Environmental liability is a critical concern for sellers involved in property and business transactions. Without the right protections in place, unexpected liabilities can surface even after the deal closes. To mitigate these risks, sellers should carefully assess key factors such as environmental due diligence, contractual representations and warranties, indemnities, and insurance coverage.
A common misconception is that transferring ownership of a property or business automatically transfers all environmental liability. However, under Canadian environmental law—rooted in the “polluter pays” principle—liability often remains with the party responsible for contamination, regardless of ownership changes. As a result, sellers may still face regulatory obligations even after a transaction is finalized. Consequently, sellers may remain liable for environmental issues under certain regulatory frameworks despite mitigating potential environmental civil liability through a well drafted purchase agreement. A well-drafted purchase agreement can help reduce civil exposure, but it is not always a complete safeguard against all environmental liability.
Due Diligence
While purchasers typically take the lead on environmental due diligence, sellers can benefit from a proactive approach. Providing environmental reports early in the process can help build trust, streamline negotiations, and reduce the risk of post-closing disputes. Commissioning updated environmental assessments before listing a property can also strengthen a seller’s negotiating position by identifying potential risks upfront.
Sellers should be aware of their statutory disclosure obligations, which may apply separately from common law duties. If there is any uncertainty regarding specific environmental disclosure requirements, erring on the side of transparency is generally in the best interest of the seller. Disclosing comprehensive environmental information about the property or business is the best course of action to help minimize future liability.
Purchase agreements should also be structured to address environmental liability. An “as is, where is” clause can shift environmental risks—including both known and unknown issues—to the purchaser. If a buyer is unwilling to accept such terms, sellers may consider adjusting the purchase price to account for potential liabilities. Additionally, sellers should carefully define the scope of environmental liability in the agreement, clarifying whether it applies solely to post-closing contamination or extends to pre-existing issues. Another option is an “our watch, your watch” clause, which allocates responsibility based on ownership periods—holding the seller accountable for contamination during their tenure while shifting future risks to the purchaser.
Representations and Warranties
When negotiating representations and warranties in a purchase agreement, sellers should carefully balance disclosure obligations with environmental liability protection.
In real estate transactions, the principle of caveat emptor (or “buyer beware”) generally applies, meaning sellers have no common law duty to disclose patent defects—issues a purchaser could reasonably identify through inspection. However, sellers must disclose known latent defects that render the property unfit for use or pose safety risks. If, however, a seller is unaware of contamination and has no reason to suspect it, they typically will not be held liable.
To further mitigate risk, sellers should avoid broad environmental representations and warranties that could expose them to post-closing liability. Purchase agreements should clarify that any environmental reports provided to the purchaser are for informational purposes only and do not constitute guarantees of accuracy or completeness. Narrowing representations and warranties to the seller’s “actual knowledge” can help mitigate liability for unknown risks.
Sellers can also further protect themselves by incorporating materiality qualifiers, ensuring that only significant environmental concerns—rather than minor or immaterial issues—require disclosure.
Indemnities
Indemnities are a key tool in managing environmental risk, allowing parties to allocate liability for specific damages or losses. For sellers, well-structured indemnities can provide essential protection against post-closing environmental claims.
Sellers should seek to avoid indemnities that create ongoing environmental liability after closing. Ideally, the purchase agreement should require the buyer to indemnify the seller for any environmental-related damages arising post-closing. If a buyer is unwilling to accept this, sellers may consider adjusting the purchase price in exchange for the buyer assuming future environmental risk.
Sellers can further mitigate risk by negotiating limits on their potential exposure, such as capping environmental claims at a specified dollar amount. Clearly defining the scope, duration, and financial limits of indemnities ensures both parties have a clear understanding of their respective obligations. Establishing these boundaries can help sellers manage liability while providing buyers with certainty in the transaction.
Environmental Liability Insurance
Environmental liability insurance can serve as an important safeguard against unforeseen environmental contamination issues. Traditional standard commercial general liability and Directors’ and Officers’ insurance policies often exclude environmental matters, making specialized environmental impairment liability insurance a valuable risk management tool. While insurance does not (and should not) replace due diligence, it can provide added security in the event of liability disputes. Sellers should carefully review policy terms to ensure coverage aligns with potential environmental risks, paying close attention to scope, exclusions, and policy limits.
Effectively managing environmental risks requires a comprehensive approach. Sellers can reduce post-closing exposure by conducting thorough due diligence, structuring representations and warranties carefully, negotiating well-defined indemnities, and considering environmental liability insurance. Sellers should engage legal and environmental professionals throughout the transaction process to ensure informed decision-making and long-term risk management. Expert guidance can help sellers navigate complex environmental regulations and structure property and share sale agreements to effectively mitigate environmental civil lability.
This blog post was written by Michael Hebert member of the Mann Lawyers Environmental Law team and Nathan Adams (primary author), member of the Mann Lawyers Business Law team and Environmental Law team. Michael can be reached at 613-369-0360 or at michael.hebert@mannlawyers.com and Nathan at 613-369-0380 or at nathan.adams@mannlawyers.com.
