Should Assigning a Commercial Real Estate Purchase Agreement Impact Your Environmental Due Diligence?

In a commercial real estate transaction, it’s common for the original buyer to assign the purchase agreement prior to closing or for a different party to otherwise take title to the relevant property. If you’re the party receiving the assignment or otherwise taking title, should this impact your environmental due diligence? According to a recent decision of the British Columbia Court of Appeal, it should.

In 0694841 BC Ltd. v. Alara Environmental Health and Safety Limited, the court ruled that a company who was assigned a purchase agreement could not rely on an environmental assessment prepared for a related entity when purchasing commercial real estate. As such, when the property was later discovered to be contaminated, the owner could not sue the environmental consultant for missing the contamination.

In this case, 0694841 BC Ltd. (069), a holding company used to make offers to purchase real estate, obtained an environmental site assessment from an environmental consultant, Alara Environmental Health and Safety Limited (Alara), as part of its due diligence in purchasing a commercial property. Alara conducted Phase I and Phase II environmental assessments on the property and did not find contamination. Alara’s report contained a disclaimer that only the “client” — in this case, 069 — could rely on the report. 069 then assigned its rights under the purchase agreement to International Trade Centre Properties Ltd. (ITC). 069 and ITC were related companies with a shared director and acting mind.

Six years after purchasing the property, ITC found contamination and sued Alara for negligent misrepresentation. The British Columbia Court of Appeal held that ITC could not rely on an environmental assessment prepared for 069, even though the companies were related, and ITC had, in fact, paid the Alara invoices. This was because Alara had disclaimed any liability to third parties. Buyers and assignees should be aware of the risks inherent in trying to rely on an environmental report with a disclaimer, particularly when it’s prepared for a third party, whether the entities are related or not.

It's important to ensure that all related entities and potential assignees are entitled to rely on the environmental site assessment. This can include obtaining a reliance letter from the consultant for all related entities or incorporating a term into the contract whereby reliance is extended not just to the entity that hired the consultant but also any related entities or affiliates. If assigning the purchase agreement to a related entity is a possibility, the abovementioned rights should be included in the contract with the consultant at the outset of the engagement. If these rights are negotiated down the road, they may be more challenging to negotiate, come with an additional fee or be forgotten.

In addition, an environmental consultant’s general service terms and conditions should be reviewed before it is hired/engaged, as their initial position is often to limit their liability to the fees paid by the client on the mandate. This limit on a buyer’s potential recovery of damages may be as little as a few thousand dollars in the case of a Phase I environmental site assessment, a far cry from the clean-up costs for even the most modest environmental problem.

For more information, please contact:

Lana Finney           +1-416-863-2228
Patrick Gordon     +1-416-863-3276

or any member of our Commercial Real Estate or Environmental group.