The right to remediate: Court of Appeal rejects tenant’s attempt to waive landlord’s obligation to remediate contaminated property

In Horn Ventures International Inc.,¹ the Ontario Court of Appeal upheld a 2022 Superior Court decision dismissing an application by an industrial tenant for an order compelling its landlord to sell it the leased property.

The issue before the Superior Court was whether the tenant could trigger a unique, remediation-based obligation to purchase provision in the parties’ lease before the landlord fulfilled its contractual responsibility to remediate the environmental issues at the property. The tenant argued, among other things, that the remediation requirement in the obligation to purchase was included for the sole benefit of the tenant, such that it could be unilaterally waived. The application judge disagreed, finding that the remediation requirement benefited the landlord too. The question in the Court of Appeal was whether the application judge had erred in interpreting the parties’ contract. 

The property 

In 1996, the landlord listed the property for sale. The tenant was interested in purchasing the property. Both parties knew the land and building had serious environmental challenges. A 1995 Phase II ESA report identified subsurface impacts relating to the past use of a solvent degreaser and an above-ground storage tank at the site. Analysis of soil and groundwater samples detected volatile organic compounds in excess of then-applicable standards. 

Instead of purchasing the property, the tenant agreed to rent the premises for 15 years pursuant to a letter agreement that required the landlord to remediate or otherwise address all environmental conditions at the property, including those identified in the 1995 Phase II ESA. The landlord received broad rights to enter the premises to conduct the remediation, including the right to occupy a portion of the building if necessary. 

The provision

The letter agreement included a set of terms that created an obligation on the tenant to purchase the property if the landlord completed the remediation. Specifically, the obligation to purchase stated that if the landlord (a) advised the tenant that it had completed the remediation, and (b) provided an unqualified and unconditional certificate from an environmental consultant confirming all environmental problems at the property had been successfully remediated, then the tenant would be required to purchase the property from the landlord for a fixed price of $1.6 million. 

The obligation to purchase permitted the tenant, at its sole discretion, to waive the landlord's requirement to deliver a certificate of completion.

The dispute

The property’s value increased significantly during the term of the lease. By the late 2010s, purchasing the property for $1.6 million was too good of an opportunity for the tenant to pass up. As a result, the tenant commenced an application seeking a determination of its rights under the contract. In June 2021, following the resolution of that initial application, the tenant attempted to trigger its obligation to purchase the property despite the fact the landlord had neither completed the remediation nor delivered the required certificate. The landlord refused to sell. 

The application decision

In a hearing before the Ontario Superior Court, the tenant argued, among other things, that even if remediation was a condition precedent to its exercise of the obligation to purchase, it was entitled to waive that requirement because remediation of the property was for its sole benefit. If the tenant was content to purchase the land despite its ongoing environmental challenges, that was the tenant’s choice to make. The landlord argued that the contractual responsibility to remediate underlying the obligation to purchase was a mutual benefit that could not be waived by the tenant alone. 

The application judge agreed with the landlord, concluding that while the delivery of the consultant’s certificate was for the sole benefit of the tenant (and therefore could be waived unilaterally), the responsibility for completing remediation also benefitted the landlord. Specifically, the contract ensured the landlord would not lose control over or access to the premises, both of which were essential to completing the remediation, before the clean-up is completed. If the remediation was not completed, then the landlord faced the prospect of prosecution or administrative orders under the EPA. In other words, the landlord’s responsibility for completing the remediation was a shared benefit that could not be unilaterally waived by the tenant in order to trigger its contractual right to purchase the property for a fixed price. 

The appeal decision

Applying a deferential standard of review to the facts at issue, the Court of Appeal held that there was no basis to interfere with the application judge’s interpretation of the obligation to purchase or his holding that the contractual requirement to complete the remediation was a mutual benefit to both parties. 

The Court of Appeal noted the landlord had contracted for specific rights of access and cooperation during the term of the lease in order to address remediation before property ownership would be transferred, in view of its future exposure to liability, and its desire to control the remediation effort and the communications with the regulator until remediation was complete and its liability ended. 

The application judge was therefore entitled to consider that a scenario under which the landlord could be forced to sell and still be left with the liability for the unremediated land, but would no longer hold either the ownership interest or the access and remediation rights, was contrary to the parties’ intentions objectively derived. 

Key takeaways

Horn is a reminder that appellate judges will show deference to lower court judges on questions of contractual interpretation absent an extricable error of law. To overcome this significant obstacle, the appellant in a contractual interpretation appeal must clearly identify the principle(s) that the lower court judge failed to follow or apply. 
Further, the Court of Appeal’s decision recognizes a fact that will be self-evident to many environmental professionals and practitioners: even in the absence of unique contractual terms, the responsibility for remediating contamination, and its attendant rights of access and cooperation, can be a significant benefit to the party tasked with the clean-up.