOE was seeking to enforce a payment obligation and that it was attempting to
create a priority claim that did not exist at law and was contrary to the priority scheme provided
in the CCAA. He observed that the reality of the situation was that whether or not the sale was
approved, Northstar had no ability to comply with the MOE orders. Further, if the sale
transaction was not approved, the secured creditor would still be entitled to enforce its rights
and presumably effect realization through a receiver. As the secured creditor would have a
superior priority position to the MOE (as a result of ss. 11.8(8) and (9) of the CCAA), the end
result would be that Northstar would have no assets available and no ability to comply with the
MOE order. The end result would be the same.
As noted above, the MOE has sought and obtained leave to appeal this decision to the Ontario
Court of Appeal. The Northstar appeal and Nortel appeals will be heard together.
Newfoundland and Labrador v AbitibiBowater Inc.43
The Supreme Court of Canada recently released its decision in Abitibi dealing largely with the
ability of a provincial regulator to require compliance with orders in the face of a stay order
under CCAA protection. In 2008, AbitibiBowater Inc ('Abitibi') closed its remaining mill
operations in Newfoundland.
The government of Newfoundland subsequently passed
legislation under which it expropriated most of the company’s property. The company was also
denied any ability to seek recompense for the expropriation44. In April 2009, Abitibi sought and
obtained protection from its creditors under the CCAA.
In November 2009, Newfoundland and Labrador issued a series of remediation orders against
Abitibi under its environmental legislation, some of which related to the expropriated properties.
Immediately afterward, the province brought a motion in the CCAA proceedings for an order that
the claims procedure order did not prevent the enforcement of the remediation orders. At first
instance, the Quebec Superior Court45 held that the orders were “claims” that were monetary in
nature despite the fact that the province had not taken any steps to incur costs to remediate.
The court held that ”although presented as injunctive orders. . . the practical, intended and
inescapable result of the EPA orders was the creation of monetary claims”.46
42
43
44
45
46
No bidder expressed an interest in this property.
2012 SCC 67
There were also NAFTA proceedings relating to this issue.
The CCAA proceedings were initiated in Quebec by Abitibi.
AbitibiBowater Inc., Re 2010 QCCS 1261 (Que. S.C.)
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The case made its way to the Supreme Court of Canada where the crux of the Province’s
position was that the remediation orders were not monetary claims in nature and therefore
would not be subject to the CCAA claims procedure/stays. In considering this position, the
Supreme Court reviewed the definition of a “claim” under the CCAA and outlined three criteria to
be used in evaluating whether an order is a claim and subject to the insolvency process:
1.
2.
3.
There must be a debt, a liability, or an obligation to a creditor;
The debt, liability, or obligation must be incurred as of a specific time; and
It must be possible to attach a monetary value to the debt, liability, or obligation.
The majority held that the first requirement was met as environmental regulatory bodies can be
“creditors” in respect of monetary or non-monetary obligations imposed by environmental
statutes. In this case, as the regulatory body exercised its enforcement powers against Abitibi,
it identified itself as a creditor.
In respect to the second requirement, the Court observed the flexibility built into the CCAA with
respect to the timing of environmental claims. Such claims can be brought against a debtor
whether the environmental damage occurs before or after CCAA proceedings are commenced.
As the contamination occurred before the CCAA proceedings were commenced, this
requirement was satisfied.
As stated by the court, this case turned on the third requirement. Where a monetary value is
not stated in an environmental order, there must be sufficient indications that the regulatory
body will ultimately perform the remediation work itself and assert a monetary claim to have its
remediation costs reimbursed. If there is sufficient certainty from the factual matrix that the
regulator will pay for and perform the remediation itself, the order may be a monetary order. The
Court concluded it was sufficiently certain that the remediation work would be performed by the
Province and that the orders would become a monetary claim against Abitibi. This conclusion,
in part, was based on the fact that most o f the properties were no longer in Abitibi’s possession
and that Abitibi had no means to perform the remediation work. Whether this aspect of the test
will be debated in the Northstar and Nortel appeals remains to be seen.
The Supreme Court of Canada ultimately held that the Province’s claims against the company
were stayed under the CCAA.
6.
Conclusion
Contaminated land management, sale, securitization and disposition are arenas full of
challenges, but with room for creative solutions. No two transactions are alike, and no two sites
have the same contaminant issues or histories. With proper transaction due diligence, parties
can manage, assign and plan for contingent or actual liabilities.
Recent cases in the regulatory sphere demonstrate how provincial environmental regulators are
looking to expand their reach to find individuals or entities to address environmental liabilities.
While some of those tools may not work for the regulator, the process of litigating the issues
may be a significant expense, without significant reward. Directors, officers, secured creditors,
receivers and trustees in bankruptcy need to be aware of the reach of the regulator. While
these liabilities may not manifest themselves in the future, planning for them can assist to
protect individuals or entities from unwittingly finding themselves on the receiving end of an
extensive remedial order.
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The costs of compliance can be large and may involve the intersection of bankruptcy and
insolvency law with environmental law. Although recent case law appears to indicate that
environmental claims can be compromised, these are fact specific situations. An owner (or
former owner) may be able to avoid liability through insolvency proceedings (depending on the
circumstances), which may trigger the MOE’s interest in other parties within its reach to address
the environmental damage.
Understanding how these areas of law intersect is essential to
protecting interests and reducing the risk of balance sheet additions.
9214647.1