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Environmental Law Article

This article appeared in CCH EnviroMation (January, 1997) and is reproduced courtesy of CCH Canadian Limited.

PROPOSED ENVIRONMENTAL SUPER LIEN MAY CAUSE LENDING CHILL

A super lien for environmental clean-up costs may make it harder for businesses and real estate developers to raise money. The provision is included in Bill C-5 which is likely to become law in 1997.

Bill C-5 (formerly C-109) passed second reading in May and completed hearings before Parliament's Standing Committee on Industry in October. It will amend the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act. Several BIA changes concern environmental issues. The most controversial is the proposal to create a super lien on real property owned by a bankrupt to secure government clean-up costs. It is not clear that the government paid adequate attention to the potential adverse effects on businesses' access to credit.

Takes Priority Over Mortgages

The proposed statutory super lien could render some existing mortgages worthless in a bankruptcy. This may scare small lenders out the market. Lending institutions tend to have a knee-jerk reaction to any new legislation, frequently out of proportion to the actual risk. Will institutions impose tighter restrictions on loans secured by real estate?

The super lien will take effect as a first charge against any real property of the bankrupt that is subject to a federal or provincial government claim for "costs of remedying any environmental condition or environmental damage affecting real property." The super lien can also affect related adjoining property (see below). This super lien will take priority over any other claims against the property, including those of mortgagees and other secured creditors.

Adjoining Property Included

The super lien will affect not only the real property to be remediated, but also "any other real property of the debtor that is contiguous thereto and that is related to the activity that caused the environmental condition or environmental damage." This means that a company's head office property could be subject to a super lien if it purchased a site next door which it used for manufacturing or for waste processing or disposal.

Some insolvency lawyers believe this provision goes too far. The National Bankruptcy and Insolvency Section of the Canadian Bar Association stated in its submission to the Committee that "a mortgage against a property having no environmental contamination may lose its priority over such property as a result of uses carried out subsequent to the mortgage on contiguous property also purchased subsequent to the mortgage." Some environmental advocates argued that the lien should extend to all of the bankrupt debtor's real property, clean or contaminated, not just contiguous property. It is clear that legal costs of buying, selling and financing business properties will increase due to the need for more detailed searches and inquiries on adjacent properties.

Uncertainty Invites Litigation

The provision is broadly and ambiguously drafted, inviting litigation on several fronts.

Neither the nature nor the extent of an eligible environmental "claim" are defined in the BIA. Such a claim would surely include clean-up costs incurred by a provincial ministry under an administrative order. In some provinces, legislation currently allows regulatory authorities to acquire lien rights for work done pursuant to a provincial clean-up order. For example, in R. v. Shirley [(1995), 129 D.L.R. (4th) 106] an Ontario General Division Court held that an MOEE claim for costs (including unliquidated future costs) was a claim provable in bankruptcy. The Court held MOEE established its right to a lien by giving notice of intention to do the work and subsequently starting work on the clean-up. Over $675,000 had been spent by the date of the motion. According to the judge, final clean-up costs could be in the millions of dollars.

It is not clear whether a super lien would be available to cover costs arising from orders of other officials (for example, an order under the Ontario Fire Marshals Act or the Gasoline Handling Act). Nor is it clear whether an award of damages in a civil lawsuit, or a provincial government compensation claim for spill remediation would qualify for this super priority. The government should define the scope of the terms "environmental condition" and "environmental damage" to minimize this uncertainty.

The proportion of costs to be eligible for the claim is sure to be contentions. Would all clean-up work qualify? What about the cost of consultant's studies leading up to the clean-up, and post-remediation monitoring costs? What if a regulator insists on cleaning up contaminated industrial land to meet strict residential or parkland standards, while mortgagees argue that less stringent (and less costly) industrial standards are adequate.

Less Stringent Burden For Trustees

Other provisions of Bill C-5 are less controversial. Trustees should be more willing to accept appointments when the standard of care for them is relaxed. In 1992 the Act was amended to provide trustees with a due diligence exemption from personal liability. Bill C-5 provides that trustees will only be personally liable for environmental conditions or damage occurring as a result of the trustee's gross negligence or wilful misconduct - a less stringent standard than due diligence. Some critics argue that relaxing the standard is not necessary, and not appropriate if the trustee has used or operated the property.

A "look and see" provision gives a trustee ten days (or a period specified in the order) to abandon a property instead of complying with an order. Within that time, the trustee may apply to stay the order for a further evaluation period. Some critics argue that trustees should not be able to abandon if the trustee is operating or using the property, or if the estate has sufficient assets to comply with the order.

How Will Lenders React?

Lenders' reactions to unpredictable environmental claims may be far more severe than any increase in risk would justify. One unfortunate effect may be to scare small investors who secure their investments to individuals or small businesses with first or second mortgages. For these investors, a super lien against one property could wipe out a significant portion of their portfolio. Unless the potential for a super lien is minimal, predictable and easily understood, many will simply refuse to take the risk, however small. For those still willing to lend, searching, risk assessment and conveyancing costs will rise. Lawyers, envisioning potential malpractice claims, may advise their clients conservatively. Institutional lenders may see this as impetus or excuse to avoid unprofitable small and medium-sized loans.

It remains to be seen whether the Bill will pass into law unchanged. Perhaps some uncertainties will be resolved during its review by the Senate.

Update

Since this article was published Bill C-5 received Royal Assent. It squeaked through at the end of April, just before the federal election call. Federal officials indicate that the environmental provisions are expected to become law

To comment, call Barry Spiegel in Toronto at (416) 863-0711 or send email to

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