Many times during my career I have been instructed to grant solicitors approval for an Agreement of Purchase and Sale, the instruction comes in my role as a solicitor for a vendor or as a solicitor for a purchaser; in many cases time is spent negotiating representations and warranties in respect of the environmental condition of lands.
When environmental representation and warranties are negotiated we often see a form of representation and warranty proposed whereby the seller is requested to promise that it has received, handled, used, stored, treated, shipped and disposed of all environmental contaminants in compliance with all applicable environmental laws, and that no hazardous or toxic materials have been released into the environment or deposited, placed or disposed of upon or near the lands.
During the course of negotiation that initially suggested form of representation and warranty is often qualified “to the best of the seller’s knowledge and without due inquiry”, the reference to “environmental laws” may be defined, and the reference to “or near” is deleted as the word “near” can have a subjectively broad meaning and no one ever knows what is happening near their lands especially behind closed doors.
Occasionally seller’s do not want to provide any environmental representation and warranty for their own reasons.
When a seller’ does not want to provide an environmental representation and warranty you must consider how to advise a purchaser, the writer suggests the following:
- Advise the purchaser there is an absent of environmental representation and warranties in the agreement of purchase of sale;
- Advise the purchaser it will need to conduct their own due diligence into the lands by virtue of retaining a provider of environmental due diligence, namely a provider who is insured that can provide a Phase 1 Environmental Report and, if necessary, a Phase 2 Environmental Report;
- Advise the purchaser that your office can assist with the environmental due diligence by virtue of conducting a Manitoba Environmental File Search to search the current records of the Department of Conservation and Climate, however the aforementioned is not to be used as a substitute for conducting a Phase 1 Environmental Report as it deals only with known reports of contamination; and
- Advise the purchaser that most lenders, and perhaps all conventional lenders, will require a clean Phase 1 Environmental Report prior to committing to financing and advancing funds, and should the purchaser intend to pay cash for the lands, a Phase 1 Environmental Report will most certainly be required for any future financing.
Importantly, an absence of environmental representation and warranties should not cause panic for a solicitor and should not be used to cause panic for a purchaser; the writer knows of no conventional lender that would indirectly rely on representations and warranties made by a seller in lieu of a clean Phase 1 Environmental Report even in the rare event some form of assignment or novation was proposed to permit the lender recourse against the seller accordingly. In fact, even in the event the environmental representation and warranties are present within the Agreement of Purchase and Sale you will still need to advise the purchaser in accordance with numbers 2), 3) and 4) and a clean Phase 1 Environmental Report will be needed unless the purchaser is paying cash and has no intention of it or its heirs ever financing the lands (the likelihood of which would be extremely remote).
Considering the outcomes from a worst case scenario, namely the lands being contaminated, the purchaser would identify the lands as being contaminated or potentially contaminated during its due diligence by virtue of conducting a Phase 1 Environmental Report, the purchaser would then make an educated business decision on whether or not to proceed with the purchase being protected by virtue of its due diligence period. In the event the Phase 1 Environmental Report contained an error, for example it states the lands are not contaminated but in reality the lands are contaminated, the purchaser would most certainly have a right of action against the provider of the Environmental Report, and provided the suggested advice in 2) is followed that provider would be insured, the loss experienced by the purchaser most certainly covered by the provider’s insurance and thereby negating any need of the purchaser to commence costly and time consuming litigation against a seller. From a practical and rational perspective, it seems that an action against an expert (i.e. an insured provider of an Environmental Report) would be superior to an action against a seller (who may have disposed of its assets by virtue of the Agreement of Purchase and Sale, or whom may be a bare trustee with no real assets) whom made an incorrect environmental representation and warranty.
Advise your clients accordingly, don’t fret, and know that proper “on the ground due diligence” will most certainly be worth far more than relying on any representation and warranty.