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When Striking Oil is a Bad Thing: The Liability of Non-Polluting Landlords and Tenants in Alberta

Given its sometimes latent and often subterranean nature, environmental contamination and its associated legal liabilities can be challenging to foresee and may be overlooked by landlords and tenants in the process of entering a new lease. The Environmental Protection and Enhancement Act (EPEA), one of the key pieces of legislation in Alberta’s environmental protection regime, allows for the possibility that a landlord or tenant may be made liable for contamination even if they were not the original source of the contamination. For this reason, lease parties need to be cautious and take steps to mitigate this potential liability, both through proper due diligence of a leased premises, and drafting of the environmental provisions of a lease.

The EPEA and Contaminated Sites

The EPEA is the primary legislation in Alberta through which regulatory requirements for the protection of the environment are managed. When confronted with evidence of environmental contamination, the director appointed pursuant to the terms of the EPEA is authorized to designate the area as a contaminated site subject to the provisions of the Act.

Upon designating lands as a contaminated site, the director is then empowered to issue an environmental protection order to the “person responsible” for the contaminated site. Such orders enable the director to require the person responsible to take a number of actions in relation to the contamination including investigating, measuring, monitoring and restoring the contaminated area to a condition satisfactory to the director.

“Person Responsible”

The “person responsible” for the contaminated site is defined very broadly under the EPEA, such that it includes current and previous owners and tenants, or other persons in lawful possession or occupation of the land.

As such, upon designating lands as a contaminated site, the director has the authority under the EPEA to issue an environmental protection order requiring any current or previous “owner” (including tenants) dating back to when the original contamination occurred, regardless of whether these owners were the source of the contamination, to take any of the above mentioned steps, up to and including full remediation of the affected land. The director and courts have shown a willingness to go back multiple decades when issuing environmental protection orders, so even prior owner/landlords who have previously divested a contaminated site without knowledge of the contamination, along with former tenants, are not necessarily safe.

Director’s Criteria

On the bright side, the EPEA does offer its director some guidance with respect to determining who the person(s) responsible for a contaminated site should be when issuing an environmental protection order, including that the director give consideration to certain factors such as when the offending substance was initially released, whether the person knew or ought to have known about it, and whether the person contributed to further accumulation or release of the offending substance.

However, it is difficult to predict what weight the director will give to each of the various factors and how exactly these will be applied. This ambiguity is particularly relevant in cases where it may not be possible to pinpoint the original release of the contamination and the site has had multiple owners and/or tenants over a number of years, some of whom may no longer exist or have any assets. Ultimately, the EPEA does not restrict the director’s broad discretion in issuing an environmental protection order including naming the person(s) responsible. As such, it is important that both landlords and tenants take steps at the outset to protect themselves.

Limiting Environmental Liability

Options available to both landlords and tenants to limit their exposure with respect to potential environmental liability include: completing proper due diligence of the leased premises, thorough negotiation of lease provisions pertaining to contamination of the premises and possibly obtaining insurance against environmental liability.

Due Diligence

Basic diligence on the environmental history of a premises includes search requests to:

  • the Petroleum Tank Management Association of Alberta regarding the presence of any underground storage tanks on the property
  • Alberta’s Environmental Law Centre for any history they may have of environmental enforcement proceedings in relation to the property
  • the local fire department for records reflecting any history of spills, releases, fires or storage tanks on the property

These types of searches are not typically expensive or time consuming to obtain, although some may require the consent of the landlord as owner of the lands. As part of an increased level of due diligence for longer term and higher value leases, either party to the lease may also consider having a Phase 1 Environmental Site Assessment completed. Such assessments are typically not intrusive (no samples taken or lab work performed) but do involve a physical walk through and historical records review by an expert who then reports on the apparent condition and whether there are any areas of concern such that a Phase 2 Environmental Site Assessment involving actual testing is recommended.

Drafting of Lease Clauses

Perhaps most importantly, landlords and tenants should ensure that the provisions in the lease related to the environmental condition of the lands, including environmental indemnities, are carefully reviewed and negotiated. Proper drafting of these provisions provides for an appropriate allocation of potential environmental liability, taking into consideration the history of the leased site and permitted use of the premises under the lease.

For example, a landlord may require the lease include an acknowledgement and agreement of the tenant, as to the current "baseline" environmental condition of the leased premises, together with a covenant of the tenant to provide an environmental site assessment either at the termination of the lease or at designated increments during the tenancy. Alternatively, a tenant bargaining from a position of strength may require a landlord to disclose to it any environmental reports or documents relating to the property in the possession of the landlord.

The indemnity provisions in a balanced lease would most typically include an indemnity from the landlord to the tenant in respect of environmental contamination pre-existing the commencement of the lease, and a reciprocal indemnity from the tenant to the landlord in relation to environmental contamination of the premises caused by the tenant or simply that are present on the premises that were not there at the outset. The landlord and tenant will each want to ensure that these provisions are not drafted in a way such that they may be taking on liability for contamination they have not caused and also bear in mind that an indemnity is only as good as the covenant of the party providing it.

Insurance

In certain circumstances, such as where there is a real potential risk of liability for environmental contamination resulting from the prior and/or future use of the site, the costs of obtaining insurance that includes coverage for environmental liabilities may make sense. Obtaining such insurance may assist in negotiations as to specific lease provisions related to the apportionment of environmental liability between the landlord and the tenant in the lease. The involvement of an insurance broker may assist in determining what insurance is available and whether a policy could be customized to fit the specific risks and exposures relevant to the leased premises.

Conclusion

With the broad powers available to the director under the EPEA, due diligence and a carefully negotiated lease are necessary to mitigate the risk of unexpected liability for environmental contamination. Lawson Lundell’s Real Estate Group has extensive experience negotiating leases on behalf of both landlords as well as tenants and can assist with every aspect of lease review, negotiation and drafting for any type of property.

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