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A recent decision out of Newfoundland should remind prospective purchasers of real estate NOT to count on Environmental Site Assessments (ESAs) or other environmental reports commissioned by the seller, unless they acquire a specific contractual right to rely on that report, e.g. through a reliance letter. Real estate lawyers, take note, please.

In Community Mental Health Initiative Inc. v. Summit Lounge Ltd., 2014 CanLII 63978 (NL SCTD), the plaintiff, CMHI, entered into a purchase agreement to buy property from the defendant, Summit. The purchase agreement required Summit to provide CMHI with a Phase I Environmental Site Assessment in order to demonstrate that the property was free from contamination. The vendor hired a well known environmental consultant, Stantec, to conduct the ESA. Stantec issued a report concluding there were no grounds for concern. The seller provided the ESA to the buyer who then completed the real estate transaction. The buyer subsequently found hydrocarbons on the property. The buyer sued Stantec claiming that its Phase I ESA report contained misstatements and wrong information.

Stantec successfully filed a summary trial application to have the claim dismissed, arguing that it only provided the ESA for use by the seller, and it had no privity of contract with the buyer.

Disclaimers work

The court referred to the following provision in the Agreement of Purchase and Sale:

“Vendor will provide Purchaser with a Phase 1 Environmental Site Assessment, at Vendor’s cost, verifying that the property is free of any potential or actual environmental contamination…”

The court also referred to this standard provision from the Scope of Services Agreement entered into between the seller and Stantec:

“Third Party Reliance: Only the Client shall be entitled to rely on the Documents provided … in the performance of the Services. The Documents relate solely to the Services for which [Stantec] has been retained and shall not be used or relied upon by the Client or any third party for any variation or extension of the Services, any other project or any other purpose. Any unpermitted use by the Client or any third party is strictly prohibited.”

Finally, the court referred to the following statement in the final Phase I ESA report:

“7.0 Closure: This report has been prepared for the sole benefit of [the seller]. The report may not be used by any other person or entity without the express written consent of [the seller and the contractor]. All parties are subject to the same limit of liability as agreed to in the contract under which the work was completed. Any use which a third party makes of this report, or any reliance on decisions made based on it, are the responsibility of such third parties. [The contractor] accepts no responsibility for damages, if any suffered by any third party as a result of decisions made or actions taken based on this report.”

These clauses are found in essentially all environmental consultant’s reports in Canada.

The Court held that Stantec owed no duty of care to the buyer. Referring to the U.K. House of Lords decision Hedley Byrne & Co. v. Heller & Partners, [1964] A.C. 465 (H.L.), the principles of which were applied by the Supreme Court of Canada in Edgewood Construction Limited v. N.D. Lee Associates, [1993] 3 S.C.R. 206, the court held that a duty of care will not arise when, in the contract, the defendant employs specific language disclaiming such a duty.

Why don’t real estate lawyers know about environmental reliance letters?

This result should not have been a surprise. Environmental lawyers know that this principle was established nearly twenty years ago by the Ontario Court of Appeal in Wolverine Tube (Canada) Inc. v. Noranda Metal Industries Ltd., [1995] 26 O.R. (3d) 577. There, an environmental consultant prepared a Phase 1 ESA for three of his client’s properties. The Ontario Court of Appeal found that a subsequent purchaser could not maintain a claim in negligence against the consultant in light of a disclaimer clause which negated any duty of care to the purchaser. That is exactly what reliance letters are for.

Nearly twenty years after Wolverine Tube, why don’t real estate buyers ask for a reliance letter? (Not that a Phase 1 guarantees anything anyway.) Why do so many buyers continue to believe that they are “entitled” to receive a clean site? And why don’t real estate lawyers disabuse them of this dangerous and expensive notion?

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