December 05 2008
Taking possession of a mortgaged property following default on the part of a borrower is often a key element in a lender’s realization strategy. Possession by the lender deprives the borrower of control of the property and access to the revenues and income derived therefrom. It also permits the lender to undertake any necessary repairs to the property and such measures as may be required to prevent waste, thereby maintaining and maximizing the value of the property in both the short and long term.
There are necessarily a number of business and legal implications which a lender must consider in determining whether to take possession of a mortgaged property. Foremost among these is the risk of incurring liability for costs in connection with the remediation or clean-up of any environmental contamination affecting the property and any related third-party claims. In some instances the costs of environmental liability may be significant and even exceed the value of the property.
In Ontario, a lender’s potential liability for cleaning up a contaminated property arises primarily under the provisions of the Environmental Protection Act (Ontario). The Environmental Protection Act grants wide discretion to the Ontario Ministry of the Environment to issue orders for the remediation of contaminated properties to any person responsible for the source of a contaminant, regardless of whether such person caused or contributed to the contamination. For purposes of the Environmental Protection Act, a ‘person responsible’ is defined as including not only the owner of the property which is the source of the contaminant, but also the person in occupation or having the “charge, management or control” of such property. In other words, liability for environmental remediation pursuant to the Environmental Protection Act is not related to fault or negligence.
As a practical matter, a lender will need to consider the most appropriate measures to deal with a mortgaged property following default on the part of the borrower without, at the same time, incurring the risk of being deemed to have assumed the charge, management or control of the property and to have become a person responsible and thus liable for environmental remediation costs.
Fortunately, the Brownfields Statute Law Amendment Act, 2001 (Ontario) reduces this risk by amending the Environmental Protection Act to provide for certain exemptions for lenders and their representatives - including receivers, trustees in bankruptcy and their respective representatives.
As amended by the brownfields legislation, the Environmental Protection Act provides that a lender or its representative is not a person responsible or a person having the charge, management or control of a contaminated property solely by reason of:
“1.any action taken for the purpose of conducting, completing or confirming an investigation relating to the mortgaged property;
2. any action taken for the purpose of preserving or protecting the mortgaged property, including any action to:
(a) ensure the supply of water, sewage services, electricity, artificial or natural gas, steam, hot water, heat or maintenance;
(b) secure the mortgaged property by means of locks, gates, fences, security guards or other means;
(c) ensure that the mortgaged property is insured; or
(d) pay taxes due or collect rents owing with respect to the mortgaged property; or
3. any action taken on the mortgaged property for the purpose of responding to:
(a) any danger to the health or safety of any person that results from the presence or discharge of a contaminant;
(b) any impairment of the quality of the natural environment resulting from the presence or discharge of a contaminant on, in or under the mortgaged property; or
(c) any injury or damage or serious risk of any injury or damage to any property or to any plant or animal life resulting from the presence or discharge of a contaminant on, in or under the mortgaged property.”
As amended by the brownfields legislation, the Environmental Protection Act also provides that a lender and its representatives are not liable under a clean-up order issued by the Ministry of the Environment if the lender becomes the owner of a mortgaged property by virtue of a foreclosure, provided that the lender sells the property within five years of the date on which the lender becomes the owner of such property.
The brownfields legislation also amended the Ontario Water Resources Act and the Pesticides Act (Ontario) to provide exemptions for lenders and their representatives similar to those now found in the Environmental Protection Act.
As amended by the brownfields legislation, the Environmental Protection Act provides for certain exceptions to the exemptions noted above. Lenders, receivers, trustees in bankruptcy and their respective representatives are not immune from liability under an order issued by the Ministry of the Environment by reason of their gross negligence or wilful misconduct. In addition, the Ministry of the Environment may - in what are characterized in the Environmental Protection Act as 'exceptional circumstances' - issue an order to a lender which becomes the owner of a mortgaged property by virtue of a foreclosure or to a receiver or trustee in bankruptcy if the director of the Ministry of the Environment has reasonable grounds to believe that, as a result of the presence or discharge of a contaminant on, in or under the property, there is:
As amended by the brownfields legislation, the Environmental Protection Act also provides that the Ministry of the Environment may not issue a clean-up order if a record of site condition - a report prepared by an environmental engineer detailing the environmental condition of a property - has been filed on the Ministry of the Environment’s environmental site registry, unless the director of the Ministry of the Environment has reasonable grounds to believe that, as a result of the presence of a contaminant that was on, in or under the property as of the certification date of the record of site condition, there is danger to the health or safety of any person.
Consequently, a lender which takes possession of a mortgaged property can limit its exposure to environmental liability by commissioning and filing with the Ministry of the Environment a record of site condition or, alternatively, by including in the purchase agreement with the purchaser of the property a provision requiring the purchaser to do so following completion of the transaction.
At the federal level, the Bankruptcy and Insolvency Act (Canada) provides that notwithstanding any federal or provincial law, a trustee in bankruptcy is not personally liable, in that position, for any environmental condition arising or environmental damage occurring before the trustee’s appointment or after the trustee’s appointment, unless it is established that such condition arose or such damage occurred as a result of the trustee’s gross negligence or wilful misconduct.
Neither the recent amendments to the Environmental Protection Act and other Ontario statutes resulting from the brownfields legislation nor the provisions of the Bankruptcy and Insolvency Act protect a lender which takes possession of a mortgaged property or a trustee in bankruptcy from liability for damages to third parties (eg, to an adjoining landowner in circumstances involving the migration of contamination from the property). An action on the part of such landowner may be based on such common law principles as:
Existing legislation in Ontario affords a lender which takes possession of a mortgaged property, as well as such lender’s representatives (including receivers and trustees in bankruptcy and their respective representatives), certain protection from environmental liability. At the federal level, the Bankruptcy and Insolvency Act reaffirms such protection in the case of trustees in bankruptcy. However, while fairly broad in scope, such protection is not comprehensive. Accordingly, a lender which intends to take possession of a mortgaged property would be well advised to consider the environmental risks before doing so.
For further information on this topic please contact David O'Brien or Iris Tam at Blake Cassels & Graydon LLP by telephone (+1 416 863 2400) or by fax (+1 416 863 2653) or by email (email@example.com or firstname.lastname@example.org).
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