WHEN IS SELLER NOT RESPONSIBLE FOR ENVIRONMENTAL CONTAMINATION?

Four years after the acquisition of a commercial property, the purchaser applied for a bank loan to pay the construction costs to increase the size of its building.[1] The financial institution required environmental testing for contamination as a condition for granting the loan. The results of the environmental testing revealed the presence of heating oil in the soil on part of the property and the application for the loan was refused pending decontamination.

The seller agreed to pay the costs of decontamination estimated at between $110,000 and $150,000. In the course of the decontamination work, the parties learned that oil had infiltrated beneath the building and the presence of rock prevented removal without its demolition. The revised cost of the clean up largely exceeded the $700,000 sale price of the property.

The seller offered to cancel the sale. The purchaser refused, restored the excavated parts and continued to use the property as it had for the previous four years without restriction, other than being unable to increase the leasable space due to its inability to obtain financing.

Purchaser argued that the oil contamination constituted a hidden defect that was known to the seller, who should be held responsible for all damages. In addition, purchaser relied on the seller’s declaration in the contract of sale that the property did not contravene any environmental protection laws. For the purchaser, this declaration constituted a contractual warranty that supplemented the statutory warranty of quality found in the Quebec Civil Code.

The seller invoked the lack of diligence on the part of the purchaser, who had substantial real estate experience. The purchaser was allegedly in a hurry to close a “deal” to purchase the property and did so without carrying out a pre-purchase inspection. Seller also argued that the purchaser did not incur any restriction in the intended use of the property and that the defect did not reach the level of seriousness that the purchaser alleged.

Regarding the declaration in the contract of sale, seller argued that the property did not infringe upon any environmental laws; the declaration was only a clause of style; and there was no evidence of any infraction. Finally, since the purchaser refused seller’s offer to cancel the sale, its recourse should be limited to a reduction in price, and not all damages.

Purchasers lack of diligence

Purchaser’s manager was highly experienced in residential real estate matters, but less so in the commercial sector. Seller was a non-profit organization that provided financial aid to charitable organizations. Its board of directors consisted of twelve volunteers who were mostly retired.

The property in question was situated adjacent to another property that was already owned by the purchaser and when the latter learned that the property was for sale, he saw an attractive opportunity. The purchaser visited the property for two hours and was given a document containing basic information about the property including the dates of construction and renovations; municipal evaluation; the lease of the sole tenant; and that the heating system was electric. The purchaser did not inquire further regarding the nature of the renovations or request additional details regarding previous heating systems. 

The day after the sole visit, purchaser submitted an offer. The sale transaction was completed within fifteen days for the agreed price of $700,000. The seller agreed to finance the sale so the purchaser did not have to obtain a bank loan. Purchaser testified that the application for a bank loan would have delayed the closing considerably since the bank would have required a Phase 1 environmental study, etc. For this reason, purchaser renounced the opportunity to conduct a Phase 1 prior to closing.

Did purchaser not foresee the day when a Phase 1 might be required, such as for a future bank loan or upon the re-sale of the property? In the opinion of the Court, the purchaser acted imprudently in that it benefited from a certain level of real estate experience; its haste to complete the sale and willingness to forego the opportunity to carry out an environmental assessment; foreseeability that an environmental assessment would eventually be required in the future and knowingly assumed the risks. 

Seriousness of the defect

The Court correctly noted that that the determination of whether a defect is covered by the legal warranty of quality is directly proportional to the impact on the intended use of the property by the purchaser. 

On the one hand, purchaser declared that the defect was so serious that it would not have bought the property had it known about the existence of environmental contamination. Once discovered, it refused to cancel the sale as proposed by the seller. The court concluded in the circumstances that either the defect was not as serious as the purchaser had alleged or that the value of the property was much greater than the price paid, despite the contamination.

The Court of Appeal has already recognized that the presence of environmental contamination will not be considered a defect unless is has a significant impact on the intended use of the property. [2]

The property was fully rented to a single tenant that intended to remain until the end of the lease. The purchaser was able to use the property for its intended use. Purchaser never received any notice from a public authority requiring that it cease exploiting the property as a result of the presence of environmental contamination. In short, the purchaser’s use of the property had not been adversely affected.

And what of the impact upon the resale value of the property? Purchaser offered no evidence on this point notwithstanding that it called a certified evaluator to testify.

