When purchasing property or a business in Ontario, environmental issues can present significant risks. If not identified and managed properly, these risks can result in substantial liabilities that extend well beyond closing. Unlike sellers, who may have certain disclosure obligations, purchasers remain bound by the principle of “buyer beware.” Taking a proactive approach to environmental due diligence is key to protecting your investment and avoiding unexpected significant costs.
The Doctrine of Caveat Emptor and “As Is” Clauses
The common law doctrine of caveat emptor (“buyer beware”) has long shaped property transactions in Ontario, including those involving environmental contamination. Courts have consistently emphasized that purchasers bear the responsibility of investigating the environmental condition of a property. If contamination is discovered after closing and the purchaser failed to conduct proper due diligence, they may be left to bear all or part of the remediation costs.
This risk is greater when the Agreement of Purchase and Sale contains an “as is” clause. Unless carefully negotiated, such clauses can make it difficult for purchasers to seek compensation from the vendor after closing. To manage this risk, “as is” clauses should be reviewed closely and drafted to account for the specific circumstances of the site and any potential contamination.
The Importance of Environmental Due Diligence
To address these risks, environmental due diligence should form a standard part of any acquisition strategy. Phase I and, where necessary, Phase II Environmental Site Assessments provide an opportunity to identify historical land uses, potential sources of contamination, and the scope of any issues present. These assessments, carried out by Qualified Persons, allow purchasers to properly evaluate liability and negotiate contractual protections.
Ignoring this process can have serious long-term financial and legal consequences for purchasers.
Records of Site Condition
In certain cases, purchasers may consider obtaining a Record of Site Condition (RSC). An RSC provides a formal summary of a property’s environmental status and, once filed, offers limited protection from environmental orders under Ontario’s Environmental Protection Act. RSCs are often required where land is being converted from a less sensitive use, such as industrial, to a more sensitive use, such as residential.
Continuing Liability for Contamination
A purchaser’s liability for environmental contamination extends beyond the closing of a property transaction. Even if the purchaser was not responsible for the initial contamination, they may still be held legally accountable as the new owner if they permit contaminants to migrate onto neighbouring properties or fail to take reasonable measures after discovering contamination.
This principle was affirmed in Sorbam Investments Ltd. v. Litwack, 2021 ONSC 5226, where the Court held a landowner liable for environmental harm despite not being the original polluter. In that case, the defendant acquired property with known contamination but did not take steps to remediate it, resulting in ongoing migration of pollutants to an adjacent property.
The Court found the landowner liable in both nuisance and negligence, awarding the plaintiff over $1.2 million for property value loss and engineering expenses. This decision underscores that purchasers who are aware of contamination must act reasonably to prevent further damage or risk substantial legal and financial consequences.
Michael S. Hebert, Practice Lead of the firm’s Environmental Law Group, represented the plaintiff in this case, providing our Environmental Law Group with firsthand experience in how courts evaluate liability in such circumstances.
Negotiating Environmental Protections and Risk
Given these risks, purchasers should carefully negotiate the environmental terms of the Agreement of Purchase and Sale. Purchasers should consider negotiating terms that require the seller to assume responsibility for remediation, provide clean environmental reports, or allow for conditions related to the purchaser’s due diligence.
Conclusion
For purchasers, environmental risks are both significant and complex. Purchasers should approach each transaction with a clear understanding of their legal obligations and potential liabilities. Engaging experienced legal counsel and environmental consultants early in the process is essential to conduct thorough due diligence, negotiate appropriate contractual protections, and mitigate future environmental liabilities.
Our Environmental Law Group welcomes further discussion on specific environmental due diligence strategies tailored to your unique property and business acquisition scenarios.
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.
