Buyer beware!

Written by Aubie J. Herscovitch

May 31, 2018 – It is said that time and experience are the forerunners to caution. This couldn’t be truer, especially when it comes to due diligence when acquiring an immovable property. The decision rendered by the Tribunal administratif du Québec (the “Tribunal”) in Juste Investir Inc. versus the Ministère du Développement durable, de l’Environnement et de la Lutte contre les changements climatiques (the “Ministry”) is a glaring illustration of this principle.

In this decision, the applicant, a shell company whose sole shareholder and director was a commercial real estate broker and director of acquisitions working for a well-established North-American real estate developer (the “Purchaser”), purchased a property in Pointe-Claire. Thinking he was obtaining a bargain, the Purchaser bought the property for a low price in 2015 when it was put up for sale by the City of Pointe-Claire for non-payment of municipal taxes. The site was in fact the former Reliance site (the “Property”), where a thousand litres of oily water contaminated with polychlorinated biphenyls (“PCB”) had spilled. This incident, rather singular to say the least, was the subject of extensive media coverage since March 2013.

In this dispute, the Purchaser accused the Ministry of negligence and bad faith in failing to properly register a Notice of Contamination against the Property, as was required by law. He also criticized the Ministry for failing to inform potential purchasers of the Property’s contaminated status. Consequently, the Purchaser pleaded that he would never have acquired the Property had he been aware of the PCB contamination. In fact, the Purchaser acquired the Property on June 4, 2015, but the Notice of Contamination was only published at the Land Registry some five months later.

Prior to acquiring ownership of the Property, the Purchaser conducted a summary due diligence, which included a site visit and a consultation of the Land Register. These verifications were quite rudimentary in the context of such an important acquisition. Moreover, and this is what caught the Tribunal’s attention, at the end of his research, the Purchaser was able to note that four million dollars had been spent in an attempt to decontaminate the soil following the PCB spill. Without being unduly discouraged, he consulted an environmental expert who indicated that work of such magnitude had “probably” decontaminated the site. For the Purchaser, the “probability of decontamination” was satisfactory to complete the transaction.

The Tribunal was of the view that these verifications were clearly inadequate. In fact, it had to decide whether the Purchaser had acted as a knowledgeable real estate broker or whether he had clearly lacked vigilance when buying the Property. The administrative judges decided in favour of the second premise, judging that, as an experienced commercial real estate broker, the Purchaser should have suspected there was something wrong with the Property. Since the latter speculated by entering into a risky investment, relying only on fragmentary information, the Tribunal concluded that he could not legitimately claim to be unaware of the presence of contaminants in the soil at the time of purchase. Thus, being the new owner of the Property, the Purchaser was compelled to comply with the order issued by the Ministry and decontaminate the Property, which would cost several million dollars.

Such decision undoubtedly turned what was thought to be a strategic investment into a nightmare. That said, this kind of situation could easily have been avoided by collaborating with and relying on the expertise of professionals having extensive experience in this area. An experienced real estate lawyer would have conducted an off-title search to identify such risks and warn a potential buyer of the existence of an open file with the Ministry in respect of unresolved environmental issues. More specifically, in this case, a search on the Ministry’s website should have been conducted in order to consult the Contaminated Sites Inventory. This search would have immediately revealed the existence of a technical sheet on the Property indicating that PCB contamination was still in effect and that a full decontamination of the Property had not taken place.

One cannot overemphasize the amount and detail of diligence that should be exercised when acquiring an immovable property, especially an older property, or one which had been used for industrial purposes. It is important to be fully informed and, above all, to deal with professionals who are familiar in carrying out such transactions. It can be concluded that, during any acquisition, and in particular when a business opportunity seems too good to be true, it remains prudent to consult a seasoned real estate lawyer in order to avoid finding oneself in such a regrettable situation.