For the foregoing reasons, the Court concluded that the purchaser could not rely on the statutory warranty of quality.

Sellers contractual declaration that the property does not contravene environmental protection laws

The purchaser submitted that the seller violated s. 20 of the Environmental Protection Act which makes it an infraction to contaminate the environment with any substance prescribed by regulation.

The Court noted that there was no evidence that the contamination was spreading and not limited to the area directly beneath the building. Consequently, there was no evidence of a violation of the law by the seller. Furthermore, the Minister of the Environment had not issued any notice of infraction in this regard.

The Court also noted that the law generally doesn’t require a property owner or occupant to clean up and remove contaminants except for businesses with industrial operations specifically prescribed by regulation or in some specific cases where the Minister is given the authority to order a clean-up, neither of which scenarios would apply to the case at bar. 

Consequently, the purchaser’s claim was dismissed.

Quantum of damages claimed by the purchaser

Purchaser claimed $3,580,287 including various expenses incurred, the value of the building prior to demolition; demolition costs; decontamination costs; and compensation for lost revenue resulting from the cancellation of the lease. 

Did the purchaser reasonably believe that it could keep the property and that seller would pay it $3.5 million dollars? 

The Court concluded that even if the purchaser could avail itself of the warranty of quality or the seller’s contractual declaration, (which it unsuccessfully argued), the amount of the monetary relief to which it would be entitled would be limited. More particularly, when a purchaser becomes aware that the cost of repairs is disproportionate to the purchase price, the appropriate legal remedy is the cancellation of the sale together with a claim for damages that it actually incurred, but not the cost of repairs. Otherwise, the purchaser could effectively end up paying little or nothing for a property, which could lead to an unreasonable and unfair result.

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[1] Société en Commandite de l’Avenir c. Familia Saint-Jérôme inc., 2017 QCCS 4246

[2] 125385 Canada inc. c. Groupe Collège LaSalle inc., 2006 QCCA 522

DISCREPANCY IN THE SIZE OF A CONDO

What are the rights of a buyer of a new condo when the actual square footage is less that what is shown in the plans?

In a recent decision of the Quebec Superior Court,[1] a lawyer promised to purchase a condo on January 14, 2010 to be delivered in September 2011 for the price of $1,350,000. According to the plans provided by the promoter, the condo was to comprise an area of 2904 square feet. When delivered, the purchaser hired a surveyor to measure it and found that it was only 2558 square feet, a shortfall of 346 square feet or 12 %. Put another way, the shortfall was equivalent to a good size room (20 x 17).

The purchaser proceeded with the sale and took possession of the condo under reserve of

his rights.

The purchaser claimed a reduction of the purchase price in the amount of $113,000 to compensate him for the shortfall. He argued that the size of the condo was an essential condition for him and the shortfall was substantial.

The promoter argued that he never promised to deliver a condo with 2904 square feet of living space and that he had explained to the purchaser the difference between gross measurements (including the thickness of walls and windows) and net, which is measured from interior surfaces. In addition, the promoter invoked the following exculpatory provision of the Promise to Purchase:

Dans l’éventualité de toute divergence entre les Plans et les Spécifications incluses aux Annexes jointes à la Promesse, le plan de l’arpenteur prévaudra et l’Acheteur accepte que le Prix d’Achat demeurera le même nonobstant toute divergence de superficie par rapport à la superficie mentionnée dans les plans préliminaires.

The key legislative provisions are the following articles of the Quebec Civil Code:

1720. The seller is bound to deliver the area, volume or quantity specified in the contract, whether the sale was made for a price based on measurements or for a flat price, unless it is obvious that the certain and determinate property was sold without regard to such area, volume or quantity.

1991, c. 64, a. 1720; I.N. 2014-05-01.

1737. Where the seller is bound to deliver the area, volume or quantity specified in the contract and is unable to do so, the buyer may obtain a reduction of the price or, if the difference causes him serious injury, resolution of the sale.

However, where the area, volume or quantity exceeds that specified in the contract, the buyer is bound to pay for the excess or to restore it to the seller.

1991, c. 64, a. 1737; I.N. 2014-05-01.

The Court accepted the purchaser’s testimony that at no time did the promoter ever discuss with him the distinction between gross and net measurements.

