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Real estate transactions often include holdbacks to deal with environmental issues. Unfortunately, the holdback clauses are often poorly worded, which can lead to unnecessary disputes.

A recent case in the Ontario Superior Court illustrates the problem: Edgar Taillefer and 996402 Ontario Ltd. v. 2059592 Ontario Corporation and Raj Siva, 2010 ONSC 1362.

During negotiations to sell his resort to Mr. Siva’s company, Mr. Taillefer’s corporation received a Ministry of the Environment Order to investigate its sewage works, and to  apply for a Certificate of Approval.

As compliance with the Order was an issue, the closing date for the sale was extended.  When the transaction closed, counsel for Taillefer undertook to hold back $50,000  “until such time as a clearance certificate has been received by the Ministry of the Environment and any required repairs with respect to same have been completed and paid by the vendor.”

The MOE later wrote to the vendor and purchaser, advising them that the intent of the Order had been complied with and that ongoing septic bed work would require regulatory approval.  The letter recommended that the current owner do certain work relating to the sewage services and to apply for a CofA for any establishment/alteration of sewage works.  The purchaser, as current owner, applied for the CofA, which was eventually issued by the MOE. The CofA required expensive remedial measures.

The vendor applied for release of the $50,000 holdback.  Initially, the cost of work needed to obtain the clearance certificate was estimated at $39,000; later estimates were nearly double that.   Mr. Taillefer argued that his company had complied with the Order and that the wording of the undertaking was “unfortunate”.  In any event, he argued, it was the new owner’s obligation to obtain the CofA, as only the “current owner” could apply for a CofA.

The Court disagreed – the holdback indicated that the parties felt that extensive remedial work that cost up to $50,000 might be required.  The undertaking specifically referred to a clearance certificate, not to any Order.  While the vendor may have complied with the Order, it had not complied with the requirements of the undertaking.  As well, terms and conditions attached to the CofA include that certain remedial work be completed; this work must be approved by the MOE, which will then issue a clearance certificate.  This work has yet to be done, and the holdback will be applied to it.

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