Danger, Will Robinson! Court Creates Common Law Super-Priority For Environmental Obligations

• Law Firm: Fasken
• Subject Matter: Finance and Banking, Environment, Insolvency/Bankruptcy/Re-structuring, Charges, Mortgages, Indemnities, Financial Restructuring, Insolvency/Bankruptcy, Environmental Law
• Author: Ms Jessica Cameron, Robyn Gurofsky and Anthony Mersich
• Published date: 29 March 2023

The recent decision from the Court of King's Bench of Alberta (the "Court") in Qualex-Landmark Towers Inc v 12-1- Capital Corp, 2023 ABKB 109 ("QL Towers*") greatly extended the protective umbrella for costs associated with environmental reclamation obligations. Relying on case law that has evolved from the Supreme Court of Canada's landmark decision in Orphan Well Association, Alberta Energy Regulator v Grant Thornton Limited and ATB Financial, 2019 SCC 5 ("Redwater"), the Court granted an attachment order and gave that order priority over prior-registered mortgagees outside of formal insolvency proceedings. The attachment order was granted against the defendant's land to secure the estimated costs for remediating environmental contamination that had migrated from the defendant's land onto the plaintiff's land.

This is the first case that has applied the reasoning in Redwater to a private dispute between two citizens, rather than the enforcement of environmental remediation obligations by a regulator against a debtor in formal insolvency proceedings. Typically, a secured party such as a mortgagee can rest assured that its security will not get "primed" outside a formal insolvency proceeding; however, the Court's decision in QL Towerssuggests that secured lenders face the risk that their security could be eroded by private citizens who advance claims in relation to environmental contamination against a land-owner. These claims are inherently unknowable and unquantifiable, causing a serious risk to secured lenders in Canada. While we anticipate that the QL Towersdecision will be appealed, in the interim it has set a dangerous precedent of which all secured lenders, and in particular real estate lenders, should be aware.

Background Facts

The Plaintiff, QL Towers Inc. ("QLT") purchased lands (the "QLT Lands") located directly adjacent to lands owned by the Defendant, 12-10 Capital Corp. ("Capital Corp" and such lands being the "12-10 Lands"). Prior to the purchase of each of the QLT Lands and the 12-10 Lands, subsurface investigations revealed that the 12-10 Lands were environmentally contaminated (the "Contamination").

Several years later, Capital Corp. was directed by the provincial environmental regulator, Alberta Environment and Parks ("AEP"), to submit an environmental site assessment and to complete a contamination delineation and remediation plan in respect of the Contamination . Although Capital Corp. initiated plans to perform the delineation, it...