Possession Following Mortgage Default And Environmental Liability

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Real Estate Morgage Enforcement, October 2008

Introduction

As mentioned elsewhere in this bulletin, 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 mortgaged property and access to the revenues and income derived therefrom. It also permits the lender to undertake any necessary repairs to the mortgaged property and such measures as may be required to prevent waste, thereby maintaining and maximizing the value of the mortgaged property in both the short and long term.

Environmental Consequences Of Possession

There are necessarily a number of business and legal implications which a lender will have to consider in determining whether or not 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 mortgaged 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 mortgaged 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 EPA). The EPA grants wide discretion to the Ontario Ministry of the Environment (the MOE) 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 EPA, 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 EPA 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 mortgaged property and to have become a "person responsible" and, thus, liable for environmental remediation costs.

Brownfields Legislation – Exemptions for Lenders and their Representatives

Fortunately, the Brownfields Statute Law Amendment Act, 2001 (Ontario) (the Brownfields Legislation) reduces this risk by amending the EPA to provide for certain exemptions for lenders and their representatives – including a receiver, a trustee in bankruptcy and their respective representatives.

As amended by the Brownfields Legislation, the EPA 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:

1. ensure the supply of water, sewage services, electricity, artificial or natural gas, steam, hot water, heat or maintenance;
2. secure the mortgaged property by means of locks, gates, fences, security guards or other means;
3. ensure that the mortgaged property is insured; or
4. 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:

1. any danger to the health or safety of any person that results from the presence or discharge of a contaminant;
2. 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
3. any injury or damage or serious risk of any injury or damage to any property or to any plant, 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 EPA also provides that a lender and its representatives are not liable under a clean-up order issued by the MOE if the lender becomes the owner of a mortgaged property by virtue of a foreclosure, provided that the lender sells the mortgaged property within a period of five years following 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 EPA.

Exceptions to the Exemptions for Lenders and their Representatives

As amended by the Brownfields Legislation, the EPA provides for certain exceptions to the exemptions noted above. A lender, receiver, a trustee in bankruptcy and their respective representatives are not immune from liability under an order issued by the MOE by reason of their gross negligence or wilful misconduct. As well, the MOE may – in what are characterized in the EPA 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 MOE has reasonable grounds to believe that, as a result of the presence or discharge of a contaminant on, in or under the mortgaged property, there is a danger to the health or safety of any person, impairment or serious risk of impairment to the quality of the natural environment and/or injury or damage or serious risk of injury or damage to any property or to any plant or animal life.

Record of Site Condition

As amended by the Brownfields Legislation, the EPA also provides that the MOE 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 MOE's environmental site registry, unless the director of the MOE 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 will be able to limit its exposure to environmental liability by commissioning and filing with the MOE a record of site condition or, alternatively, by including in the purchase agreement with the purchaser of the mortgaged property a provision requiring the purchaser to do so following completion of the transaction.

Bankruptcy and Insolvency Act (Canada)

At the federal level, the Bankruptcy and Insolvency Act (Canada) (the BIA), 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 (a) before the trustee's appointment or (b) 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.

Civil Liability

Neither the recent amendments to the EPA and other Ontario statutes resulting from the Brownfields Legislation nor the provisions of the BIA protects the lender which takes possession of a mortgaged property or a trustee in bankruptcy from liability for damages to third parties – to an adjoining landowner, for instance, in circumstances involving the migration of contamination from the mortgaged property. An action on the part of such landowner may be based on such common law principles as: nuisance (any reasonable interference with the use and enjoyment by the adjoining landowner of its property); negligence (lack of reasonable care where damage or injury to others is foreseeable); trespass (intentional interference with the adjoining landowner's right to exclusive use of its property); riparian rights (where there has been a "material alteration" of the character or quality of a body of water); strict liability (resulting from a discharge or escape of a contaminant that is deemed to be "inherently dangerous"); or civil action (arising from breach of statute).

Conclusion

As noted above, 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. Also as noted above, at the federal level, the BIA 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.

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.