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.
No comments:
Post a Comment