If you’re purchasing or considering purchasing commercial property in Ontario, you know a substantial amount of due diligence is involved. From title searches and land surveys to lease agreements and zoning regulations, this rigorous process is meant to identify risks, liabilities, and issues that could affect the property down the road.

One of the most crucial elements of this process is environmental due diligence. In the following blog post, we’ll explore what environmental due diligence entails, what to expect in each of the three phases of environmental site assessments, and the legal framework that governs environmental due diligence in Ontario.

What Is Environmental Due Diligence in Commercial Real Estate?

Environmental due diligence involves investigating and assessing potential environmental risks and liabilities associated with a commercial property. Identifying risks and liabilities early in the real estate transaction can prevent unexpected costs and delays.

Who Is Responsible for Environmental Due Diligence?

Generally, the purchaser or developer of a property initiates and pays for environmental due diligence, especially when there will be a change in land use, financing, redevelopment, or zoning. In some cases, especially when environmental risk is high, lenders, investors, or municipalities require proof of environmental clearance before agreeing to finalize a deal.

The due diligence process should be conducted by qualified environmental consultants, usually environmental engineers or geoscientists. These professionals are licensed and experienced in Ontario’s regulatory framework.

Common Environmental Issues in Commercial Properties

In the context of commercial property, environmental due diligence can uncover various possible issues, many of which have significant legal consequences. Common environmental issues include:

• Contaminated soil or groundwater: Contamination might be from previous activities such as dry cleaners, gas stations, or car repair shops.
• Underground storage tanks (USTs): Old tanks, used for fuel or chemical storage, may have leaked over time.
• Hazardous building materials: Older buildings can contain asbestos, lead-based paint, and mould from water intrusion. These materials must be handled and disposed of according to strict regulations.
• Air quality concerns: Vapour intrusion from contaminated soil or groundwater can negatively affect indoor air quality.

Identifying and addressing these issues early in the transaction can save time, money, and other challenges in the future.

What Are the 3 Phases of Environmental Site Assessments?

Environmental due diligence in Ontario is typically completed through a phased approach.

Phase I

Phase I of the Environmental Site Assessment (ESA) is a preliminary investigation. The goal is to gather information about potential environmental liabilities at a site.

Phase I includes:

• Site visit: A visual assessment to locate possible contaminating activities.
• Examination of records: Title documents, aerial photographs, and previous environmental reports are reviewed in depth.
• Interviews: Conversations with current and former property owners, property managers, and other personnel with relevant knowledge.

At the end of Phase I, the environmental consultant will report areas of concern, make recommendations, and determine whether a Phase II ESA is required.

Phase II

A Phase II ESA occurs when Phase I identifies possible contamination (APECs, or Areas of Potential Environmental Concern). This phase involves extensive testing to confirm the contamination. It might include:

• Soil sampling
• Groundwater testing
• Indoor air quality assessment
• Inspections for asbestos, lead paint, mould, and other hazardous materials

The results of Phase II indicate the severity and scope of the contamination and whether remediation is necessary.

Phase III

Phase III focuses on remediation and the development and implementation of a cleanup strategy. This might include:

• Removal of contaminated soil
• Groundwater treatment
• Disposal of hazardous material

The remediation plan must adhere to all relevant environmental regulations.

Once remediation is complete, ongoing monitoring may be needed to ensure the site remains safe and compliant.

Environmental Laws and Regulations

In Ontario, environmental due diligence is governed by a combination of laws, regulations, and guidelines. The primary piece of relevant legislation is the Environmental Protection Act (EPA), which provides the framework for the prevention, mitigation, and penalization of pollution.

Ontario Regulation 153/04 (Records of Site Condition) is a key regulation under the EPA. This regulation sets out standards and requirements for:

• Phase I and Phase II ESAs: See above for more details.
• Risk Assessments: These are scientific and technical evaluations that determine whether a contaminated site can be used without full remediation, i.e., by managing or containing the risks.
• Filing a Record of Site Condition (RSC): This document is filed with the Ontario Ministry of the Environment, Conservation and Parks (MECP). It summarizes a property’s environmental condition, typically in relation to real estate development or land use changes. The RSC confirms that a property has been assessed for contamination and is suitable for its intended use.

The government of Ontario’s website has a comprehensive guide for completing a Phase I ESA to comply with Ontario Regulation 153/04.

Another important regulation under the EPA is Ontario Regulation 406/19 (On-Site and Excess Soil Management). This regulation contains rules for the reuse of excess soil and aims to stop the illegal dumping of excess soil.

Environmental Due Diligence: A Critical Element of Ontario Commercial Real Estate Deals

Environmental due diligence is a vital part of a commercial real estate transaction. It protects buyers, investors, and developers from unexpected environmental risks and liabilities and ensures compliance with provincial laws and regulations. Failure to conduct proper due diligence can lead to costly cleanups, project delays, and legal action.

By understanding the three phases of environmental site assessments, recognizing common risks, and working with qualified professionals, parties can make confident, well-informed decisions.

Willis Business Law: Providing Trusted Commercial Real Estate Due Diligence in Windsor-Essex County

Before finalizing any commercial real estate transaction in Ontario, ensure you’ve taken the necessary steps to protect your investment by enlisting the help of Willis Business Law. Our commercial real estate lawyers understand that environmental due diligence is not only a legal safeguard but a strategic advantage. If you’re considering buying, redeveloping, or financing commercial property, we’ll assess potential risks and ensure you maintain compliance with Ontario’s environmental regulations. To book a consultation, please call 519-945-5470 or contact us online.