Article 1720 stipulates that the seller must warrant that the size of the area stipulated in the Promise to Purchase is accurate. The Court found that the promoter could not exculpate himself from the warranty with a clause that states that the size of the area stipulated in the Promise to Purchase is only approximate. Moreover, the legal warranty is independent of the good or bad faith of the promoter.

The exception to the warranty included in Article 1720 has generally been interpreted restrictively, and the burden of proof is on the seller to establish that it applies to a given set of facts. In the present case, the promoter was unable to do so, particularly given the size of the shortfall.

Having determined that the promoter breached the legal warranty, what then is the compensation that is appropriate in the circumstances?

The jurisprudence does not support a rule of thumb approach i.e. a reduction in price proportionate to the size of the shortfall. Trial judges are accorded significant discretion to quantify damages and price reductions, but must not do so arbitrarily or enrich the purchaser.

In the present case, the purchaser hired an expert evaluator to undertake a comparative review of similar properties, and arrived at a value of $500 per square foot. From this he subtracted the cost of two garage spaces and a storage locker that were included in the price, leaving the amount of $327 per square foot. The expert concluded that if 2904 square feet at $327 gives $949,608, then 2558 square feet would give $836,466, a difference of $113,142 (tax included) which rounded off to $113,000, is the amount that the Court granted.

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[1] Gagné et al. –vs- 6983499 Canada Inc. et al., 2017 QCCS 1721

SOIL CONTAMINATION-CLAIM IN WARRANTY DISMISSED AGAINST PRIOR OWNERS

In Sévigné et al. –vs- Prud’homme et al. 2016 QCCS 6529, soil contamination was discovered five years after the date of acquisition. The Buyer sued to cancel the sale or reduce the price in order to offset clean-up costs in the amount of $125,000. The Seller, in turn, sued his predecessor in title and so on up the chain of title. There were 4 levels of incidental warranty actions.

At least two legal arguments, based on the following provisions of the Quebec Civil Code, were raised by the buyers:

1725. The seller of an immovable warrants the buyer against any violation of public law restrictions affecting the property which are exceptions to the ordinary law of ownership.

The seller is not bound to that warranty where he has given notice of these restrictions to the buyer at the time of the sale, where a prudent and diligent buyer could have discovered them by reason of the nature, location and use of the premises or where such restrictions have been registered at the registry office.

1991, c. 64, a. 1725; I.N. 2014-05-01.

III.  —  Warranty of quality

1726. The seller is bound to warrant the buyer that the property and its accessories are, at the time of the sale, free of latent defects which render it unfit for the use for which it was intended or which so diminish its usefulness that the buyer would not have bought it or paid so high a price if he had been aware of them.

The seller is not bound, however, to warrant against any latent defect known to the buyer or any apparent defect; an apparent defect is a defect that can be perceived by a prudent and diligent buyer without the need to resort to an expert.

1991, c. 64, a. 1726; I.N. 2014-05-01.

The most recent sale took place in 2007. In 2012, there was serious flooding in the basement after which, the owner noticed the presence of noxious odours. Tests carried out in 2013 and 2014 confirmed the presence of hydrocarbons in the soil. In 2015, an underground heating oil tank was discovered which was believed to be the cause of the contamination.

Regarding Article 1725, the relevant “public law restrictions” are environmental protection statutes and regulations. To succeed, the buyer would have to establish that the contamination existed and the environmental protection law was in effect at the time of the sale. If the sale took place before the law came into effect, the buyer could not succeed on this ground.

Article 1726 requires the buyer to prove that the defect existed at the time of the sale; that the defect was not apparent; and that the defect either rendered the property unfit for its intended use or significantly diminished its usefulness to the extent that the buyer would not have bought it or paid so high a price if he would have been aware of it.

Regarding the most recent sale (i.e. Plaintiff’s claim), Article 1725 clearly applied. Article 1726 also applied since the presence of soil contamination made the property unfit for its intended use, which was to lease the property to earn rental income.

However, the outcome was different for the incidental actions in warranty that were brought against prior owners. For some of them, their purchases pre-dated the application of environmental statutes and regulations so they could not rely on Article 1725.

In addition, the fact that the soil contamination was not discovered until 2012 and had no palpable consequences before then was a bar to the application of Article 1726 since the prior owners could not establish that the latent defect (the soil contamination) diminished their use and enjoyment of the property.