Canada: Environmental Due Diligence

Last Updated: December 19 2001
Article by Marilyn Lee

Originally appeared in Fall 2001 Real Estate Briefings

I am often asked what types of environmental due diligence activities should be undertaken by a party on a proposed acquisition. Will these differ for an asset transaction, a share purchase or a lease?

Two types of due diligence activities can be under-taken:

1. Inquiries with government offices.

2. Getting an environmental assessment done by a private consulting firm.

Government Inquiries

The purpose of making inquires with government offices, generally the Ministry of the Environment, is to determine whether those offices have any records with respect to the property. These records may indicate previous or ongoing violations of environmental laws or reveal that orders, permits or approvals have been issued with respect to the site.

However, it is important to remember there will be limitations to the usefulness of such inquires. The government records may be organized in such a way that the government officer cannot readily find all files relating to a particular property. Therefore, an order may have been issued against a prior owner of the land but may not be found by the government officer responding to the inquiry. Secondly, these inquiries are database searches that will indicate whether there are government records relating to the site. It will not, however, indicate actual conditions at the site.

Notwithstanding the limitations, these inquiries play an important role in assessing the environmental condition of a site. In Ontario, there is a commercial service which will do a computer-based search of all government databases (there are about 20-plus) with respect to a particular property and the surrounding area. The search costs from $200 to $500, depending on the number of databases and the size of the area searched, together with the legal time in reviewing the results. The search takes about five to seven business days. There is generally no charge for a direct inquiry with a government office, but the response time can be four to six weeks. Occasionally the Ministry of the Environment will require the inquiry be made under the Freedom of Information Act instead, which will result in a charge for search time.

Environmental Site Assessments

An environmental site assessment ("ESA") will involve a report by a professional environmental consultant, often an engineer, as to the actual environmental conditions at the site. It can involve a visual inspection of accessible areas, called a Phase I Environmental Site Assessment ("Phase I ESA"). It can also involve subsurface drilling and testing to determine whether there is underground soil or groundwater contamination, called a Phase II Environmental Site Assessment ("Phase II ESA").

The advantage of an ESA is that it provides information on the actual conditions at the site. The disadvantage of an ESA is the cost. A Phase I ESA will cost approximately $1,000 to $2,000 and a Phase II ESA will generally start at about $5,000 to $6,000. Accordingly, whether to obtain an ESA will depend on the assessment of likely environmental contamination based on the client’s knowledge of historical uses, the number of sites being acquired and the amount of money being invested. Often, a Phase I ESA is commissioned initially and a Phase II ESA is done only if warranted by conditions disclosed by the Phase I ESA.

It should be noted that, even though the amount of money being invested may be relatively low, if there are environmental liabilities associated with a site, the potential exposure may exceed the monetary investment. It is also advisable to obtain an ESA if the party may be reselling or financing the properties. It is common for lenders to require at least a Phase I ESA prior to lending on commercial or industrial property. The existence of an ESA may also make an asset more attractive to potential buyers.

Transboundary Transactions

Where properties are been acquired in a number of jurisdictions, ESAs can be ordered either through local law firms or an environmental assessment firm which has offices in all of the jurisdictions. It is often preferable to order the ESAs through one environmental assessment firm as the form of the reports will be consistent from property to property.

The content of this article is intended to provide a general to the subject matter. Specialist advice should be sought about your specific circumstances.

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