Monday, April 8, 2019

Who will clean up when the tenant walks away?


When a residential tenant vacates a farmhouse, they may leave behind personal items; they may leave behind a mess.  The landlord might succeed in requiring the former tenant to clean up, or the landlord himself or herself might have to clean up.  When there’s a change in a farm land tenancy, the landlord or the new tenant may need to apply fertilizers or pesticides, pick stones, or conduct extra tillage to transition from the previous tenant’s cropping practices to new ones.  But what happens when an industrial tenant or occupant of a farm property walks away or goes bankrupt?  What happens when an oil well, a pipeline, or a wind turbine is abandoned in place?

The Supreme Court of Canada very recently addressed this question in the context of orphaned oil wells in Alberta.  An orphan well is one for which the cost of remediation required for abandonment of the well exceeds the actual monetary value of the well.  The Supreme Court was tasked with deciding whether a bankruptcy trustee, in administering the estate of a bankrupt oil and gas company, can renounce or disclaim the company’s interests in orphan oil wells (and walk away from remediation obligations) while at the same time selling off the company’s other valuable wells and assets in order to maximize the recovery by creditors. 

The case involved Redwater Energy Corporation, a publicly traded oil and gas company. In 2015, Redwater's principal secured creditor, the Alberta Treasury Branches ("ATB"), commenced enforcement proceedings after Redwater couldn't meet its financial obligations.  On May 12, 2015, Grant Thornton was appointed Receiver for Redwater under the Bankruptcy and Insolvency Act ("BIA").  In July, 2015, Grant Thornton told the Alberta Energy Regulator (“AER”) that it would be taking control of only 20 of the 127 Redwater oil and gas licences.  The AER responded by issuing orders "for environmental and public safety reasons" requiring the abandonment and remediation of the 107 wells that the Receiver was looking to “disclaim”.  In October, 2015, a bankruptcy order was issued for Redwater.  In November, 2015, Grant Thornton, now trustee in bankruptcy for Redwater, disclaimed the assets it had previously renounced in its capacity as Receiver, and indicated to the AER that it did not intend to comply with the environmental remediation orders.

The AER and the Orphan Well Association ("OWA") brought court applications for declarations that the disclaimer was void.  They also sought an order compelling Grant Thornton, as trustee, to comply with the abandonment and remediation orders issued by the AER.  Grant Thornton brought a cross-application for approval of the sale of certain assets, and a ruling on the constitutionality of the AER's position.  At first instance, the Chambers Judge sided with the trustee in bankruptcy.  On appeal before the Alberta Court of Appeal, two of three judges sided with the Trustee, while one judge would have ruled that a portion of the sale proceeds from the viable wells must be set aside to meet the expected cost of remediating the orphan wells.

The Supreme Court of Canada was also split on the case (5-2), but this time in favour of the AER position.   The majority found that the AER’s use of its regulatory powers to require remediation of the environment was not in conflict with the BIA, so that the doctrine of federal paramountcy (which would resolve the conflict in favour of the federal bankruptcy legislation and against the provincial energy and environmental legislation) was not triggered.  The Court found that the BIA did not empower the bankruptcy trustee to walk away from the environmental liabilities of the estate it was administering.  Also, as the AER was not asserting any claims provable in the bankruptcy, the AER’s exercise of its authority did not upend the priority scheme established by the BIA.  The AER regulatory scheme and the federal bankruptcy scheme co-existed with and applied alongside each other.

As Chief Justice Wagner wrote:

Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy. ... The Abandonment Orders and the LMR requirements are based on valid provincial laws of general application — exactly the kind of valid provincial laws upon which the BIA is built. … End-of-life obligations are imposed by valid provincial laws which define the contours of the bankrupt estate available for distribution.

Leases, easement agreements, and other similar land use agreements can and often do contain clauses requiring the tenant or occupant to remove its facilities and to restore the land to previous conditions once the tenant or occupant ceases operations and vacates the land.  However, the protection afforded to landowners in such clauses is only as good as the tenant or occupant – if operations have ceased, and there is no money left, the promise to clean up and restore the property is an empty one.  Wherever possible, landowners should require additional security to guarantee fulfillment of contractual clean-up and restoration obligations by tenants and occupants.  Landowners should not assume that government funds for orphaned and abandoned facilities will be sufficient or even available.

Read the Supreme Court's decision at: Orphan Well Association v. Grant Thornton Ltd.