Canada: Solicitors' Negligence Case Incorporates Scary Diligence Assumptions For Real Estate Lawyers

Last Updated: August 1 2016
Article by Aaron Atcheson

The recent Superior Court of Justice decision Dobara Properties Limited et al. v. Arnone et al., 2016 ONSC 3599 (CanLII) ("Dobara") has potentially alarming implications for real estate lawyers' practice with respect to the scope of their diligence and reporting obligations.

Defendants Gino Arnone and Erickson & Partners (the "Arnone Defendants") acted as real estate lawyers for the Plaintiffs on their purchase of commercial property in late 2004, which land the Plaintiffs discovered post-closing to be contaminated. The Arnone Defendants failed to advise the Plaintiffs at the time of their purchase that there had once been a service station on the property, despite having been aware at the time of the Plaintiffs' purchase that an expired notice of lease to Shell remained registered on title to the property. The Plaintiffs sued the Arnone Defendants for damages arising from the Plaintiffs' purchase of contaminated land as well as Barbara Hicks, Selwyn Hicks and Hicks & Hicks Professional Corporation (the "Hicks Defendants"), the Plaintiffs' former lawyers who had been retained to commence a solicitors' negligence action against the Arnone Defendants but failed to do so within the applicable limitation period. The Plaintiffs then sued both sets of lawyers.

The Dobara action was dismissed as against the Arnone Defendants on the basis that it had been commenced after the expiration of the relevant limitation period. The Hicks Defendants admitted liability but disputed that the Plaintiffs had suffered any compensable damages. The Plaintiffs claimed environmental remediation costs, loss of property value, a commission on the failed sale of the property, cost of replacing a roof on the building on the property, excess mortgage interest and an amount for mental distress. The Court accepted that the Plaintiffs would not have closed the transaction had the Arnone Defendants advised them prior to closing that the property was a former gasoline station.

The Plaintiffs remediated the property in 2010 and sold it in 2012, allegedly at a sale price well below market value due to the stigma associated with the property's prior contamination. The Court considered the Plaintiffs' claim for damages for, among other things, environmental remediation costs and loss of property value arising from the Plaintiffs' 2012 sale of the property.

The Court awarded damages to the Plaintiffs for their remediation costs, noting that the trend in cases involving contaminated land is to award damages for environmental remediation costs rather than damages for diminishing property value (see Midwest Properties Ltd. v. Thordarson et al., 2015 ONCA 819 (CanLII)). Relying on Tridan Developments Ltd. v. Shell Canada Products Ltd., 2002 CanLII 20789 (ON CA), the Court dismissed the Plaintiffs' claim for loss of property value on the basis that the Plaintiffs had not provided expert evidence supporting their conclusion that the property's value was diminished at the time of sale in 2012 by the fact of its previous contamination. The decision is particularly noteworthy because the judge was a former Ministry of Attorney General counsel specifically assigned to the Ministry of Environment.

Perhaps more notable than the details of the decision are the issues that arise from the agreed facts in the case. Dobara raises distressing questions for real estate lawyers about the scope of their diligence and reporting obligations to their clients in similar circumstances. Although not express in the Court's decision, Dobara assumes that real estate lawyers have a positive obligation to infer, on the basis of expired notices of lease remaining on title, as to a property's likely prior use and to report that conclusion to their client. And while it may be reasonable to expect a solicitor to highlight a prior lease to a large gasoline retailer, how far can this obligation extend? Do solicitors have an obligation to review all deleted instruments on a parcel register to identify past notices of lease that have been removed? Is the solicitor obligated to inquire as to the former lessee's operations when such operations cannot be inferred from the name of the entity, such as where a numbered company has been used as the tenant. If an entity is known to have various kinds of operations, at what point is the solicitor obligated to inquire as to the use of the property, notwithstanding that their client may not wish to proceed with a Phase I Environmental Site Assessment? Are there comparable diligence obligations for those practicing residential real estate law to review parcel registers for adjacent properties and advise on circumstantial indications of potential environmental implications?  These and related questions have important implications with respect to the regular practice of commercial real estate law in the Province of Ontario and should be given due consideration. In light of the Dobara decision, it will be interesting to note the real estate bar's approach to reviewing and advising on prior registrations on title of potential environmental concern.

Following Dobara, real estate lawyers should consider incorporating as part of pre-closing correspondence with their clients, in all cases, the recommendation that the client consult with an environmental consultant as to the appropriate level of due diligence in the circumstances. While a Phase I ESA may not be necessary in all cases, it may be prudent for such an advisory to be included in all circumstances in lawyer-client correspondence.

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

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Aaron Atcheson
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